The state of our economy

To the editor,

The state of our economy is at the forefront of issues for many Americans. What is really going on in our economy?

The current unemployment rate is 3.6 per- cent. To find a lower rate, you would need to return to 1951, the year I was born. Suvce to say the current rate is very low.

Unemployment rates are only half of the employment story, however. The other is real wages. Earnings increased by 5.5% over the past year, compared with an inflation rate of 8.5%. The rise in the average price level exceeded the rise in earnings, and therein lies the rub.

Workers are struggling. The inflation rate is the highest it’s been since 1981, following the Arab Oil Embargo, the Iranian revolution, and the market power of OPEC, all of which sent oil prices skyrocketing and translating into a 1981 inflation rate of 13.3%.

Market power is the key. It exists when a few large firms (or countries) dominate an in dustry and use their power to restrict output to drive up prices and profits. For a product like petroleum, consumers have little choice but to pay the higher price.

As a component of the average price level, oil prices directly link to inflation. And, since oil is used in producing virtually all goods, higher oil prices translate into higher costs of production, which are passed onto consumers in the form of higher prices (unless, ideally, they begin to conserve).

We’re seeing a pattern here. High oil pric- es mean high inflation rates. And euorts by the Federal Reserve to raise interest rates will lower the rate of inflation by lowering the demand for goods. But—and this is crucial— rising interest rates can easily push us into a recession with an attendant job loss. This was the outcome when Federal Reserve chair Paul Volcker raised interest rates in 1981, triggering the worst recession since the 1930s. Similar policy by Fed chair Jerome Powell in 2022 will likely trigger recession as well.

The parallels between 1981 and the present are disturbing. At both times, we faced the prospect of stagflation, which is a com bination of high unemployment and high inflation rates. And, both time periods in volve supply-side shocks. In 1981, the shock was the drop in oil supplies to the West and the consequent rise in oil prices. Today, the shocks are more complicated, and include the war in Ukraine, COVID-19, and supply-side bottlenecks, among others. Most important is the role of market power, previously held by OPEC and currently held by U.S. oil companies making billions of dollars at the expense of consumers.

The Fed will undoubtedly raise interest rates while seeking a delicate balance be- tween unemployment and inflation. But the key question for today is this: what do oil prices, formula shortages, high insulin prices, and cable news have in common? If you guessed market power, you are right on. Stay tuned!

Dr. Jacqueline Brux Emeritus professor of economics and Director of the Center for International Development at the University of Wisconsin – River falls Town of River Falls