Today, Explained - The devil’s bargain on inflation

Episode Date: October 19, 2022

The Federal Reserve knows raising interest rates disproportionately hurts Black people. It just doesn’t have any better tools, says the Minneapolis Fed’s Neel Kashkari. This episode was produced by Miles Bryan, edited by Matt Collette, fact-checked by Laura Bullard, engineered by Efim Shapiro, and hosted by Noel King. Transcript at vox.com/todayexplained Support Today, Explained by making a financial contribution to Vox! bit.ly/givepodcasts Learn more about your ad choices. Visit podcastchoices.com/adchoices

This year, the Federal Reserve has raised interest rates four times. The Fed did so to fight the nine-ish percent inflation that's making life, groceries, gas, cars, furniture, all the things a lot more expensive. But there's a tradeoff. When interest rates go up, jobs take a hit. The Fed talks about this tradeoff all the time. There is a thing they talk about far less. Who is going to lose jobs? Black Americans face twice the unemployment as white Americans,

no matter what kind of an economy we have, a booming economy or a recession. This is not something the Fed talks about all the time, although these conversations are happening at high-level meetings and at dinners. The sort of agreed-up upon vibe was one of just feeling really, really bad about it. Coming up on Today Explained, the devil's bargain we make to fight inflation.

And we get to ask a Federal Reserve Bank president whether we can do anything other than feel really, really bad about it. The all-new FanDuel Sportsbook and Casino is bringing you more action than ever. Want more ways to follow your faves?

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Back in late August, I read with fascination an article that you wrote about what might happen if the U.S. goes into a recession because of interest rate hikes. Now, you know that a recession is bad for workers in general, but you look specifically at how Black workers would be affected. Why did you do that? So when you think about workers and the economy, often you can easily get caught in thinking about things in terms of aggregates. But of course, nobody lives in an aggregate world. We all operate within particular segments of society, particular walks of life. We're all from unique and different communities. It just so happens that for Black workers, the Black community, there is a remarkable consistency going back decades and decades

that the Black unemployment rate runs usually about twice the white unemployment rate. And in fact, in certain decades, the Black unemployment rate runs at twice the general unemployment rate as well, the one that we see on headlines month after month. And so I was attracted to this story because essentially we are at a point in the Fed's inflation fight where there is a consensus view that there is going to be some sort of trade-off between lowering inflation and a rise in unemployment or just a general weakening in the labor market. That's sort of a way of saying that in order to achieve price stability, at least in the short term, American society may require double-digit black unemployment. And I wanted to really ask myself as an establishment economics reporter, it doesn't get any more mainstream than the paper that I'm at.

Outside of me, ask society, what does that mean? And why is that the case? Why is the Black unemployment rate consistently so much higher? Twice? What's going on? Well, it's a pretty straightforward story. So the numbers would suggest that, you know, if you're Black, you're much more likely to be experiencing poverty.

You're less likely to have formal education. You may have certain barriers to employment, like past arrests or incarceration. And we see that through a mix of coincidence, but also structural disadvantage that throughout many decades, the Black community has been subject to all of those misfortunes. But beyond the fact that the past reverberates to the present, economic research in the past, I'd say two decades, has found a name that just reads culturally as African-American can actually count as a penalty against an applicant that has the same exact credentials, qualifications, in some studies, the same exact resume

as a gentleman or a woman that has a name that reads as white. We now realize the way racial bias can infect us, even when we don't realize it. So that we're guarding against not just racial slurs, but we're also guarding against the subtle impulse to call Johnny back for a job interview, but not Jamal. Tell me how long this has been going on. How long has it been the case that the black unemployment rate is twice the white unemployment rate? As long as the government's been tracking it. Jesus. Which is, you know, quite shocking. There's been variability, but it's consistent. When you look at other indicators of economic inequality that pair and correlate with race, it shouldn't come as a

shock. But that doesn't mean that it's not sobering. Let's talk about where we were even a year ago, Tal, before inflation became hot, before Americans had the sense that the economy was spiraling. How had Black workers in the U.S. been faring? We saw in the post-pandemic recession or the initial post-pandemic recession recovery that Black workers made ultimately modest in the scope of time. Modest but meaningful gains. The nation's largest retailer, Walmart, announced today that it's giving a pay raise to hundreds of thousands of its employees. You saw workers not only just earn more pay, but go from being in certain forms of insecure service work to finding jobs that are more stable that offer

more benefits. To the extent there was and is a Biden boom, Black workers were chief beneficiaries of it. And this is specifically benefiting some of these more marginalized groups, which have historically taken longer to recover out of previous recessions. And I want to cast the light specifically on Black employment. Now, when you take without dipping into the hindsight 2020 back and forth over what exact policies led to inflation, one thing that is for certain is that if the government decided to only lean on the COVID vaccine rollout as the chief way to normalize the economy and spur growth, it probably would not have been enough for Black workers to get ahead. Okay, so there's all this money sloshing into the economy as a result of government policy.

