What happened to the Federal Reserve’s inclusive employment goal?
May 3, 2022
Episode 655

What happened to the Federal Reserve’s inclusive employment goal?

And are we thinking about maximum employment all wrong?

If you’re a regular listener to this program, you’ve probably heard of the Federal Reserve’s dual mandate: price stability and maximum employment.

But in the summer of 2020, the Fed made a little tweak. It added the words “broad-based” and “inclusive” to the employment part of the mandate, acknowledging the benefits a strong economy brings to low- and moderate-income communities. This is significant because for decades the Black unemployment rate has been double the rate for white workers in this country.

So, the Fed started “running the economy hot” longer to try to close that gap. But the central bank has begun a campaign of raising interest rates to cool the economy because inflation is here. What now?

“The gap will get bigger because they’re risking the unemployment rate going up,” said William Spriggs, a professor of economics at Howard University and chief economist at the AFL-CIO. “The idea that the labor market before was really tight and they were overheating the economy, that just wasn’t true. There are lots of workers out there who would tell you ‘I don’t think the labor market is tight’ because they still haven’t come back to the labor market.”

On the show today, Spriggs explains why the Fed’s approach to closing the unemployment gap hasn’t worked and what can really be done to fix it.

Then, the hosts will talk about the big story of the day: the draft Roe v. Wade decision and what overturning the 1973 ruling might mean for the health and economics of women, especially poor women, in this country.

Plus, listeners get creative with a fundraising idea (send us your thoughts) and this week’s answer to the Make Me Smart question.

Here’s everything we talked about today:

We’re looking for your answer to the Make Me Smart question: What is something you thought you knew that you later found out you were wrong about? Leave us a voice message at 508-827-6278 or 508-U-B-SMART or email us at makemesmart@marketplace.org.

Make Me Smart May 3, 2022 transcript

Note: Marketplace podcasts are meant to be heard, with emphasis, tone and audio elements a transcript can’t capture. Transcripts are generated using a combination of automated software and human transcribers, and may contain errors. Please check the corresponding audio before quoting it.

Kimberly Adams: Hello, I am Kimberly Adams, and welcome to Make Me Smart, where none of us is as smart as all of us.

Kai Ryssdal: I’m Kai Ryssdal, it is Tuesday. Today, it is time to go deep into a single topic. And we’ve been talking about this one for a while and for various and sundry reasons. Couldn’t do it till today. But this is gonna be a good one. And it’s about the Federal Reserve, which is going to raise interest rates tomorrow afternoon, tomorrow being Wednesday. And what that’s going to mean for inequality in this economy, right, because it’s getting worse. There are those who will say that the Fed hasn’t helped. There are those who will say that the Fed has helped. But we’re going to talk about how the Fed does what it does, right? And let’s remember that it does two things statutorily, right? One is a dual, it is called a dual mandate, right? It’s price stability, and maximum employment. And we’re going to talk about what that means in the real economy.

Kimberly Adams: So specifically, in August of 2020, the Federal Reserve added to that mandate, the words “broad-based and inclusive” to that employment part of the mandate, acknowledging this idea that the benefits a strong economy would bring to particularly low income and moderate income communities. Why is it significant? So for decades, I mean, long term, the Black unemployment rate has been double the rate for white workers in this country. And how that looked in practice for the addition of this “broad based and inclusive” being added to the mandate that at the Federal Reserve allowed the economy to run hot or kept interest rates low longer than it might have otherwise, hoping that eventually by letting the economy run hot, keeping the interest rates low, the rising economic tide would really raise all at least many more boats than it might have, under previous policy, particularly narrowing that gap between black and white unemployment.

