Why you should care
Because low interest rates can’t fix what ails working- and middle-class Americans. But schools can.
In the HBO television drama Too Big to Fail, Paul Giamatti turned out an award-winning performance as former Fed Chairman Ben Bernanke, lobbying Congress to authorize Fed and Treasury intervention in the wake of the 2008 financial meltdown.
Now something else is unfolding at the Fed that could make for great cinema, and aspiring cinematographers could have fun debating who should play the Fed’s new chair, Janet Yellen. But hers is a movie of a different genre, as evidenced by the Fed’s focus on labor market dynamics during its “Sundance for Central Bankers” meeting in Jackson Hole last month.
Typically, the Fed focuses on financial markets, exchange rates and the like. This year, Yellen, her Fed colleagues and other influential central bankers from around the world listened to a very different set of scholars present research on forces such as demographics, wage dynamics and job polarization (the decline of mid-skill jobs) that are reshaping supply and demand in the workplace. This signals a fundamental shift in the way our nation’s top monetary authority is assessing policy.
The rest of us — including our representatives in Washington — should take the hint.
We should focus on creating a future labor pool of people trained to program the software, rather than consigning them to working the checkout line.
More than two years ago, in July 2012, during a gridlocked election year in Congress, Sen. Chuck Schumer, D-N.Y., famously declared the Federal Reserve “the only game in town” and urged Bernanke to get America back to work! Maximizing employment has been the Fed’s second mandate since Congress handed it to the central bank in 1977, but the Fed is always balancing it against its first task — keeping inflation in check and ensuring price stability. To do both, the Fed has a single toolbox: monetary policy solutions, such as adjusting interest rates.
Since the 2008 financial crisis, the Federal Reserve has powered much of the U.S. recovery by knocking interest rates down to record lows through a series of aggressive financial-asset purchasing programs called quantitative easing (QE for short). Those programs have lifted levels of employment by boosting economic activity. But it’s been slow going.
With QE set to end in October, nail-biting Fed watchers now wonder whether Yellen will keep interest rates at current levels, enabling workers — especially those in low-end jobs — to enjoy a near-term rise in wages. The alternative? She could announce a rate hike designed to prevent the labor market from overheating down the road, potentially causing a detrimental, 1970s-style wage-price spiral and runaway inflation.
Nor is any long-term solution likely to come through an increase in the minimum wage.
Instead of obsessing over whether the Fed will keep interest rates low, or whether a cashier or fast-food cook will receive $8 an hour instead of $7.82, we should demand policies that enable more workers to upgrade their skills. Put another way, we should focus on creating a future labor pool of people trained to program the software used in bar code scanners rather than consigning them to working the checkout line.
Ironically, central bankers’ renewed focus on the labor market exposes their limitations when it comes to helping the average worker. Current labor-market research tells us that sustainable wage increases don’t really depend on the Fed’s short-term interest rate decisions. Nor is any kind of long-term solution likely to come through an increase in the minimum wage. Better skills are the only way to produce sustainably higher wages — especially those skills that meet the demands of a globalized, tech-driven market.
Which is why it all boils down to education. And why something other than the Federal Reserve has to break us out of the circular problem we face: Too many Americans are stuck with low wages because they lack a higher level of skills. But how can these low-income, low-skill workers possibly afford the cost of acquiring the very skills that would lead them to higher wages?
The problem is not that universities are gouging students, but that Congress won’t share the responsibility for employment.
The real question, of course, is how can our economy afford it if they don’t? Sounding a critical alarm when it comes to future American productivity, a recent study by the McKinsey Global Institute reports that 64 percent of U.S. companies have positions for which they cannot find qualified applicants and that there will be a shortage of 1.5 million college graduates in the U.S. labor force by 2020.
The litany of costs and debts associated with higher education are familiar to many. Providing education — whether a bachelor’s degree, vocational schooling or on-the-job training — is not cheap. It’s also true that more can and should be done to lower the net cost of education for more people. But too often, the discussion stops at the level of schools.
The problem is not that universities are gouging students (as the accusations go), but that Congress lacks the long-view perspective and discipline needed to share responsibility for U.S. employment, rather than foisting it onto the Federal Reserve.
And there is much Congress could do.
Each year, courtesy of the U.S. tax code’s mortgage interest deduction allowance, the Treasury gives homeowners $70 billion in subsidies, 35 percent of which goes to people who earn more than $200,000 a year and could afford a house without the handout. Pell Grants — federal scholarships for students who come from the poorest families — are not tax exempt. As long as policymakers prioritize boondoggles over biophysics, good jobs and good wages will remain a dream deferred for too many working- and middle-class Americans.
Monetary policy has brought us a long way since 2008, but there’s only so much it can accomplish alone. By returning labor to center stage, the Fed has created an important opportunity to move public discourse beyond a short-term focus on interest rates and the minimum wage and to shine a brighter light on what’s required to achieve lasting prosperity for the greatest number of people.
The only sustainable way for American workers to attain higher wages is for our elected leaders to make upgrading the skill level of our workforce a national imperative.