On one side of our economy, we have historically low unemployment rates, strong job growth and robust consumer spending.
But on the other side:
Record-high gas prices. Interest rate hikes. A tight jobs market. Inflation at a 40-year high.
And after declaring just six months ago that it expects prices to normalize this year, the Federal Reserve now projects inflation will be double its initial expectations.
So … what’s going on?
Today, On Point: We’ll try to make sense of our confusing economy.
Highlights from our interview with Rana Foroohar
Let's talk about inflation. Because, I mean, the Fed had to rapidly change its projections, which is surprising enough. But even more fundamental, why is this happening right now?
Rana Foroohar: There's a couple of reasons, and let me kind of break it into two pieces. There are the financial reasons for inflation, and then there are sort of the real world pieces. So let me start with the real world. First, we had a pandemic. And we've talked about this before. You had different parts of the world shutting down and reopening in different ways, at different times.
You had supply chains getting all messed up. And that causes choke points. And choke points cause inflation. Because you get these sort of stop-start periods of growth, and then recession. And that just kind of messes up the way the economy works. And then as things get started back ... it's like the water gets turned on. And then there's inflation.
You also got war in Ukraine, and that took a lot of the world's spare energy off the market. Russia was the big kind of gap. So you had the grain from Ukraine, which is really the breadbasket of Europe, being taken off the market. Now it's being pirated, sold by by Russia. That's a whole different story.
But then you also have the financial reasons for inflation. And we've talked about these before, in depth on the show. I wrote in my first book about the process of financialization. That's the fact that we've kept rates low, not just since the financial crisis, but really, if you look kind of in a trend line since the early 1980s, basically since Volcker tackled the last round of inflation with high rates, they've been dropping ever since then.
And then, after the financial crisis and after the pandemic, you had the Fed pouring a lot of money into the economy and that's inflationary. So lots of things going on at the same time.
Mostly conservative critics of the pandemic aid that went out during 2020, 2021 ... said inflation is going to happen because you're pulsing the economy with trillions of dollars that weren't there before. Just your thoughts on that?
Rana Foroohar: This is absolutely a criticism that conservatives, but also some sort of neoliberal economists like Larry Summers, for example, made about Biden's fiscal stimulus during the pandemic. They said, Look, we've already got an economy that's running pretty hot. Let's not add more fuel to the fire. You can make that argument.
But I would push back a little bit and say that if that is the case, then it's really just this fiscal stimulus was the icing on an already extremely pumped up economy. That had been pumped up again since the financial crisis, and really decades before that, with low rates. And yeah, fiscal stimulus did add some more heat.
But I would say, and I think this is a very, very important point that gets lost in the sort of technocratic debate over, Was there too much fiscal stimulus? Was there not enough? Biden is a president that is very pro-labor, and this is a president that looked at what happened in the financial crisis where we bailed out banks but not homeowners and said, You know what, I'm not going to do that again. I'm going to make sure that the little guy is feeling comfortable, as comfortable as possible in the middle of a global downturn. And I'm going to err on the side of maybe being a little more generous.
And you know what? I think that was the right political decision. I think that we were already headed for inflation. And I'm not going to blame fiscal stimulus for that.
It seems like for years, if not decades now, we've had an economy that's been essentially subsidized by debt. And everything, a lot of the prices that we've become used to, and even though a lot of the business models out there are based on sort of false low prices that are created by debt.
With that bursting, are we now in that paradigm shift that you're talking about, looking forward to a new reality for many years to come, of just permanently higher prices if we don't get that debt base cushion anymore?
Rana Foroohar: Yeah, let me step back and just give a few beats on where I think we've come from, just to give context to where I think we're going. Yes, we have had an economy that has been subsidized, I think artificially with low rates, which actually encourage debt. It makes debt cheaper. So it means that companies and consumers can take on more of it. And that's something that policymakers of both stripes actually encouraged, because it's easy.
It's a lot easier to just say, Hey, Fed, create more money, keep rates low, keep the financial economy growing. By the way, the financial economy, meaning, like all the financial assets out there in the world, is now about three times the size of the real economy, which I've always thought is very bizarre, and it makes the wealthy wealthier because they own most of those paper assets.