Kai Ryssdal: The catch, of course, is that now that we have inflation at as measured by the CPI, eight and a half percent year on year, the Federal Reserve is going to start substantially raising interest rates, right, starting tomorrow. And what’s that going to mean for the the the perennial challenge of evening out or reducing Black and minority unemployment in this economy, while taking care of inflation, which is also oh, by the way, hitting all Americans, but arguably Americans, not even arguably, but Americans at the lower end of the income spectrum harder. Anyway. Bill Spriggs, professor William Spriggs is professor of economics at Howard University. He’s the chief economist, also at the AFL-CIO. We’ve had him onMarketplace a couple of times, and Kimberly’s talked to him, Professor Spriggs. Thanks for coming on.

William Spriggs: Thank you for having me today.

Kai Ryssdal: So let’s, let’s do a little tomorrow’s news. Today, the Federal Reserve is going to raise interest rates half a percentage point the first of what is expected to be a series of interest rate increases. What is that going to do to this idea of inclusive maximum employment?

William Spriggs: In the end this may make the Fed either look brilliant, or pitifully sad. The problem of inflation at the moment is rooted in all of the supply chain disruptions that we’ve seen, and the Fed wants to fight that inflation. Unfortunately, it’s tool is not the best to deal with this. The Fed can’t do anything about the shortage of chips, or the bird flu that’s going to create the shortage of chickens or any of the other calamities we’ve been having. So if the Fed is lucky, then what will happen is somewhere in the fall, the chips will come rushing back to the auto factories we’ll get auto production back to its historic levels. And a third of inflation will disappear just because of the chip disruption to autos. And then everybody will say, “Oh, the Fed was brilliant.” But of course, they’ve had nothing to do with it. Because they have nothing to do with when these chips are going to finally appear in the factories. But the primary effect of raising interest rates is to slow demand for durable goods, which slows demand for workers, which threatens raising unemployment. Because if there aren’t enough jobs available, then people become unemployed.

Kimberly Adams: So let’s look at this, like central tenet of what the Fed is supposed to be doing, which is, you know, working towards maximum employment. When you talk about maximum inclusive employment, which is supposedly the new goal. What does that actually mean? And what would that look like in practice?

William Spriggs: I would reword the Feds mandate differently than you did before.

Kimberly Adams: Okay.

William Spriggs: The Fed’s mandate comes from the Humphrey-Hawkins Full Employment Act, which is titled The Full Employment Act. So they’re supposed to achieve full employment, and do it without – do that, without increasing prices. So there’s a difference in the emphasis, they’re supposed to worry about full employment first. The Fed operated under a very rigid belief in the past, that there was an unemployment rate at which inflation would take off, this was called the NAIRU. Under the rule, the Fed would project what they thought was the unemployed – overall unemployment rate. That would ignite inflation. For the longest, they believe this rate was somewhere around 6%. Over time, it slowed down to about 5%. During the 1980s, understand the implication. If I don’t let the unemployment rate go below 6%, or 5%, Black unemployment rate cannot fall below 12 or 10%. For the entire decade of the 1980s. Because of that rule, the Fed never let unemployment get below 5%. So for the entire decade, every month, the Black unemployment rate was above 10%. Why is that significant? Because in February of two years ago, for the very first time, in our record of unemployment, the unemployment for white men went above 10%.

Kimberly Adams: Hmm.

William Spriggs: Understand that in the entire recorded history of unemployment, monthly unemployment in the United States, white men have only had one month, one month, in which the unemployment rate was about 10%. Black people had 10% unemployment every month for an entire decade because of this philosophy. Finally, at the end of the 1990s Alan Greenspan decided, well, let’s see what happens if the unemployment rate goes below this. And you know what, nothing happened. Inflation did not go through the roof, that dragon that’s at the end of the map, you know, the flat earth map, and there’s the dragon that each year if you go there …

Kimberly Adams: There be dragons.

William Spriggs: And so that is the crucial point, it isn’t really maximum employment that’s inclusive, from my perspective, it’s the Fed having a deeper understanding of how the labor market works.

