Fed Stands Prepared to Raise Unemployment to Keep Wages Down

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That is what Janet Yellen, the president of the San Francisco Federal Reserve Bank, reportedly said yesterday. Of course, those were not her exact words. She warned of the dangers of inflation and then said, "we cannot and will not allow a wage-price spiral to develop." USA Today readers may have applauded the commitment to preventing a wage-price spiral without understanding that it means that the Fed will throw people out of work to put downward pressure on wages. That is the Fed's mechanism for preventing a wage-price spiral. It might be good policy to use higher unemployment to fight inflation, but readers should at least understand the trade-offs involved.

--Dean Baker

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