What's the Fed got to do with it?

It's been said that the President and Congress can dicker all they want about the economy, but it's the Federal Reserve Board that really calls the shots. This isn't entirely true (think of the economic impact of military spending, for example) but economist Dean Baker has a good piece in Truthout showing how the Fed runs things:

The Fed has far more direct impact on the U.S. economy than any other agency of the government. It can control how many people in the United States have jobs. While the media tend to speak of the Fed's actions in euphemisms, when the Fed raises or lowers interest rates (its main policy tools) it is deciding whether the economy should create more or fewer jobs.

Cuts in interest rates are intended to boost the economy. Lower interest rates make it easier for families to buy cars and homes and for businesses to invest. If more cars and homes are sold and more factories or offices are built, then more people are employed. In the opposite case, if the Fed raises interest rates, it makes it harder to buy cars and homes and for businesses to invest. This means that fewer people will be employed.

The point bears repearting: more than any other entity, the Fed has the power to create and destroy jobs. This important but usually ignored fact undercuts the whole basis of social policy from conservatives to the Bill Clinton wing of the Democratic Party, which has argued over the last 25 years that if you just cut people off welfare and give them education/skills, they will find a job.

But what if the Fed is actively destroying jobs? It's called "structural unemployment," and no political leader is willing to challenge it, even as they heap moral and other abuse on the supposedly shiftless and lazy poor unlucky enough to be on the receiving end of this cornerstone of federal policy.

Baker notes that "it is often easier for the Fed to destroy jobs than create them." Lowering interest rates might not boost the economy, but by jacking them up in the name of fighting inflation is guaranteed to put tens of thousands out of work.

Who is hurt most? Well, it's not the CEOs and Paris Hiltons of the world:

It is important to understand that this method of restraining inflation does not affect everyone equally. The people who lose their job when the Fed raises interest rates tend to be factory workers, retail clerks, and custodians, not doctors, lawyers, and CEOs. In other words, the Fed controls inflation by forcing the middle class and poor to face higher unemployment and take pay cuts.

There is also an important racial component to the Fed's inflation fighting. As a rule of thumb, the unemployment rate for African Americans tends to be twice the overall unemployment rate, while the unemployment rate for African American teens is typically six times the overall average. This means that if the Fed pushes up the overall unemployment rate from 4.5 percent to 6.5 percent, it will raise the unemployment rate for African Americans from roughly 9.0 percent to 13.0 percent. It will raise the unemployment for African American teens from roughly 27
percent to 39 percent.

Politicians won't talk about this because (1) it reveals how little their decision-making (aside from choosing the Fed chair) impacts the economy, and (2) it would entail challenging the Wall Street interests.

Far easier (and more politically expedient) to just push the poor and working families deeper into economic insecurity.