opinion | Marc Miles

Low interest rates actually hurt the middle class

Should the Fed raise interest rates?

The call to raise interest rates has many middle and low income workers worried, but the majority of Americans would actually be better off if rates were allowed to rise. The pressing social problems of slow growth, sluggish wages, and income inequality are all exacerbated by the Federal Reserve’s continued low interest rate policy.

This is basic economics. When the price of apples rises relative to oranges, people buy fewer apples and more oranges. In this case the apples are workers and the oranges are machines and technology.

Low interest rates reduce the cost of investing in machines and technology, making them more attractive. The relative cost of workers goes up. As businesses decide to expand, they rely more on machines and technology and hire fewer workers. Thus, as the economy expands, fewer jobs are created. And i f fewer workers are needed, there is less pressure for wages to rise. As we have seen, wages have barely kept up with inflation.


Also, income inequality widens when interest rates are low. With machines and technology doing more of the work, proceeds tend to go to those providing the capital to buy them and not to workers. More money ends up in the bank accounts of the wealthy upper income investors and less finds its way into the hands of middle and low income workers.

The daily discussions of Fed policy overlook these undesirable side effects. Yet they are real. A recent Wall Street Journal story noted how the current shift in the economy toward slow growth is different. It asked if we have reached a tipping point of machines replacing workers without also creating new jobs. If so, why now? Low interest rates provide a plausible answer.

Of course, the impact of interest rates on relative job demand is not unique to the current predicament. It has been clearly evident in the past 50 years of US data.

The US Federal Reserve in Washington.
The US Federal Reserve in Washington. (AFP/Getty Images)

Using the government’s estimates of capital assets and employees, the back and forth of how much labor is used relatively can be tracked to at least 1960. Over these 50-plus years, there is an upward drift or trend in the use of machines relative to jobs. However, year to year, as interest rates move, the ratio migrates above or below that trend.


With high interest rates, capital is relatively more expensive and the ratio falls below the trend line. Conversely, when rates are low — like today — capital is cheaper, and the ratio jumps above the trend.

For example, in the 1970s when inflation and interest rates took off, the amount of capital used per worker plummeted. Payrolls of businesses, nonprofits, and government suddenly ballooned. The industries most hurt by these soaring prices were the most capital intensive, such as autos and steel. Suddenly those industries were part of the “Rust Belt.”

Conversely, in the mid-1980s, rates began to fall. By the early 1990s headlines noted the culling of middle managers and how companies were becoming “lean and mean.” Payrolls were shrinking. Investment in technology flourished; it was the “dot com era.” Suddenly there was widespread use of labor saving computers and software. The country’s capital-labor ratio moved above the trend.

Today, with Treasury rates at all-time lows, the data show the national ratio of capital to workers at an all-time high relative to the trend. It is therefore no surprise that job growth has lagged behind the average recovery. The unemployment rate may have fallen, but other labor market statistics, such as the participation rate, tell a far different story.

Meanwhile, the average worker’s wages have barely kept up with inflation. Public attention has shifted to a widening income gap. No wonder many Americans feel that this nearly six-year recovery has left them behind.


The Federal Reserve assumed it was doing a favor for all Americans by keeping rates unusually low during the recovery. Basic economics and data suggest the opposite — low rates actually exacerbate the pressing problems of middle and low income Americans. Note to the Fed: No need for patience. Higher rates would be preferable.

Marc Miles is a senior scholar at American Principles Project. This column is based on a recent presentation he gave to Federal Reserve Chair Janet Yellen.


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