Get ready for the next unnecessary recession. The Federal Reserve, President Joe Biden, and congressional Democrats are going to stick it to everybody who works for a living. Their reasoning: you stop inflation by pushing wages down.
The Federal Reserve raised interest rates by another 0.5 percent after four consecutive 0.75 percent increases. The Fed’s action last week puts the Federal Funds Rate at 4.5 percent, the highest it has been in 15 years.
The Fed now projects growth of the nation’s Gross Domestic Product in 2023 will be less than half of what it previously expected, down from 1.2 percent to 0.5 percent.
That is no accident.
The Fed believes it still has to fight inflation, and it knows that its efforts to do so will stop economic growth, as its policies are designed to do. The Wall Street Journal summarizes it this way: “Fed officials say they combat inflation primarily by slowing the economy through tighter financial conditions—such as higher borrowing costs, lower stock prices and a stronger dollar—that curb demand.”
The Fed governors are admitting their formula for pushing prices down is to throw people out of work, make it harder to borrow money, and make imports cheaper, which will cost even more Americans their jobs. All these actions reduce wages by making people compete for scarcer jobs.
Well, you might say, if that is what it takes to stop inflation, it’s worth it, right? We tighten our belts for a while, squeeze inflation out of the economy, and then get back to normal when it’s all over.
That’s not how it works. In fact, that scenario is a myth that justifies government malfeasance.
The recorded price increases that are identified as inflation may be caused by excessive money growth, but they also may not. Price increases can be caused by a decline in the production of goods and services that makes normal money growth excessive: a reduction in the supply of goods and services without a corresponding decrease in consumption (aka demand) will result in price increases. Throwing people out of work will only worsen the problem by further reducing supply.
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In such cases, the Fed is a convenient but falsely accused whipping boy for inflation caused by government policies or outside events that reduce the supply of goods and services.
What is really happening is that since 2020 the federal government has been giving people trillions more dollars without requiring them to work for it. That simultaneously reduces the nation’s supply of goods and services (by suppressing work) and increases demand for them (by giving people more money to spend).
Indeed, the federal government has been pushing down the labor supply since 2009. The national employment rate for adults of working age is now a tick below 60 percent, down from about 63 percent in 2008. Productivity growth has declined as well. Labor force productivity growth has been significantly below the long-term average every year since 2010.
A further problem with the Fed’s job-destroying policy is that the statistics on price increases include past events that are only being documented now. Alan Reynolds of the Cato Institute regularly points out that year-old rent prices are included prominently in the figures, and oil price shocks working their way through the economy over time distort the inflation numbers. That means the Fed and other policymakers are chasing red herrings. The Fed will raise interest rates too late and keep them elevated for too long. Inflation, then recession, then rinse and repeat.
We are now moving from the inflation phase to the inevitable recession. The stock markets reacted rationally to the Fed’s promise to crash the economy, falling by an average of 3 percent on Thursday. Federal Reserve Chairman Jerome Powell is doing precisely what he and the other Fed governors think is the Fed’s job: to fine-tune the economy by crashing it whenever there are not enough unemployed people to push labor costs down. Does that sound cynical to you?
The spending, taxing, borrowing, and regulatory policies of the U.S. federal government (and many state and local governments) suppress the production and trade of goods and services to levels far below what we would achieve if given the freedom to produce. Nearly all our economic problems are caused by this fiscal and regulatory squeeze.
The rule of thumb is this: If something is wrong, the government is most likely to blame. Throwing people out of work is not the answer to these government abuses. Lighten the heavy hand of government, and the invisible hand of the market will provide what people need and want.
Sam Karnick ([email protected]) is a senior fellow and director of publications for The Heartland Institute, where he edits Heartland Daily News.
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