The Misery Index: Unemployment vs. Inflation

November 18, 2021

The party that used to be known as the GOP (now the Trumplicans) has gotten back on the bandwagon of fiscal probity, having fallen off it like the proverbial drunken sailor after its recent and unlamented departure from power. They have gone on a rampage attacking the Biden administration’s budget proposals. Their current insistence that the Biden administration’s legislation will raise the national debt so high as to provoke runaway inflation reeks of hypocrisy. That party blithely voted for tax cuts targeted for the benefit of the rich. According to the center-right think-tank Committee for a Balanced Budget, those cuts will add $3.4 to $3.8 trillion to the national debt over the ten year budget window. The Trumplican decision not to draft a campaign platform in the 2020 Presidential election saved them from having to defend their incoherent economic policies.  Trumplicans now campaign only by stirring up resentment on race, abortion, guns, masks, and vaccines. That works best if they can increase national misery, calculating that they can blame it on the incumbent President.

The Trumplicans have recently raised an argument that sounds superficially reasonable. Better, they argue, to risk higher unemployment than higher inflation because unemployment affects only those who lost their jobs while inflation affects everybody. This argument requires reasoned examination as some Democrats as well as the Trumplicans have bought into it. Economists refer to ‘misery rates’ calculated by adding inflation rates to unemployment rates implying a one-to-one trade off in severity. Readers can look up thousands of articles that discuss the numbers. What the economists do not measure, but national leaders must, is the more important question: who suffers and who benefits from unemployment and inflation?

Who suffers from unemployment? Those obsessed with numbers would have us believe that a ten percent, for example, unemployment rate affects only ten percent of the population leaving the other 90 percent fat, happy and undisturbed. The subtext is “don’t worry it’s only the poor.” Don’t believe them; the middle class will suffer as well. As unemployment increases middle class workers have less leverage with their employers. Study after study indicates that middle class wages stagnate in tune with joblessness. More importantly, the unemployment rate is not a number, it is real people who know other people. Every job lost will generate fear among that person’s family, friends and neighbors over their own job security. The pressure to help friends and family will add to their anxieties. Parents whose children graduate into a bad job market certainly feel the pain, even if they are themselves still working. Studies of ‘misery rates’ in Europe from the 19th century through the 21st century Eurozone economic crisis indicated that unemployment has a four to one greater impact on misery than inflation. Greece recently spent a decade with double digit unemployment and no inflation; in fact, prices declined. Flipping those numbers would have induced much less misery.

Who benefits from unemployment? Big corporations and the wealthiest people in general. Their profit margins increase as they drive down workers’ wages and benefits. Rich kids graduating from elite schools never have to worry about finding a job, daddy always has a friend on Wall Street who will take on even the least competent scion of privilege. Central Banks react to high unemployment by lowering interest rates on the theory that making cheap money available to big corporations will lead to more jobs. Like tax cuts for the wealthy, cheap money has not worked that way for a long time. The jobless, of course, cannot benefit from cheap loans because – duh – they are jobless.

Who suffers from inflation? Big corporations must pay more to hire and retain workers who now have the leverage to demand better pay. Interest rates almost always climb as Central Banks try to dampen inflation. This affects everyone, of course, but primarily corporations who depend on short-term or variable interest rate loans to finance their operations. Pensioners and others, such as government employees, on fixed incomes will suffer until government budgets, now swollen with new tax revenues, raise their incomes, smoothing out earlier losses.

Who benefits from inflation? Middle class debtors are the classic beneficiaries. A homeowner with a thirty year fixed rate mortgage on his house sees its value increase manyfold over the fixed interest rate of the mortgage; but his monthly payment stays the same. Inflation almost always leads to fuller employment in almost all sectors. In the long run, wage earners and salaried employees will benefit as higher incomes remain locked in even after inflation subsides.

Dealing with both unemployment or inflation requires a government to first analyze the causes carefully and then select the tools. The current situation in the United States, spawned by the COVID pandemic, has no historical precedent. Prices have been driven up primarily by disruption of supply chains at a time when an enormous amount of pent-up spending power hit the market. It began with a sharp increase in consumer demand that has collided with a shortage of computer chips, a shipping industry trying to recover, the disappearance of a million unused shipping containers and the unwillingness of workers in transportation, i.e., truck drivers and stevedores, to work brutal hours at lousy wages. The effect of course, has now spilled over into other sectors.  Decreasing government expenditures and raising interest rates, the classic ‘conservative’ response to inflation, is meaningless in these circumstances. The Biden administration is having difficulties developing and implementing strategies, but compared to the utter cluelessness of the GOP – other than its desire to increase misery to garner votes – Biden looks to be a genius.



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