The False Pretense of Economic Stability
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
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