Workers start making more money, that includes Black workers, but then we get inflation and the Fed in response starts raising interest rates. And then what happens, Tal? How are those interest rate hikes? There have been four of them this year affecting Black employment today. So we're seeing that the amount of job gains is decreasing in recent months, but it's still incredibly strong compared to even the pre-pandemic status quo. And yet, considering how quickly and how aggressively the Fed has moved to tighten

what they call financial conditions, it still remains true that their policies work with a lagged effect. So we might not see whether we end up just in a murky meddling along downturn that doesn't quite qualify as a recession or whether we'll end up in a full-blown recession. They know that regardless of what happens, that Black folks and other historically discriminated against groups will have a tougher time. There has to be a conversation at the policy level about whether there is any other tool that could control inflation besides rate hikes, because rate hikes are going to lead to 10% Black unemployment or some level of Black unemployment that is just, it's too high. What are the conversations around guys and gals find something else? We're not doing rate hikes

if this is what it's going to mean for black Americans. Late this summer, I was talking with a prominent black female economist who has been very high up in the Washington, D.C. think tank world and who remains very well connected in policymaking spaces on the Hill and knows many people in the administration. And without violating her off-the-record guarantees, she was able to tell me, in general terms, about a dinner that she had with some of these prominent thought leaders

and policymakers. And everybody was white, except for her. They were all wrestling with the thing that all economists are wrestling with right now, which is achieving price stability without breaking the entire economy. And I think as she put it, there was a certain amount of statistical fatalism, which is a phrase I really like, that look, trade-offs are hard, and it seems that at least temporarily, we might need to see unemployment go higher. We need to see the labor market loosen. And she pointed out the racial disparities that could and likely

will result. And as you can imagine, it was very awkward and i think many uh black professionals of all types when pointing out uh disparities in a room full of white peers have you know probably felt what she felt in that moment there was there was sort of this well we're at an impasse here and the sort of agreed upon vibe was one of just feeling really really bad bad about it. And she told me that she felt like she was at a loss. I think of it a little bit like gentrification. Everybody's like, oh my goodness, we feel so bad about it. But we're not going to stop gentrifying. Right?

Yeah. One of the oldest tropes in monetary policy, which is the wheelhouse of the Federal Reserve, is that it's the job of the Federal Reserve to pull the punch bowl away at the party just as it's getting started. Just when things are getting a little bit too loose, everybody's getting a little too happy,

conversations flowing, a couple people start dancing, let's rein it in here. That's the job of the Federal Reserve to be the sober manager of the economy, the designated driver, so to speak. And frankly, I like that little fable. And I think it is a pretty helpful shorthand. But what it makes me think of is, well, what about all the people that didn't even get to the party yet? Yeah. Yes.

Or the people that got to the party, but have only had like a sip or two of their drink. What does it mean that every single party they go to, just as it's getting started, the Federal Reserve is pulling the punch bowl. And in that expanded fable of mine, my dark little twisted world, I mean, that's Shonda, that's Jamal,

that's, you know, Jose, That's the white guy named Rick. But like who, you know, has a prior arrest and only has a high school education. I mean, these are the people that in, president of the Minneapolis Fed, and one of the people deciding when the punch bowl gets taken away. Support for Today Explained comes from Aura. Aura believes that sharing pictures is a great way to keep up with family, and Aura says it's never been easier thanks to their digital picture frames. They were named the number one digital photo frame by Wirecutter. Aura frames make it easy to share unlimited photos and videos directly from your phone to the frame. When you give an Aura frame as a gift, you can personalize it, you can preload it with a thoughtful message, maybe your favorite photos. Our colleague Andrew tried an Aura frame

