There’s a growing palpable sense of optimism among many economists and journalists that the United States economy is heading toward a growth phase while avoiding recession. They are in turn lauding the Federal Reserve for its strategic handling of inflation—with economic growth and low unemployment rates—as well as praising the efficacy of the Biden administration in reining in prices through social pressure on profit-making and through increases in production via large subsidy grants, along with the stimulus checks that have been distributed generously through various legislative acts.
This optimism and belief in the ability of the government to deal with economic problems come right after experiencing a severe inflationary crisis over the last three years, starting in late 2020. The turbulent inflationary experience faced by the average American was largely due to the expansionary monetary and fiscal policies pursued by both the Fed and the US government as countercyclical policy measures to deal with the covid shock and the emanating effects of the work stoppages, which was accomplished via strictly enforced lockdowns that regulated economic lives to hitherto unforeseen levels.
The combination of a decline in the rate of price inflation with unemployment remaining under 4 percent has bolstered a sense of elation and euphoria widespread amongst these economists, journalists, and the broader audience. They believe that the Fed has effectively employed the tools to control inflation and growth, so we should count it as another win for the central banking era where industrial policy overcomes the errors of capitalism.
However, before we applaud institutions and policies whose track records for over a century haven’t always aligned with their stated goals, it’s essential to dig deeper. The reasons behind seemingly stable unemployment figures merit a closer examination, with the “immaculate disinflation” narrative—which is gaining ground amongst the wider audience—needing to be demystified.
The Myth of “Immaculate Disinflation”
For more than six months, headlines have declared that inflation has dropped sharply to 3 percent, achieving the lowest point it’s been in more than two years. The purported claim intends to signal to the public that the fight against the inflation menace has been won and that economic stability is being achieved. Notwithstanding such claims, the actual users—the consumers of the US dollar—have been on the receiving end of policies under which the purchasing power of their nominal dollars has continued to fall due to inflation, and the personal savings rate has been steadily falling as well, from a prepandemic 9.1 percent to the current 3.9 percent.
The gradual eroding away of people’s purchasing power has led to a situation where the goods that people use to maintain their living standards are more expensive. This is the experience of average consumers despite their having received stimulus checks, having moratoriums placed on their debt payments, and experiencing nominal wage increases from the monetary expansion in the economy.
The persistence of the painful experience of consumers becomes a siren call. In light of changing economic conditions when prices are still increasing from one month to the next, previous debt moratoriums are being lifted, and unemployment in the labor market that earlier seemed to be stable is now ticking up. The unemployment rate rose to 3.8 percent in August, the highest it’s been in over a year, which otherwise had been falling from 14 percent at the beginning of the pandemic before stabilizing around 3.4–3.6 percent.
These events, however, are only manifestations of a deeper problem involving investment and the intertemporal coordination of economic activities, which are in a much graver situation. Prices in a market economy act as a coordinating communication language that allows market participants to adjust their own plans with those of others. The money market rate of interest or the loanable funds rate, as understood by Ludwig von Mises and Friedrich Hayek, facilitates the coordination of intertemporal economic activities or activities where coordination amongst different individuals’ production and consumption plans needs to be established.
If the market rate of interest is allowed to emerge without intervention, it will reflect the current needs of money holders and the demand for loanable funds by borrowers for investment opportunities. High demand for money is reflected through saving periods by consumers whereby by forgoing consumption, these consumers make crucial intermediate goods available to be used in long-term investments rather than final-stage consumer goods.
However, if consumers do not hold money as savings and interest rates are artificially lowered below market levels, it sends false signals to producers regarding the production of capital versus consumer goods. This situation, in turn, gives rise to inflationary pressures, capable of spreading throughout the economy, while simultaneously creating false expectations about future demand for capital goods based on an artificially created scenario.
The tightening cycle of the Fed started in March 2022 with price inflation running at 8.5 percent, marking the official end of the low-interest policy that started in early February 2020. As the Fed’s rates have gone from nearly 0 percent to 5.5 percent in only over a year, price inflation has declined from 9 percent to 4 percent. However, it has remained above 3 percent for the past four months and is beginning to show signs of further upward increases in the inflation cycle as producers’ costs increase. While inflation has refused to budge in the past few months, the unemployment rate has steadily climbed uphill, edging toward 4 percent.
The year 2023 marked significant financial turbulence in the US, as high costs of borrowing have met overexpanded businesses. More than 230 companies have declared bankruptcy due to macroeconomic stressors like decelerated growth, rapid interest rate hikes, and persistent inflation. High-profile bankruptcies included Vice Media, impacted by operational and financial challenges; Bed Bath & Beyond, struggling with debt and market shifts; and retailers like Party City and David’s Bridal. The Federal Reserve’s aggressive interest rate increases have led to a “credit crunch” that is affecting overexpanded and vulnerable companies.
This paradoxical economic landscape includes escalating bankruptcies and bank failures coexisting with a seemingly stable unemployment rate. The resilience in employment figures—in the face of financial disarray—can largely be attributed to the government’s audacious adventures into industrial policy experiments, where trillions of dollars have been funneled into specific sectors through incentives such as tax breaks for investment.
The rise in unemployment in the private and the general sectors of the economy—including manufacturing, construction, information, financial, and technological sectors—has been met by ever-increasing levels of government employment. Government employment increased by seventy-three thousand in September, representing about a quarter of the total jobs added that month, coming in above the average monthly gain of forty-seven thousand jobs over the prior twelve months. Employment and spending in the public sector of the economy have overshadowed the private sector in recent times, creating a bloated public sector with heavy fiscal burdens.
In this grand charade of economic stability, we find ourselves spectators to a precarious illusion, a spectacle that vaunts the triumph of “immaculate disinflation” while blatantly disregarding the eroding purchasing power of the average American. This is not stability; it’s a meticulously crafted mirage, obscuring a landscape littered with the casualties of fiscal and monetary recklessness—savings plummeting, consumer baskets shrinking, and a private sector gasping for breath under the weight of bloated government.
The narrative of victory over inflation and unemployment is a dangerous diversion, pulling the wool over our eyes as market signals are distorted and economic principles sacrificed at the altar of political expediency. The surge in government employment—far from a sign of health—signifies a troubling imbalance, a steroid boost offering a temporary high while the body politic weakens.