Kai Ryssdal: So Jay Powell and the gang at the Federal Open Market Committee as the pandemic hit, and and interest rates went to zero, and they started flooding the system with cash and mechanisms by which to maintain liquidity in this economy have, to some degree helped with inclusive unemployment, the question of the day is now that they’re going the other way, now that they’re running off the balance sheet, and now that they’re going to be, I don’t know, a couple of three maybe interest rates of a half percentage point a piece this year. What is going to happen to that racial unemployment gap?

William Spriggs: The two to one is going to stay two to one. The, the gap in the linear sense, you know, like, the Black gap minus the white  gap, it will get bigger, because the unemployment that they are risking, right, the unemployment rate going up, they are risking it because of the source of inflation is a supply shock, not a demand shock. And we saw from last quarter, they’re real headwinds for the economy because we took a big hit, we weren’t able to export as much as we normally do. And going forward with what’s going on in the Ukraine, we’re likely to see continued disruption in global trade, which is going to hurt to be another headwind. And we’re going to continue to see price pressure because the effect on oil from Russia, and the importance of the Ukraine as the breadbasket of Europe, putting pressure on grain prices.

Kimberly Adams: Dr. Spriggs, if you could help me understand sort of this, how this experiment seemed to have gone, seems to have gone to you because you did have the Fed saying, we’re going to pay more intention, more attention to this Black-white unemployment gap, we’re going to let the economy run hotter, longer at the risk of inflation, to try and attempt to close that gap. Have they just like thrown up their hands and say, “Oh, well, it didn’t work?”

William Spriggs: Well, one they characterize that incorrectly, run the economy hot. That’s not – to reach full employment is not running the economy hot. And this is on the basis of economists believing that the Black-white unemployment gap is a skills gap. It is not a skills gap, on no dimension, visit the skills gap. It’s a friction in the labor market, because discrimination is real. And black workers face that discrimination. And so the idea that the current labor market or the labor market before was really tight, and they were overheating the economy. That just wasn’t true. There are lots of workers out there who would tell you, “I don’t think the labor market is tight,” because they still haven’t come back to the labor market. And the whole point of this is supposed to be that the Fed becomes better economist. This is why the Fed needs greater diversitynd in on the board, who are the economists advising it, right. Because once you get that you go, well, that unemployment rate is not the North Star. You need additional information. And you need to get off this idea that you’re running the economy hot to get Black unemployment down. That’s the most unnerving thing. It’s a microaggression I face as a Black economist all the time.

Kai Ryssdal: We should point out here. Two things. Number one, that diversity on the Board of Governors of the Federal Reserve is currently being blocked by Republicans in the Senate, itme one. But item two, what I hear you saying here, professor, is that Jay Powell and the gang at the Fed are not equipped to do anything to do to to substantively reduce that racial unemployment gap, because monetary policy can’t solve racism in this economy.

William Spriggs: No, that’s not what I’m saying. Not at all.

Kai Ryssdal: All right.

William Spriggs: So if if you go back to the fall before the COVID pandemic, we actually have the unemployment rate of white men and Hispanic men equal. For a long time. Economists also thought that the one and a half to one ratio, which is not always the same for the Hispanic community as for the Black community, but it was running roughly one and a half to one almost all the time. And that’s because the cost of discrimination goes up the closer you get to full employment. And at that point, you you put oil into that friction, and you can ease the market. The Fed has never let the unemployment reach actual full employment. So we haven’t gotten to the point where we can grease everything. But when the labor market gets tight, the unemployment rate for Blacks with associate degrees does in fact, get better than the unemployment rate for white high school dropouts. Unemployment rate for Blacks with high school degrees, does in fact get very close to the unemployment rate for white high school dropouts. So so what happens is, when the labor market tightens those disparities ease up, and of course, if you leave it long enough, then yes, the Black to white ratio would fall below to the one we just haven’t ever taken seriously full employment.

