Karen Dynan has been reported as one of a few economists on Biden’s shortlist to replace Lael Brainard on the Federal Reserve Board of Governors. While her proponents have highlighted the Harvard-trained economist’s perfect centrist resume, her recent statements on how best to tackle inflation should concern workers and their allies. And this blithe analysis concerning unemployment should come as no surprise – Dynan, like Biden’s foils in the GOP, believes cuts to Social Security benefits are likely.
Seeks More Unemployment Even as Real Wages Fall
Even as inflation has eased (the CPI’s most recent inflation data, for December 2022, showed that inflation had dropped for the sixth consecutive month) Dynan has continued to portray inflation as a monster that must be slayed at any cost – including if that means hurting workers and creating unemployment where there previously was none.
In a January 2023 interview, Dynan said “I don’t think any disinflation is going to be sustainable without some softening of labor demand” – an abstracted, academic way of calling for the Fed to deliberately increase unemployment. (People without jobs spend less money, which lowers inflation over time. It’s cruel, and it’s not the only way to reduce inflation, but it is the easiest tool at the Fed’s disposal to do so.)
The Federal Reserve plays a crucial role in two crucial parts of US economic policy – ensuring the nation’s largest banks are stable and setting the Fed funds interest rate. The second of these is a crude tool for heating up or slowing down the American economy by making it cheaper or costlier for individuals and businesses to borrow money. It is the second tool that threatens to harm workers and which Dynan has expressed an interest in wielding.
Dynan’s interest in using the Fed’s rate hiking power to create unemployment and reduce upward wage pressure has not only been expressed in the January interview. In a December interview with the Harvard Business Review, Dynan expressed her disbelief that inflation could subside without job losses (as it has done consistently for six consecutive months.)
“The Fed’s hope is that bringing labor demand back in line with labor supply—without a lot of job loss—will be enough to reduce inflation back to its target level. But history suggests that won’t be enough. A more likely scenario is that the unemployment rate will have to rise considerably to reduce wage pressures sufficiently to wring the excess inflation out of the system,” Dynan said.
This aligns almost perfectly with the views of Treasury Secretary Larry Summers who, as my colleague Max Moran wrote, has consistently ignored alternative explanations for inflation and even the Fed’s other obligations besides preventing inflation. The Fed also has a responsibility to promote full employment across the economy, which is of exactly the same legal importance as its anti-inflationary responsibility and is usually ignored by centrist economists like Summers and Dynan.
Dynan being considered for Brainard’s seat is even more concerning when juxtaposed with Brainard herself, who was willing to call out increased corporate profits as a major driver of inflation. Dynan has made no such statements, routinely stating that the cause of inflation was Covid relief programs to the exclusion of other explanations. This explanation is especially at odds with the U.S. Bureau of Labor Statistics February report that concluded “From January 2022 to January 2023, real average hourly earnings decreased 0.9 percent, seasonally adjusted.”
Dynan would steer the Fed toward even higher interest rates in the hopes of creating a minor recession to ease upward pressure on wages which cannot be the driving force behind an inflation that is outpacing their growth. Her calculations are simple; by creating higher unemployment, American workers will be less emboldened to demand higher wages and would have less money at their disposal, ending inflationary pressure.
Dynan Out of Step with Biden, Democrats, and Public Opinion on Social Security
The Biden Administration should be aware that Dynan is out of step with their stated goals of supporting working Americans and the labor movement. Dynan has stated as recently as 2020 that she expects a cut in Social Security benefits in the coming years (“We know with social security it’s going to be a matter of raising taxes or cutting benefits, or probably some combination of that.” (emphasis added).
After making protecting Social Security the focal point of his State of the Union Address, Biden should be wary of promoting an economist who has helped legitimize the arguments that Social Security benefits likely must be cut.
The past two years of the Biden economy have surpassed expectations. Inflation has eased and jobs have come back at a rapid clip. With the once-mythical soft landing now a viable possibility, the President should avoid nominating someone who would jeopardize that progress, put millions of Americans out of work, and deliberately create a recession — all (ostensibly) to end inflation that was already subsiding.