This blogger has a valid complaint about some recent economics coverage in the Washington Post. He accurately notes that a story in Tuesday’s paper fails to mention the trade-off between interest rates and employment.
He wrote, “In an article titled ‘Fed Chief Raises Inflation Concern’, authors Nell Henderson and Brooke A. Masters fail to mention the trade-off between employment and interest rates. They paint the trade-off as follows:
“Like many economists, Bernanke argues that keeping inflation low is vital to promoting a strong economy because it allows people to make purchases, borrow money, plan for retirement, invest and make other financial decisions without worrying about rising prices. But beating inflation means raising interest rates, which crimps consumer spending by raising borrowing costs.
“Nowhere do the authors mention that beating inflation also means raising unemployment.
“Dean Baker explains the relationship in his book The Conservative Nanny State. Rising interest rates discourage borrowing and reduce the buying power of those who do borrow, since they now must pay higher interest on their loans. As a result, there is decreased demand in the economy, slowing growth and job creation. According to Baker:
“the Fed worries that if too many people have jobs, or if it is too easy for workers to find jobs, there will be upward pressure on wages. More rapid wage growth can get translated into more rapidly rising prices â€” in other words, inflation. So the Fed often decides to raise interest rates to slow the economy and keep people out of work in order to keep inflation from increasing and eventually getting out of control.
“People can have an honest debate over whether or not it is currently appropriate to raise interest rates. But such a debate must consider that higher interest rates lead to lower employment, a cost that Henderson and Masters fail to consider in their article.”