You might have asked yourself “what is going on here?” after hearing the latest economic news. Of course partisans on both the left and right have predictably run to their respective dark corners. If you watch Fox News, we’re already in a recession and teetering on the brink of much worse, with the administration about to raise taxes and increase government spending, leading to either hyperinflation, a depression, or the specter of stagflation. If you watch any of the mainstream media, we just recovered all the jobs lost during the pandemic, hiring is racing forward, inflation is (still and perhaps always) temporary, and now we can turn this challenge to an opportunity to make a green energy transition.
Sometimes I wonder if the spin-meisters ever have a momentary pang of conscience. Nope.
What to make of all this contradictory economic data? The Biden administration fears being blamed at the voting booth, so they grasp at every positive data point, while the GOP does the same with the opposing data. Any rational observer would note this is not the economy we want: inflation is too high, growth is too low, and many of the fundamentals are out of balance. I’ll try to cut through the political spin and technicalities of the “dismal science” with an analogy.
Imagine the US economy is a jumbo airliner coming in for a landing. We’ve been through a harrowing flight (the pandemic): drinks were spilled, passengers thrown about the cabin, babies crying, and more than a few Hail Marys whispered. All everyone wants is to get to the ground safely, back to normal (where the economy acts in a steady, reliable way).
In the pilot’s seat is the Chariman of the Federal Reserve Board (aka, the Fed), Jerome Powell. The Fed sets interest rates, among other things, so it has the most important role in getting the economy back to normal. The co-pilot would be the rest of the federal government (all three branches), but as that is too large a group, we’ll put President Biden in as its representative. The flight crew are the parties (Democrats & Republicans). We assume they want us to reach the ground safely, as they are passengers, too. Things work best when they cooperate with each other as a team. Sometimes, their emotions get carried away. If one side is walking down the aisle saying “all is well” and the other side is running down the aisle screaming “we’re all going to die” panic ensues.
Back to the plane (the US economy). To grossly simplify the mechanics of flight and landing a plane for our analogy, there are only two factors involved: speed and length of runway. To stay aloft, the plane needs to maintain a certain speed, as that is what generates lift. But speed also creates momentum in the big iron bird. To land, the plane needs to be going slow enough so that once its wheels touch down, it has sufficient runway to come to a halt. Simple, right? Everyone who has ever flown more than once knows the difference between that hard bounce and strong reverse engine thrust of a hard landing (with that “ooooh, here we go feeling”) and the gentle bump of a soft landing. We want a soft landing after all we’ve been through, not a stomach-churning brace-for-impact and head-for-the-emergency-exits landing.
Pilot Powell stepped out of the cockpit for a bathroom break after the long flight. Co-pilot Biden nervously eyed the autopilot, looked down at the horizon gradually coming closer, and thought, “a little more speed (federal stimulus spending) would be a good thing.” The most dangerous thing to an airplane is the ground, so pilots have a natural inclination to worry more about lift than runway. By the time Powell got back to his captain’s seat, he realized his co-pilot had over-corrected, and our plane was coming in too fast. The co-pilot was just about to increase speed again when Powell said “no way, José” and instead reduced it (raised interest rates).
The passengers felt the sudden drop in altitude and change in engine noise. The flight crew did its best to either calm or frighten the cabin, depending. What followed was a series of additional brakings (more rate increases) as the airport loomed closer. The plane is still going too fast, but it’s close to the ground and otherwise smoothly descending.
This is where we are today. We have not landed, nor have we crashed. In fact, a crash is mostly out of the question. It’s possible we will come in softly (inflation abates, the job market returns to normal, steady growth resumes). It’s also possible we will bang down (inflation remains strong, or growth stagnates), and it’s even possible we end up off the runway (stagflation), nobody seriously hurt, but shaken all the same.
Recessions are best declared after the fact; during the event, it’s pretty clear things are not going well, regardless. Too many economic “things” are going well, but not all are, and some important ones (for example inflation, consumer confidence) are most certainly not going well. The recent good job news (strong hiring) has a paradoxical effect: it is hard to say the economy is stalling when so many people are being hired and the jobless rate is falling. Yet the same ecomomic data say the economy (our plane) is not slowing much, so the pilot is likely to decrease flight speed again (raise rates again, and more), which increases the probability of a problem when we land.
It’s true the pilots are in part responsible for our situation, but also true they are the only ones who can avoid disaster. Meanwhile, stay in your seat with your seatbelt buckled, and while it may be fun to listen to the flight attendants argue, pay attention to the cockpit announcements.