Understanding the Unemployment Surge and Recession Concerns

Unemployment Rate and the Sahm Rule

There's a growing concern among economists and political figures about the recent surge in unemployment rates, and the resulting scare on Wall Street. The Bureau of Labor Statistics reported last Friday that the unemployment rate had risen to 4.3% in July. This increase is similar to the pace often observed in the early stages of a recession, a phenomenon known as the Sahm Rule. This has triggered panic in the stock market, which has only intensified as other economies, particularly in East Asia, have experienced even sharper downturns.

Political Figures and Economists Weigh In

Despite the concerns, many establishment-friendly economists and political figures are dismissing the idea that this surge in unemployment and the resulting scare on Wall Street represent a recession. However, some are clearly worried. Senator Elizabeth Warren, for instance, has used the jobs data to restate her argument that the Federal Reserve is waiting too long to cut rates. She has warned that Fed Chair Jerome Powell “risks driving the economy into a ditch,” and that he “needs to cancel his summer vacation and cut rates now.” Paul Krugman, a renowned economist, has echoed this sentiment, stating that the Fed’s reluctance to cut rates already is a mistake that needs to be reversed quickly to prevent a recession.

The Need for Accurate Interest Rates

While there are calls for rate cuts, there is still a belief that the Fed can prevent a recession. However, the solution to ending these debilitating boom-bust cycles isn't about lower or higher rates, but about accurate interest rates. Interest rates are prices, and like any other price, they are determined by people’s preferences. In this case, the factor in question is called time preference. Every human always prefers satisfaction in the present to the same exact satisfaction in the future, but the extent to which we prefer present gratification over future satisfaction differs from person to person.

Understanding Time Preference

For some, immediate gratification is highly preferred to delayed gratification, even when that delayed gratification is much larger. These people have a high time preference. Typically, as we become adults, we come to recognize that if we partially withhold from consumption, we can often bring about significantly more satisfaction by helping to produce more goods and services that can be consumed and/or traded in the future. Those who forgo a lot of instant gratification to pursue delayed gratification are said to have a low time preference.

Time Preference and Civilization

As civilizations developed, time preferences fell. The next big acceleration came in the early 1800s with the Industrial Revolution. Advancements in energy made production significantly more efficient. The result is the developed world we have today. It’s important to recognize that the fall in time preference was not merely a symptom of the development of human civilization but a leading cause.

Artificial Manipulation of Interest Rates

Interest rates are prices that serve as the closest proximation for a society’s time preference. However, governments today control interest rates by expanding or restricting the supply of new money and credit entering the loan market. This artificial manipulation of interest rates by governments is reversing the progress made over the last ten thousand years as humans learned to use foresight and to value production over the easiest form of instant gratification.

Bottom Line

If we want to see an end to perpetual recessions and debt-fueled mass consumption, we need to stop listening to those who benefit from the current system of centrally-planned interest rates. We need a return to accurate interest rates, which have helped encourage and coordinate the production of a better future for thousands of years. What do you think about this perspective? Share your thoughts with your friends and sign up for the Daily Briefing which is everyday at 6pm.