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If you have any questions or concerns about your gambling or someone close to you, please contact Connex Ontario at 1-866-531-2600 to speak to an advisor free of charge. BetMGM operates pursuant to an operating agreement with iGaming Ontario. Let's begin with you telling me your full name and what you do. My name is Neil Kashkari. I'm president of the Federal Reserve Bank of Minneapolis. What does your job entail? My job is to lead the Minneapolis Fed, which is one of 12 independent Federal Reserve Banks spread out across the country. And our job is to represent this region. We're the ninth Federal Reserve District, and that's Minnesota, North and South Dakota, Montana,

the Upper Peninsula, Michigan, and Northwestern Wisconsin. We try to monitor the overall economy's activity, and then I participate in the Federal Open Market Committee meetings every six weeks when we set interest rates for the nation. Part of my job is to make sure that my region is represented in that deliberative process. A couple years back, Neil, the Fed started talking not just about unemployment in the U.S., but about Black unemployment in the U.S., almost like it was a separate thing. Now, we were just talking to Tom and Smith from The New York Times, and we learned that it is arguably a separate thing, because it's usually twice what white unemployment is. I remember you as one of the people who

started drawing focus to this, started saying saying this is important to pay attention to. Why did you do that? You know, for the years before the pandemic hit, we kept getting surprised. We thought that the economy was at full or what we call maximum employment. Everybody who wants a job has a job. We were hearing that from businesses that they couldn't find workers. And yet the economy continued to grow, people continued to find jobs, and inflation didn't materialize. So that told us, well, wait a second, there must be more workers out there than we were realizing. And I would go into low-income communities and communities of color and African-American communities, and I met many groups that said, hey, we don't have jobs or we're stuck in a part-time job. We want more work. So there seemed to be a disconnect, and it seemed as though those average statistics that we look at for the nation were hiding really important pockets of labor and hiding people who wanted to contribute more to our economy. And that matters a lot for the Federal Reserve to understand what our economy's potential

is. As a matter of fact, you got so invested in this that at one point I remember you spent a day, correct me if I'm wrong, I'm trying to figure out exactly what happened here, but I think you spent a day living with a black family in Minnesota who was struggling to make ends meet.

Can you tell me a little bit about that? There's a group called FedUp, which is a group of labor activists in the country. They had a local chapter in North Minneapolis called Neighborhoods Organizing for Change. And there'd been a lot of heated discussions with the Federal Reserve and a lot of criticism of the Federal Reserve. And I said, hey, I want to go meet them. So will you please organize a meeting for me? I'll come and meet with your leaders, but I also want to meet with the families that you represent. And so then I went up there and we spent an afternoon together and it was a wonderful afternoon. I mean, we had very honest conversations. They shared with me what they were experiencing

day to day, trying to get jobs. And, you know, I just come from meetings with businesses who are telling me they can't find workers. And I realized there's a big gap. There's a big disconnect between what we're hearing from businesses who we tend to focus on and what workers are actually experiencing. And the more time I spend in North Minneapolis with people who live there and with families and community leaders, the more I realized this is a really important part of America we as a Federal Reserve do not have enough visibility into. It's actually core to our jobs. One of our jobs is to understand the economy's potential. And if we don't fully appreciate that there's potential that's untapped, then we're missing the big picture for the economy as a whole.

So when we say unemployment without cleaving off Black unemployment, what you're saying is we miss a ton. You actually do have to get into that level of specifics to understand what's happening with this very large and important racial group in the U.S. Absolutely. You know, just the name, the unemployment rate, the way it's calculated, you have to declare yourself that I am looking for a job to be counted as being unemployed. There are a lot of Americans who've been struggling for a long time and they've given up. When the government accountant calls them and says, are you looking for a job? They say, no, I'm not. They're missing. They're not included at all as though they don't

count. And many folks, it turns out when a good job appears, when one becomes available, turns out they go and they get it. And a lot of people who one month will say, I'm not looking for a job, very next month, they will end up taking a job. And so our understanding of who actually is available to work, it's much, much more complex than just saying, are you unemployed or not?

It's a much more complex question and it's a very important question. And let's talk about where we are now. So you know, Neil, that it's very perilous question. And let's talk about where we are now. So you know, Neil, that it's very perilous. The Federal Reserve is going to continue raising interest rates. That means Black workers could see double-digit unemployment rates, especially if the United States goes into a recession, which no one wants. You support the Fed's rate hikes. Why? I support the hikes because we have to get the economy back into balance.

The profound gains that we saw in 2017, 18, and 19 were all made possible in the context of an overall stable economy with low and controlled inflation. We went through the rapid pandemic. We went through the shutdown. We've got this uneven reopening. We have this massive inflation. And you know who inflation is hitting the worst? It's hitting the low-income families the worst because they have the least flexibility to be able to adjust their behavior to change and respond to it. So if you're a higher-income family, maybe you shopped at a premium grocery store and now you shift to a lower-cost grocery store.