Kimberly Adams: I’m really struck by what you said a moment ago, this idea that the language of running the economy hot is a microaggression, in that the idea that you keep pushing for economic improvement until the Black unemployment rate improves at the same rate or even getting close to what the white unemployment is, is in in the way that language is framed kind of overdoing it. And I’m just kind of sitting within processing that and how that language is pretty common throughout economics. But getting back to sort of the role of the Fed here, in the environment that we’re in racism and economics is real. And all of the pushback against, you know, sort of blaming the Fed for high inflation while we were trying to get Black unemployment up. What is the role for the Fed in in closing that gap? Or do we just sort of, is there a role for it?

William Spriggs: Well, you have to fight discrimination on every front. We do have laws, we have equal employment opportunity laws, it is illegal to discriminate, but we know it takes place. So of course, we can beef up the EEOC, which has had a frozen budget despite taking on being charged with fighting lots of discrimination, not just race based discrimination. So so we know we can do things about discrimination. But we also know as I mentioned, discrimination against Black workers goes down, when the labor market tightens. The gap between unemployment based on you know, people’s educational level, that that part of discrimination gets smaller. And that’s the key thing that you have to reduce if you want to reduce the black white unemployment gap. You have to get that Blacks with more education than whites, start to check the unemployment rate of equally educated whites. That’s the key. And that does happen when the labor market tightens when the labor market gets to lower levels, the unemployment rate for Blacks with more educational fights, that starts to equalize quite dramatically. But the Feds tendency in the past is every time we get close to that they raise the interest rates, the unemployment rate goes up, and then everybody says we can’t do anything about it. You know, just because for, and you know, we’ve had like almost eight months of time when Blacks with associate degrees do  better than white high school graduates. But then you raise the interest rate, like the market turns around, and the next thing you know, that level of discrimination goes back up.

Kimberly Adams: William Spriggs, professor of economics at Howard University and chief economist to the AFL-CIO, thank you so much. Lots of food for thought there.

Kai Ryssdal: Thanks for your time, sir.

William Spriggs: Thanks for having me.

Kai Ryssdal: So there we go. Right, it’s man, I still think I was right, that basically the Fed doesn’t have the tools to solve racism in this economy. That’s what I think.

Kimberly Adams: Well, was it ever – have we created institutions that were intentionally designed to not fix racism, though?

Kai Ryssdal: Oh, yeah. Yeah.

Kimberly Adams: Is it – you know, of course, the Fed wouldn’t have the tools to fix racism in this economy, when most of the institutions that we have were not exactly designed with equity in mind. And so trying to sort of reverse engineer, an institution like the Fed to fix one of the country’s foundational problems, may have been a bit too optimistic to begin with. Yeah, but I’m still just sort of turning over in my head this idea of the phrase, running the economy hot as a microaggression. And I absolutely hear what he’s saying. Because you know, you’re asking for – you’re asking for the basics and people are telling you it’s the extreme.

Kai Ryssdal: Let us know what you think about the topic the conversation anything at all, actually, that you hear on this podcast or whatever’s on your mind. Come Wednesday on our Whaddya Want to Know show, we do those as well. Our number is 508-827-6278, 508-U-B-SMART, is how you can get us.

Kimberly Adams: You can also send us a voice memo at makemesmart@marketplace.org. And we will be right back.

Kimberly Adams: Okay, time for the news fix. And it’s obviously the one story that we are all talking about today. Man what a bombshell.

Kai Ryssdal: Tell you what, tell you what. So it’s it’s a story out of the Supreme Court anPolitico and the Alito draft opinion. overturning Roe v. Wade, and Casey, the two main abortion rulings of the past 50 years in this society and in this economy. And for the first time actually, my news fix is an episode of this podcast from last September I think it was when Molly and I spoke to Caitlyn Meyers at Middlebury about the amicus brief that she filed in the Dobbs argument that Dobbs is the case in Mississippi that the court is we’re led to believe by this leaked draft – draft going to issue come June and overturn Roe vs. Wade. And it’s all about abortion as health care and reproductive rights as a key economic right. And I just – you should go and listen to it because it hits on so many points that you are not hearing in the coverage of the last, what 12 or 18 hours. Look, a lot of it’s been about what it means for women in the society. Rightly, it’s also been about the leak, but it hasn’t really other than David talking to her on the morning show this morning for about four or five minutes, it hasn’t really been about the economic impact of eliminating abortion in this society. And it’s, it’s gonna be huge, it is going to be huge.