So we have this kind of weird, saccharine high in the economy. But the Fed has not been able to change the real story on the ground. They can't make new factories. They can't, you know, create new industries. So that's where we've been. Now, pandemic hits and the market starts to change. Rates are going up, debt's getting more expensive. So we're starting to see the bursting of that everything bubble. But the pandemic and the supply chain disruptions that we've seen have also kind of been like a scrim that's been raised on what I think are artificially cheap prices.
I mean, one of the bargains that we made in our economy, again, over the last half century, was we're going to export cheap capital to countries like China. They're going to give us cheap labor, and we're going to get a lot of cheap stuff in Wal-Mart. Unfortunately, the price of all the things that make us middle class — housing, health care, education, have been rising way before the pandemic, or the war in Ukraine, at about three times the average inflation rate. So those cheap TVs are not helping us, ultimately, to have a more secure and better lifestyle.
And now that the supply chain shortages hit and we're like, Oh, wait a minute, okay. Now that we have to source labor, maybe more locally, we have to think of energy different. We start to see that cheap isn't really cheap if you factor in the fragility of these long supply chains, the real cost of energy.
And then if you start to think about, you know, slave labor in Xinjiang, environmental practices of big corporations that give us cheap food but are also polluting the land, like I think we're starting to have a big conversation not just in this country, but around the world, of what are the real costs of these cheap goods and services? That we thought were so cheap.
But when we really look at the full costs ... maybe they should be priced appropriately. And maybe that would ultimately lead us to a healthier place, even if there's pain in the short term.
On the likelihood of an upcoming recession
Rana Foroohar: Oh, I think it's pretty likely. But, you know, I know I keep kind of going back to the long term. But frankly, I think we all need to, at this point, think a little bit more beyond the immediate and beyond the quarter. I don't mean to diminish the pain that anybody might be feeling, or the difficulties that might be coming down the pike. But if we look, recessions and recoveries have to happen. That's how the business cycle works.
So throughout history, I mean, hundreds of years, millennia, the economy grows and then it gets a little too hot, too frothy. You see speculative businesses, Pets.com back in 1999 or crypto today that are kind of like, you know what, maybe these things shouldn't exist. Maybe we need to have a little downturn so they get weeded out.
That process used to happen in a gentler way, over a shorter period of time. So if you go back to the 80s and 90s, the business cycle recovery and recession used to go about five year cycles, or something like that. And when it happened, it would be a little gentler.
So you wouldn't see like a financial crisis cliff fall, you would see, you know, there's a downturn. Things are slowing. I remember when I came out of college in 1992, we were in a little bit of recession, but it wasn't like things were dire. Now, again, because of our reliance on easy money, and only on monetary policy, instead of having a political system that can actually create longer term, bigger solutions with fiscal policy, we've gotten used to the Fed stretching out the business cycle. So it's now like ten year cycles of expansion. But then when you get a contraction, it's bigger, so there's more pain.
I don't actually see President Biden using the bully pulpit of the presidency and talking about this bigger picture, this paradigm shift that you've been seeing throughout the hour. I mean, why isn't the president coming out and saying, We have to reshape the economy to serve all Americans in the 21st century.
And we're not going to just focus exclusively on prices, because that's only one issue. We want to rebuild everything, from the bottom up. And we're going to do it. I don't see him being as vigorous as he could be about that.
Rana Foroohar: Yeah, well, it's a great point. But let's put that in context with our political reality. Imagine if President Biden came out and said the truth, let's say. Which is that, you know what, folks? We've had a cheap capital for cheap outsourced labor economy for half a century.
We've all thought that the bargain was we'll send our jobs abroad, we'll use robots, you can get cheaper gadgets. But we're not going to worry so much about skills training, social safety net, anything like that. And we're going to shift to green energy. It's going to be inflationary for the next 5 to 10 years. How does that sound in advance of the midterms? [Laughs]. That's the deal. That's where we are.
This program aired on June 27, 2022.