Air Conditioners and the Federal Reserve Cooled Down the Economy

In early December the Federal Reserve Board moved to slow down the economy by raising interest rates. While this rate hike was widely expected, its impact will be to slow the rate of economic growth, thereby reducing the rate of job creation.

The Fed move followed an agreement that President-Elect Donald Trump negotiated with Carrier, an appliance manufacturer, to save 800 jobs in Indiana. Carrier had become a major issue in the presidential campaign since it had revealed plans to shut an air conditioner factory in Indiana and move production to Mexico. Donald Trump had railed against this plan as a betrayal of American workers and vowed to put tariffs on companies that shifted jobs when he became president.

After the election, he was questioned on this pledge. Trump, along with his vice-President Michael Pence, who is currently the governor of Indiana, sought to work out a deal with Carrier. They negotiated a package, including $7 million in incentives from the state of Indiana, which persuaded Carrier to keep some of the jobs in the state. It appears that Trump may have also threatened retaliation against United Technologies, Carrier’s parent company, which is a major military contractor.

Regardless of the merits of deal, it was a huge public relations victory for Trump. He was seen as carrying through on a campaign pledge. Perhaps more importantly, Trump was seen as going to bat for U.S. workers, something we’ve rarely seen from U.S. presidents in recent years.

The Carrier deal got huge attention at the time, with all the major news shows featuring it prominently as did the riggedbakercountry’s major newspapers. This is worth contrasting with the Federal Reserve Board’s interest rate hike, which got virtually no attention outside of the business pages.

While the exact impact of a rate hike is not easy to calculate, in part because rate hikes are often largely anticipated, a reasonable range might put the impact at between 5,000 and 15,000 jobs a month. In other words, because the Fed raised rates in December, at the end of a year we are likely to have between 60,000 and 180,000 fewer jobs than in a scenario in which the Fed left interest rates unchanged.

It is worth comparing this impact with the jobs saved in the Carrier deal. The low end of the range would be 75 times as many jobs as were saved in the Carrier deal. The high end would more than 200 times as many jobs as were saved in Indiana.

Furthermore, the Fed’s interest rate hike in December cannot be viewed in isolation. The Fed is on a path of rate tightening with almost everyone expecting further hikes in 2017 and 2018. There will be considerable debate both inside and outside the Fed about the need for higher interest rates.

The ostensible rationale for the December hike was the need to slow the economy in order to prevent inflation from spiraling out of control. However the inflation rate remains well below the Fed’s target range, and the inflation data released in the week following the rate hike showed inflation slowing modestly.

This raises the possibility that the Fed is needlessly slowing the economy and preventing workers from getting jobs. In addition, by weakening the labor market, the Fed is reducing workers’ bargaining power, preventing them from getting pay increases. This is especially unfortunate since a higher rate of unemployment disproportionately harms the least advantaged workers, including those with less education, as well as African Americans and Hispanics.

Given what is at stake, the Fed’s rate hike should have been dominating news reporting for the days immediately before and after the hike. Reporters should have been conveying the view of experts along with key pieces of economic data, such as numbers on inflation, job growth, and employment rates.

As it was, the Fed rate hike received little attention outside of the business pages. While it would have been almost impossible to avoid news on the Carrier deal, even most people who follow the news closely probably know next to nothing about the Fed’s rate hike and the issues it raises.

The difference in the attention given these two events is troubling, but the greater concern is for the future shape of reporting rather than this history. Donald Trump is a person who is known to most people first and foremost from his performances in a television show, The Apprentice.

While this show is supposed to be “reality TV,” it is actually a carefully staged production in which Donald Trump is portrayed as a thoughtful and decisive businessman, assessing the skills and performance of his would be assistants. In order to convey this impression, scenes can be filmed an endless amount of times, and then edited shamelessly in order to produce the right effect.

Given the success of his show and his presidential campaign, Donald Trump will likely take the same approach to the presidency, putting on staged events with the idea of getting the media to portray the desired image of President Trump. His first shot in this effort was the Carrier deal where he got the media to give prime time to a deal that will likely have less than 1.0 percent of the impact on jobs as a little noticed Fed rate hike. We will soon find out whether the U.S. media are prepared to act as serious news reporters or are content to act as production assistants in a real life reality TV show.


This column originally ran in The Hankyoreh. 

Dean Baker is the senior economist at the Center for Economic and Policy Research in Washington, DC.