Kimberly Adams: Especially without infrastructure to support children and families. This idea that we live in a country where prenatal care is unaffordable for many people giving birth is not only exceptionally risky, but extraordinarily unaffordable for many people. Raising children is incredibly unaffordable for many people. And so we disincentivize and from an economic standpoint, having children in the first place and also penalize women who want to make a choice not to be parents. And I was skimming – I mean, it’s a long draft opinion, and I was skimming it. And I one of the things that really jumped out to me was that Justice Alito is attempting to compare the overturning of Roe v Wade to the overturning of Plessy versus Ferguson, which was the, you know, very infamous ruling from the Supreme Court that’s, that created the standard of separate but equal in discrimination. And those two things are not the same. I’m just gonna put that out there. But this is definitely a turning point in this country. And some, you know, lots of people who know me know, I spent the entirety of my youth attending a very conservative, educated school, you know, Southern Baptist, extremely religiously conservative, and we had Bible class like everyday chapel once a week, and we spent a lot of time in biology class, talking about abortion, and I’m very familiar with the arguments and how incredibly important and emotionally motivating this is for many people who are strongly against abortion and people who really feel like this is the most important issue in the country. I remember going around and interviewing people in the lead up to the 2016 presidential election, when everyone was saying, “oh, evangelicals are never going to vote for Trump. There’s no way.” And I was like, “yes, they will.” Because of this issue in particular, and I really do think that a lot of people who aren’t familiar and who don’t consider themselves religious, really underestimate how important this issue is to so many people and how strong of a motivator it has been for political action. And real – recognize too late, how much people prioritize this issue. And now there’s going to be really lasting political and economic and motional – emotional and moral consequences. And probably, of course, many health consequences for people as a result.

Kai Ryssdal: Yeah. There’s there’s so much to say about this ruling, thoughts we’re all having. It’s huge news. But it’s, it’s to the, to the point of the conversation Molly and I had with Caitlyn Meyers. It’s an enormous economic story as well for these women, who now we’re going to be affected for the rest of their lives. And I think we just will –

Kimberly Adams: Well, poor women, specifically, because wealthier women will always be able to get access to the carrier, they’ll be able to travel out of the country, they’ll be able to find a way to get access to abortion pills or travel to a state where they can get that service. What we’re really talking about is poor women.

Kai Ryssdal: Yep, for sure.

Kimberly Adams: Okay. That is the news fix. I’d be really fascinated to hear what people have to say and their thoughts about this news. In the meantime, let’s do the mailbag.

Kai Ryssdal: Lots of things. First up is a voice message we got following up on last week’s Tuesday show that Amy Scott and I did about the build to rent market. Here you go.

Peggy: Hi, this is Peggy in Seattle. And I’ll tell you one thing that’s happening a lot in Seattle, there are quite literally hundreds of ADUs and detached ADUs going in to the rental market. My next door neighbor has actually purchased a single family house between us and put a rental in the bottom, will rent the main house and then is going to build a cottage in the back. So he’ll have three rental properties on a regular single family lot which the city is allowing. But it’s super interesting. I think ADU, DADU story would be super cool to buy. Thanks for making me smart.

Kai Ryssdal: ADUs we should say are auxilary dwelling units sometimes called granny flats, in-law apartments, what have you. I think it’s super interesting that the guy next door is going to put three rental properties basically, on one thing I mean, you know, there’s there’s a story to be done here about the need for density in housing and getting rid of single family lots, which is a thing out here in California, but wow, three-on-one in a residential neighborhoods kind of wild.

