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Throwing People Out of Work Is No Way to “Fix” the Economy

We can have a strong job market and lower inflation — and we don’t need more painful interest rate hikes to do it.

Federal Reserve Board Chairman Jerome Powell speaks during a news conference following a meeting of the Federal Open Market Committee at the headquarters of the Federal Reserve, on July 27, 2022, in Washington, D.C.

From groceries to rent, prices are rising on just about everything these days — and those with already-stretched budgets are feeling the pinch.

Bringing prices down must be a top priority for lawmakers, but Washington’s default tool for dealing with inflation — aggressive interest rate hikes — only makes life harder for these families. That’s because aggressive interest rate hikes work by increasing unemployment and slowing down wage growth, a “cure” far worse than the disease.

Former Treasury Secretary Larry Summers is a longtime advocate of this cruel approach. Earlier this summer, Summers cheered the idea of throwing millions out of work when he suggested that the Fed should “raise interest rates enough that the economy will slip into recession.” More recently, he doubled down: “My worst fear would be that the Fed will continue to be suggesting that it can have it all in terms of low inflation, low unemployment, and a healthy economy.”

In other words, Summers has consistently argued that cooling inflation matters more than taking care of people. According to him, we should do what we must to bring prices down, even if it means throwing millions out of work.

But the data is in: We can have a strong job market and lower inflation — and we don’t need further aggressive and painful interest rate hikes to do it.

The labor market added 528,000 jobs in July, far exceeding expectations. In fact, we’ve averaged over 500,000 new jobs a month for the past year — an astounding number for a recovery period. We also saw 0 percent inflation in July, and annual inflation is subsiding as well. While inflation-adjusted wages are down roughly 3 percent annually, the most recent jobs report showed real wages ticking up slightly since June.

It’s worth taking a closer look at Summer’s prescriptions so we don’t fall for this bad advice going forward. In June, Summers suggested that “we need five years of unemployment above 5 percent to contain inflation” — or even “or one year of 10 percent unemployment.” That would push some 10.5 million people out of work, with the worst impacts on poor communities and people of color who already suffer higher unemployment rates. And these numbers don’t even take into account the long-term scarring that comes with unemployment spells.

What’s more, throwing millions out of work would do little to address the root causes of rising prices: outsized corporate power, supply chain shortages, and the war in Ukraine. As Federal Reserve Chair Jerome Powell admitted in June, raising interest rates “can’t affect… all the supply-side things that are still pushing upward” on gas and grocery prices. Rate hikes also won’t break up the megacorporations that Powell conceded could be “raising prices because they can.”

Thankfully, there are real solutions on the table. The Biden administration’s Inflation Reduction Act tackles health care costs and makes critical investments in clean energy that will start to untether us from our reliance on fossil fuels which the war in Ukraine shows can be volatile and unpredictable.

In June, President Biden also signed the Ocean Shipping Reform Act. This bill increased regulation of the deeply concentrated ocean shipping industry — a sector that has contributed significantly to supply chain bottlenecks and inflation. And policymakers have introduced legislation that would hold corporations accountable by taxing windfall profits and prohibiting price gouging.

We can’t “save” the economy if people are struggling. After all, we are the economy. When we do well, that’s when our economy thrives. It’s time for our leaders to finally hit the mute button on Larry Summers’ inflation advice — or we will all pay the price.

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