Or maybe you bought premium goods and now you buy the low cost goods to save money. Well, if you're the low income family that was already buying the low income goods at the low income grocery store, what do you do? You can't do anything. You still need to put food on the table. You need to put gas in your car. And so inflation right now is damaging and hurting all Americans, but it's disproportionately hurting the lowest income Americans. And so the Federal Reserve, we have to do our part to get the economy back into balance, to get inflation back down to 2% so that we can get back to that Goldilocks economy of 2% inflation, but a really strong labor market for low-income families especially.

But is it worse to have a smaller paycheck due to inflation? Is that really worse than having no paycheck at all? I mean, we're talking about people being thrown out of their jobs. We know what's going to happen. There's not an easy answer, but I'll say it this way. Inflation literally affects everybody. The devastation of unemployment, unfortunately, fortunately, and unfortunately affects a smaller number of people. And it's easier for the government to target assistance to those smaller number of people than it is to try to support all of the American people who are facing this high inflation. So there's an issue of numbers, but that's not an easy story to tell somebody who loses their job because for them, it's overwhelming.

But let me offer one other perspective. I reach out to a lot of labor groups, organized labor workers. At a recent roundtable I had of labor union leaders in Minnesota, a labor leader who represents low-income service workers made the following statement to me, and I was surprised by it. She said, inflation is much worse for our low-income members than is a recession. And I said, I don't understand that. Explain that to me. How can inflation be worse than a recession? No, for the very reasons you just said. And she said, because our members know how to deal with the recession. They lose their job.

This happens all the time. They rely on family and friends. They help each other get through it because they're not all losing their jobs at the same time. The difference is with inflation, they all get hit by inflation and there's no one to turn to for help. Now, I know I've got other friends in the labor movement who have a very different view of this topic. It's a very complicated topic and there are no easy answers. But I do know we cannot allow 9% inflation to continue in the American economy. That is not going to be good for workers in the long term. I wonder if I can kind of push you at the macro level.

You gals and guys in the Fed are very smart people. There's a lot of PhDs in the room at any Fed meeting I would venture. Two of the 12 Fed presidents at this point in history are Black. Why is doing a thing that will clobber one segment of American society, Black workers and their families, the only solution you have? Well, where does inflation come from? It comes from a mismatch between supply and demand. Demand for goods and services in the American economy is far outstripping our economy's ability to supply it. At the Fed, the only tools we have are demand tools. We can increase demand or lower demand by raising and lowering interest rates, so we can bring demand down. Our hope is that we get some help on the supply side.

More workers come off the sidelines. There's more supply chains. They're less gummed up because of COVID. More people feel confident to go back to work because vaccines have been highly effective. All of those things should boost the supply side of the economy. And then we will have to do less work on the demand side to bring those two things down. But the demand tools are the only tools we at the Fed have. Other policymakers potentially have tools that they tools we at the Fed have. Other policymakers potentially have tools that they can help on the supply side. When you sit in a room with a lot of smart people or you're on a Zoom with a lot of smart people, the discussion isn't around what else could we

try. It sounds like this is what we have. This is the one tool that we have, but we are very vocal. And I speak to members of Congress and senators from my region all the time, both sides of the aisle, talking about these exact same issues, talking about these tradeoffs, and saying we need whatever help we can get on the supply side of the economy so that it's not simply up to the Federal Reserve to lower demand to bring these two things into balance for the very reasons that you say. Does the Federal Reserve to lower demand to bring these two things into balance for the very reasons that you say. Does the Federal Reserve care about Black people? Absolutely. Absolutely. The reason that I've made such an emphasis, and many of my colleagues have too, over the last seven or eight years to go into Black communities and other communities of color is we want to make sure that we are hearing directly from important constituents that we are charged to serve. We are charged to represent them. They matter to the economy. They matter to the country.

They matter to the Federal Reserve. Ultimately, we have very blunt tools. Ultimately, we cannot set a different interest rate for black Americans and white Americans. We have to pick monetary policy for the country as a whole, but we want to make sure that we have good visibility into all of these different communities because they matter. Today's show was produced by Miles Bryan and edited by Matthew Collette. It was engineered by Afim Shapiro and rigorously fact-checked by Laura Bullard. The rest of our team includes Halima Shah, Siona Petros, Hadi Mouagdi, Victoria Chamberlain, Avishai Artsy, and my co-host, Sean Ramos-Furham. Our supervising producer is Amina El-Sadi. We use music by Breakmaster Cylinder and Noam Hassenfeld.

And we are distributed to public radio stations across these United States in partnership with WNYC in New York. I'm Noelle King. Today Explained is part of the Vox Media Podcast Network. you