After almost a year of concerns over inflation and a hot economy, the Federal Reserve's repeated interest rate hikes have slowed the economy and raised recession concerns. That was the point: 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 choices that have pushed policymakers to see constituents primarily as consumers — with prices and market choice as their foremost concerns — and government as responsible primarily for maintaining consumer markets. These choices shifted both understandings of American citizenship and the very operations of the state over the past 80 years.
Since the 1940s, the federal government has been charged with promoting economic stability through "maximum employment, production, and purchasing power." But, over the latter half of the 20th century, the Fed increasingly prioritized stable prices over maximum employment. This shift was not natural, but rather the result of decades of work by neoliberal theorists and conservative policymakers to prioritize stable prices and markets for corporations and investors rather than tight labor markets that empower workers.
In 1937, the Federal Reserve argued explicitly that "price stability should not be the sole or principal objective of monetary policy." Rather, it defined economic stability as "full employment of labor and of the productive capacity of the country as can be continuously sustained." The Board of Governors believed that goal might, in some instances, mean accepting inflation as a price of, not threat to, stability.
In early 1945, as World War II and the wartime full-employment economy both came to a close, Congress began to debate a full employment bill that proposed all men had a right to a job, and that the government take responsibility for creating those jobs where the private sector failed. This commitment proved a sticking point for many in Congress who believed the private sector, not the federal government, should create jobs. As a compromise, the final version of the bill, the Employment Act of 1946, encouraged consumption to drive employment and vice versa. The idea of a "consumer" moved one step closer to being at the very center of the American government's management of the economy.
Only a year after the Employment Act's passage, in 1947, the Mont Pelerin Society met for the first time. The scholar-activists there seized on the idea of governing for the consumer as a means of pushing back against the New Deal state, which they argued had overly centered workers.
In place of a model of governance where the state helped maintain a balance between oppositional workers and corporations, these conservatives proposed a model of economic governance where consumers and corporations might be seen on the same side with a shared interest in a competitive market that kept prices low.
Interestingly, the focus on consumers continued not only through the 1950s but into the more liberal era of the Great Society. Under President Lyndon B. Johnson, efforts to foster equality centered expanded access to credit and markets. For example, the Higher Education Act of 1965 broadened access to college education through the creation of the first large-scale federal student loan program instead of through an expansion of the public university system. In another example, to address housing inequality, the Housing Act of 1968 created mortgage-backed securities that gave low-income buyers the ability to get credit to purchase homes.
The consumer, not the worker, also increasingly guided the government's management of the economy. Congress once again debated full employment legislation in the late 1970s during the Jimmy Carter presidency thanks to a push from labor and the Congressional Black Caucus in the face of the 1970s recession. As in 1946, the original proposal included a provision to make the federal government an employer of last resort if full employment (defined as above 4% unemployment) was not reached in five years. But the bill that 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 maximum employment only in the context of the first two goals.
The next year, Carter's appointee to chair the Federal Reserve, Paul Volcker, initiated interest rate hikes to purposefully put the economy into recession to bring down inflation. The Volcker Shock, as it came to be known, solidified the idea that inflation was the most significant problem the economy could face, and that controlling inflation was worth an occasional recession.
More than 50 years later, we know that monetary policy that prioritizes combating inflation rather than ensuring employment has led to deeply unequal outcomes. In the wake of the Volker Shock, for example, the Black unemployment rate reached 19.5%, 9 points higher than the overall unemployment rate. Further, prioritization of prices over employment led to decades of wage stagnation for most workers while the assets held by the wealthy grew in value.
Expanding access to higher education through student debt has also created vastly unequal outcomes for Black and white students. Likewise, improved access to home loans for lower-income borrowers did not address a still-segregated housing market that left Black families vulnerable to predatory lenders.
In short, addressing inequality through consumer-oriented policies has failed.
President Joe Biden entered office with a policy agenda that decentered the consumer in many — but not all — cases. In his first year in office, his administration proposed policies that experimented with the government providing child care, broadband and a host of other services directly, rather than through subsidies that fostered consumer markets. And, into early 2022, the Federal Reserve seemed to be prioritizing employment over prices.
As a result, employment boomed. Workers gained more labor market leverage than they have had in years. By June of 2022, Black male employment exceeded its pre-pandemic levels. For the first time in almost 40 years, wages at the bottom of the income distribution have kept pace with, and by some measures even outpaced, inflation.
At the same time, prices rose for a range of reasons — from supply chain issues to the war in Ukraine to corporate greed. In the face of rising prices, the habit of viewing the consumer as the priority of economic governance reappeared with a vengeance.
The Fed's recent decisions to raise interest rates are rooted in consumer-centric governing. It's not clear its actions will significantly impact prices, but history shows, they probably will harm American workers — especially people of color, those with less education and other already marginalized workers who benefit the most from a tight labor market and are often the first to suffer in a slack one.
Indeed, although today's liberal policy agenda has re-centered the importance of public goods, such efforts have been undermined because almost all Americans, including politicians and reporters, are accustomed to measuring the health of our economy through purchasing power. Understanding this history is the first step to freeing ourselves from it.
Suzanne Kahn is the managing director of research and policy at the Roosevelt Institute and author of, "Divorce, American Style."