Higher interest rates are a sign of workers’ power

There has been a lot of talk and fear about “inflation” in the past months. But what is inflation? We are told that it is the rise in the price of goods and services. But this is only part of the story. Since wages can make up more than half of all business expenses, the fear about inflation is really employers’ fear of higher wages. 

There is no doubt that inflation is bad for workers. When the cost of goods and services rise, it reduces the purchasing power of our wages. However, the government’s only response to inflation has been to raise interest rates. This monetary policy is designed as an attack on workers.  

Inflation has been rising between 7 and 8 percent per year since the economy began recovering about two years ago. In response, the Federal Reserve has been regularly raising interest rates from about 0 percent % to the current 3 to 3.25 percent with threats to raise them even higher. The Fed has raised interest rates four times this year alone. This means that the cost of borrowing is going up and will further reduce our real wages. 

The Fed claims it is raising rates to fight inflation. Fed Chair Jerome Powell, a Trump appointee, gave a startlingly candid reason for raising interest rates in May that we rarely hear. He said rate hikes are needed “to get wages down.” With record low unemployment, and average wage increase of 5.3 percent in the past year, Powell wants to raise unemployment and inflict “some pain to households and businesses.”   

Powell’s comments demonstrate that the Fed is hardly neutral. Rather, it is a tool of employers against workers. Higher interest rates raise costs, which discourages buying. That has the effect of reducing demand for workers and triggering layoffs. Less spending coupled to layoffs reduces tax revenues which leads to government deficits, cutbacks in services and even more layoffs.  

Higher interest rates makes it more expensive for businesses to borrow, encouraging them to lay off workers and slash wages which also increases profits.  

Using interest rates to raise unemployment is intended to weaken worker power. University of Texas at Austin economics Professor Emeritus Harry Cleaver, in an email interview, said, “we have the Fed doing its thing, once again, in service to capitalist corporations and at the expense of workers throughout most of the income and wealth hierarchy.”  

The expectation is workers will be afraid to lose their jobs since they will have a harder time finding a new one. As a result, we will accept poor pay and working conditions and avoid unionizing. It also means unionized workers will be more likely to engage in concessionary bargaining that accepts wage and benefits cuts and higher productivity quotas.  

Fighting inflation is really coded language for wages being too high. But are they? Wages have only risen 5.2 percent in the past year after decades of no growth. Even this small increase is a decline because inflation rose faster at 8.3 percent. In fact, corporate profits have been rising about seven times faster than wages, according to Josh Bivens of the Economic Policy Institute.   

Using higher interest rates to attack workers is hardly limited to the U.S. As a key part of so-called “neoliberal” economics, interest rate increases have been combined with privatization, deregulation and tax cuts on corporations and the rich by the International Monetary Fund around the world as a condition for getting its “help.” This has repeatedly resulted in open markets, spiraling debt, smashed unions and a low wage labor force to be exploited.

Why unleash higher interest rates now? After all, if profits are up, then price increases are really unnecessary. But the federal government is not considering limits on profits and prices as it last did during World War II and then during the Nixon years. And certainly, except from former Labor Secretary Robert Reich, we hear little about raising taxes on corporate profits and on the rich, both of which have declined significantly over the past four decades.   

Rates are going up because the elites have seen a widespread upsurge of worker organizing since the start of the pandemic when there were hundreds of wildcat strikes and the threat of a national transport strike during the first few months.

Since then, we have also seen a modest increase in already historically low number of strikes and a continued surge in strike threats that have led to rising wages. The Congress responded to these demands with trillions of dollars in new spending. A large portion of the spending went to temporary measures like subsidized business payroll costs, and extended unemployment, paid sick and family leave, and tax credits to families with children.

Why does the Fed and not Congress control interest rates and the money supply? In 1913, Congress handed its power over the currency in Article I, Sect. 8, Clause 5 of the Constitution to a network of regional and national bank boards we call the Fed. Most of the regional directors are bank executives. Although the seven-member national board is appointed by the president and confirmed by the Senate, Congress has no further check on its power. They serve 14-year terms, which last through at least two presidential administrations. They are difficult to fire and not subject to government transparency laws. The Fed only recently started holding press conferences. 

The Fed was designed to be an elite minority check used to prevent economic democracy. The Fed steps in on the side of the employers against workers who have too much power and threaten the propertied elites.  

Today, while wages are rising slowly for the first time in decades, elites see that workers are getting organized and the balance of power is starting to tip in our favor. Their response is to raise interest rates and push up unemployment — in order to inflict some “some pain” that will weaken worker power. 

So what can be done? Because controls on prices and profits are unlikely, the most effective strategy is to keep organizing to raise our wages to match rising prices.  

What we cannot do is cave in. The last time we had high inflation, in the late 1970s, our unions engaged in concessionary bargaining resulting in disastrous wage and benefit cuts and layoffs. This failed strategy decimated the workers’ movement for four decades, an historic defeat from which we are finally starting to recover.  

Higher inflation and interest rates are a sign that workers are becoming more powerful. This is the time to keep using our power. 

Robert Ovetz is the author of the new book "We the Elites: Why the US Constitution Serves the Few" (Pluto, 2022). Contact him with feedback and ideas for columns at rfovetz@riseup.net.