Higher interest rates could be devastating for the US, says economics Nobel

Winner of the Nobel Prize in Economics in 2021, Canadian David Card, 66, says that if US inflation forces the Federal Reserve to accelerate interest rate hikes, the effects will be “devastating” for the United States, the world’s largest economy.

Based in the US, where he teaches at the University of California at Berkeley, Card says three factors put the global economy at risk.

“There is a lot of uncertainty. The optimistic scenario is that inflation moderates and the Fed does not have to raise interest rates so much; that there is a reasonable denouement in Ukraine; and that China recovers from its problems”, he says.

“Depending on the outcome, any one of these factors can get in the way of the United States, and the three of them together can do a lot of damage,” he said, in an interview with Sheet.

In 12 months, US inflation reached 8.3%, and the expectation that August would register deflation was frustrated – the increase was 0.1% over July.

The economist points out that many US consumers depend on short-term loans, and that rising interest rates would directly affect income.

Card won the Nobel for research related to the labor market. He says that while the US unemployment rate is low (3.7% in August), earnings are “flat”.

“We see a lot of companies hiring, and one of the reasons for that is that they can sell their products 8% more expensive than last year. [por conta da inflação]but they are paying only 4% more in salaries”, says Card.

“It’s a strange situation, where real wages have declined despite the growth of the economy. It’s hard to predict where things are going.”

The economist says that one of the reasons the job market is booming in the US, with people changing jobs at an unprecedented pace, is that a large portion of the so-called “baby boomers” (born in the post-World War II euphoria) are retiring — opening up vacancies in the market.

“For a long time, American companies got employees without worrying too much about rising wages or the quality of work, and Americans’ living standards have been falling for many years,” he says.

“That’s changed. Today, it’s workers who choose their jobs, and employers are realizing they have to do something about it. But it’s still hard to pinpoint exactly what’s happening. I think this will be a topic for many years to come. front.”

Card says, however, that the global scenario of post-pandemic uncertainty – with high inflation in several countries, the Ukrainian War and China slowing down – has led companies to keep a foot back on long-term commitments to workers.

“Companies are tending to not commit to workers because they don’t know exactly if they’re going to need them in the future. There’s also a lot of uncertainty about what kind of workers will be needed.”

He says that countries like France, Spain, Portugal and Italy have registered a significant increase in younger workers on temporary and non-formal contracts.

“Countries like Korea have the same problem with their young people. Although Koreans are very well educated, with one of the highest rates of young people in universities in the world, many only find informal occupations or temporary jobs, which causes a lot of frustration,” he says. .

Card will be in Brazil next week to give a conference on the labor market and wages and to participate in a seminar on informality and income in Latin America, both at Insper.

The economist considered the reduction of informality in Brazil at the beginning of the last decade to be “remarkable”, attributed to the greater dynamism of the economy with the boom in commodity prices in the second half of the 2000s.

“In that period, combined with the increase in the educational level, inequality also decreased. That came to an end, but it is not inexorable that the situation of informality remains like this”, he says.

Of the total number of Brazilians employed at the end of the second quarter, 40% were in the informal sector.