Kimberly Adams: I mean, it happens quite a bit here in D.C., like the very classic sort of row house with the basement apartment that you know, there’s a walkout and you have like younger people, particularly college students, like living in the dark all the time, my friend bought a very expensive condo. That’s basically in a basement in D.C. and just like, wow, but yeah, housing is in short supply all over and, you know, you run into the “Not in my Backyard’ element, but also not wanting to build, you know, shelters or low income housing in the neighborhood. So, I think we’re really coming up on in, especially in cities, are people going to be willing to tolerate, you know, accessory dwelling units and, you know, multifamily units or, you know, larger complexes of affordable housing in an area. And we’re kind of running out of the option to say none of the above.

Kai Ryssdal: Yeah, Amy’s coming back, by the way in, in number of weeks, and over a month or so. And we’re gonna do a whole housing deep dive with her. So look out for that one. In y’all’s feed as they say.

Kimberly Adams: Nice.

Kai Ryssdal: Yeah. Yeah.

Kimberly Adams: Okay, and one of you called in with an idea for our next fundraising campaign.

Adnan: Hi, guys. My name is Adnan, I’m from Jacksonville, Florida. I was thinking if you guys really want us to raise money for Marketplace you gotta utilize the power of the NF T’s. I don’t remember if you’ve ever talked about Kai’s, the Jeep picture being turned into an NFT but one thing I realized while listening to a couple episodes was you need to get an mp3 of Kai’s grumpy old man sounds whether it’s the sighs or the grunt or the verbal eye-rolling. I’m pretty sure you can raise a lot of money by selling an NFT of this mp3. Thank you guys so much for making me smart.

Kai Ryssdal: Oh my god, I’ve become a caricature of myself.

Kimberly Adams: It’ll be like the modern day version of Carl Kassell recording people’s voice messages, it’ll be the “Kai’s grumpy old man sounds ringtone.”

Kai Ryssdal: Moving right along to the end of this merciful end of this podcast. Before we go we’re gonna leave you as we always do with this week’s answer to the Make Me Smart question if you could hear it over Kimberly laughing at me. Here’s, here’s the question of course what is something you thought you knew but later found out you’re wrong about. Hit the tape, please.

Diane: Hi. My name is Diane Hooker, live in Pocket City, Oklahoma. I bet I’m your only listener in {ocket City, Oklahoma. Anyway, I have an answer to the Make Me Smart question. When my kids were kids, young teens back in the mid aughts, they saw a lot of new chain stores opening around in Denver where we live. We discussed this a lot and they came up with a cute little name for the companies that they felt were taking over the world. Mickey McStar Mart Mickey McStar Mart So this stood for Disney, McDonald’s, Starbucks and Walmart. We were totally, totally wrong about that.

Kai Ryssdal: It’s actually pretty good. Mickey McStar Mart.

Kimberly Adams: What happened to every restaurant being Taco Bell?

Kai Ryssdal: Yeah, that was pretty good. Mickey McStar Mart.

Kimberly Adams: Mickey McStar Mart, instead it’s all just Amazon. All right, well on that uplifting monopolistic note, keep sending us hear your answers via voice memo to our email at makemesmart@marketplace.org, or leave us a message at 508-827-6278 also known as 508-U-B-SMART. I wanted to like do a play on Mickey MStar Mart for Make Me Smart, like, but couldn’t come up with it quick enough. Anyway, Make Me Smart is directed and produced by Marissa Cabrera. Ellen Rolfes writes her newsletter our intern is Tiffany Bui.

Kai Ryssdal: Charlton Thorp engineered. Mingxin Qiguan is going to mix it down later. Ben Tolliday and Daniel Ramirez composed our theme music. The senior produce is  Bridget Bondar. Donna Tam is of course the director of On Demand and Marketplace’s Vice President and General Manager is Neal Scarbrough.

Kimberly Adams: Mickey McMake Smart?

Kai Ryssdal: Yeah, don’t force it.

Kimberly Adams: Okay, fine.

Kai Ryssdal: Sorry.

Kimberly Adams: It’s all right. I tried.

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