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After nearly a year of concerns about inflation and a hot economy, the US Federal Reserve’s repeated rate hikes have slowed the economy and fueled fears of a recession. That was the crux of the matter: the Fed’s actions were rooted in the decision that lower prices are more important than continued job growth.
This prioritization is the result of decades of decisions that have led policymakers to see citizens primarily as consumers – with prices and market decisions as their top concerns – and government as primarily responsible for maintaining consumer markets. These decisions have transformed both the understanding of American citizenship and the actual operations of the state over the past 80 years.
Since the 1940s, the federal government has had a mandate to promote economic stability through “maximum employment, production and purchasing power”. But in the second half of the 20th century, the Fed increasingly prioritized stable prices over maximum employment. This shift was not natural, but the result of decades of work by neoliberal theorists and conservative policymakers to prioritize stable prices and markets for companies and investors over tight labor markets that empower workers.
In 1937, the Federal Reserve specifically argued that “price stability should not be the sole or primary objective of monetary policy.” Rather, it defined economic stability as “full employment of the country’s labor force and productive capacity which can be continuously maintained”. The Board of Governors believed that this goal could, in some cases, mean accepting inflation as the price of stability, not as a threat.
In early 1945, as World War II and the wartime full-employment economy were ending, Congress began debating a Full Employment Act that would propose that all men have a right to a job and that the government should be responsible for the creation of those jobs takes over where the private sector has failed. That commitment proved a sticking point for many in Congress, who believed that the private sector, not the federal government, should create jobs. As a compromise, the final version of the bill, the Employment Act 1946, encouraged consumption to promote employment and vice versa. The idea of the “consumer” moved a step closer to the center of American government economic governance.
Just a year after the Employment Act was passed, in 1947, the Mont Pelerin Society met for the first time. The scholar-activists there seized on the idea of governing for the consumer to counter the New Deal state, which they felt had overly centered workers.
Instead of a model of government in which the state helped maintain a balance between opposition workers and businesses, these conservatives proposed a model of economic government in which consumers and businesses could be seen on the same page, with a shared interest in a competitive marketplace that keeps prices low.
Interestingly, the focus on consumers continued not only through the 1950s, but also into the more liberal Great Society era. Under President Lyndon B. Johnson, efforts to promote equality focused on expanding access to credit and markets. For example, the Higher Education Act of 1965 expanded access to higher education through the creation of the first large-scale federal student loan program, rather than through an expansion of the public university system. In another example, the Housing Act of 1968 created mortgage-backed securities to address housing inequality, which gave low-income buyers the ability to obtain credit to purchase homes.
The consumer, not the worker, also increasingly directed government control of the economy. Congress debated full-employment legislation again in the late 1970s, during the Jimmy Carter presidency, thanks to a push by unions and the Congressional Black Caucus in the face of the 1970s recession. As in 1946, the original proposal included a provision that the federal government would become the employer of last resort if full employment (defined as unemployment above 4 percent) was not achieved in five years. But the bill Carter signed into law in 1978, the Full Employment and Balanced Growth Act (known as Humphrey-Hawkins), focused on controlling inflation, balancing the budget, and maximizing employment only in the context of the first two goals.
The next year, Carter’s appointed Federal Reserve Chairman Paul Volcker initiated rate hikes in a targeted effort to push the economy into recession and bring down inflation. The Volcker shock, as it became known, cemented the notion that inflation was the biggest problem the economy could face and that controlling inflation was worth an occasional recession.
More than 50 years later, we know that monetary policies that prioritize fighting inflation over safeguarding jobs have produced wildly uneven outcomes. For example, after the Volker shock, the black unemployment rate reached 19.5 percent, 9 points higher than the overall unemployment rate. Furthermore, the prioritization of prices over employment led to decades of wage stagnation for most workers while the assets of the wealthy appreciated.
Expanding access to higher education through student debt has also led to very unequal outcomes for black and white students. Likewise, increased access to home loans for low-income borrowers has not responded to a still-segregated housing market that left black families vulnerable to predatory lenders.
In short, tackling inequality through consumer-centric policies has failed.
President Biden took office with a political agenda that in many – but not all – cases decentered the consumer. In his first year in office, his government proposed policies that experimented with government providing childcare, broadband and a variety of other services directly, rather than through subsidies that boosted consumer markets. And by early 2022, the Federal Reserve appeared to prioritize employment over prices.
As a result, employment boomed. Workers gained more leverage in the labor market than they had in years. By June 2022, black male employment exceeded pre-pandemic levels. For the first time in nearly 40 years, wages at the bottom of the income distribution have kept pace with, and even exceeded, inflation.
At the same time, prices rose for a variety of reasons – from supply chain issues to the war in Ukraine to corporate greed. With prices rising, the habit of placing the consumer as the priority of economic governance re-emerged with a vengeance.
The Fed’s recent decisions to raise interest rates are rooted in consumer-centric governance. It’s not clear that his actions will affect prices significantly, but history shows that they are likely to hurt American workers — particularly people of color, the less educated, and other already marginalized workers who benefit most from a tight labor market, and often the first are suffering from a flaccid.
Indeed, although today’s liberal policy agenda has refocused the importance of public goods, such efforts have been undermined because nearly all Americans, including politicians and reporters, are used to measuring the health of our economy in terms of purchasing power. Understanding this history is the first step to freeing ourselves from it.
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