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Home Publications Blogs Beat the Press The Washington Post Wants the Fed to Start Throwing People Out of Work

The Washington Post Wants the Fed to Start Throwing People Out of Work

Thursday, 06 March 2014 21:34

The Washington Post, which adheres rigidly to the philosophy that a dollar in a non-rich person's pocket is a dollar that could be in a rich person's pocket, argued in its Wonkblog section that it might be time for the Fed to start raising interest rates and throwing people out of work. The story is that when the unemployment rate falls below 6.5 percent, the inflation rate might start rising.

This one is almost too much to believe even from the Washington Post. Of course the unemployment rate has come down considerably from its 10.1 percent peak in 2010, but most of the reason is that people have left the labor force. According to the OECD, the employment rate among prime age workers (25-54) is up by only 0.8 percentage points from its 2010 low and is still down by 4.0 percentage points from its pre-recession level.

But let's look at the evidence the Post uses to make its case. The post has a chart that divides the years since 1983 into years when the unemployment rate was above 6.5 percent and years when it was below. The unemployment rate is then graphed against the change in the core inflation rate over the year. The regression line has the expected downward slope implying a negative relationship between the unemployment rate and the change in the inflation rate.

This is all nice and predictable. But the truly incredible part of the story is that in the graph itself we see that the rate of inflation actually declined in most of the years when the unemployment rate was below 6.5 percent. That's right, fans of counting and arithmetic everywhere will be able to see that in 10 of the 19 years where the unemployment rate was below 6.5 percent the inflation rate actually fell. It only rose in eight of these years, with the rate being unchanged in one of the years. Are you scared of inflation yet?

We could look at this one from a slightly different angle. The unemployment rate was below 6.5 percent as a year-round average for 15 consecutive years from 1994 to 2008. Over this stretch the core inflation rate fell from 2.8 percent in 1994 to 2.3 percent in 2008. See, hyperinflation is just around the corner.

The incredible part of this story is that even if we took the very worst year for inflation in this thirty year stretch, the inflation rate only rose by 0.8 percentage points. So, even if we happen to draw the bad straw and we get the same sort of jump in the inflation rate in 2014 from letting the unemployment rate fall too low, we will se the core rate of inflation rise from 1.5 percent to 2.3 percent. The horror, the horror.

Hey, but it's much better to throw more people out of work, at least by the thinking at the Washington Post.

Comments (9)Add Comment
Kissinger was right though
written by Dave, March 06, 2014 10:24
On a positive note, WP printed Kissinger's take on Russian and the Ukraine which was the best opinion I've seen on the issue.

" ... the philosophy that a dollar in a non-rich person's pocket is a dollar ....
written by John Puma, March 07, 2014 2:18
that could be in a rich person's pocket" is accompanied by its corollary philosophy that every government dollar earmarked for the poor is best diverted to a rich person's pocket already bulging from previous government largesse.
written by djb, March 07, 2014 3:36

The strongest point they make is that if unemployment goes below 6.5 % then inflation rate becomes (scary monster) UNPREDICTABLE!!!

so we have act now and raise interest rates because, as you say, inflation rates might creep up to 2 or three percent cutting the profits of rentiers

Its like the Cheney doctrine..... if we judge a 1% chance that someone in a country will attack american interests then I guess we have to invade?

written by Chris E, March 07, 2014 4:17
But the truly incredible part of the story is that in the graph itself we see that the rate of inflation actually declined in most of the years when the unemployment rate was below 6.5 percent

This struck me as well. The line of best fit shows inflation not increasing until 5.5%, yet the Wonkblog author makes claims contradicting her own data. Bizarre.
Stupid Liberals Duped Again by the 1%
written by Last Mover, March 07, 2014 6:17

Stupid liberals still don't get it. It's more important to drive people out of the labor force with deliberate austerity spending cuts and job reductions, then frantically declare there's not enough workers to support non-workers, Social Security, Medicare and all the rest of it.

And long term productivity will be replaced by robots anyway. The inflation scare is just icing on the cake, and notice btw how conveniently, predictions of it are not offset with a larger labor force or more robots.

Listen up America. You're doomed to the serfdom of economic slavery to the 1% anyway the economic pie is sliced on the supply or demand side.

Works every time.
written by jonny bakho, March 07, 2014 7:33
WonkBlog is not the same after Klein left. The economics reporting a bad. There is nothing wonky about it. They have devolved to he said she said. It was one of the bright spots. Now it is just another site for VerySeriousPropaganda.
written by skeptonomist, March 07, 2014 9:14
Why restrict consideration to after 1983? The years of very high inflation before that showed conclusively that the Phillips curve was a delusion. Unemployment went very high but this did not quell inflation. The idea that the Fed can control inflation by any means is only tenable if that period is ignored. Indeed, there is no credible evidence of this in any period.
real story
written by hepion, March 07, 2014 11:20
Interesting thing about inflation is that yearly increment has stayed at same levels for last 30 years, while the divider ie. the price level has gotten bigger so percentage increase has steadely gotten smaller.

Real story about inflation is 30 years of falling inflation.
written by PeonInChief, March 07, 2014 3:04
In fact, I've seen plenty of articles in the Very Serious Newspapers over the years where I noted that the graph, table or whatever didn't reflect the argument being made in the accompanying article.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.