News that tens of thousands of Americans in the tech industry are receiving pink slips and other “sorry, but you are fired” notices is a sad reminder that reducing inflation comes at a high cost.
Any nation should seek to avoid unhappy circumstances in which its central bank feels compelled to put the screws on the economy. At a deeper level, though, the layoffs are the latest illustration of how market-driven prices and interest rates were long ago goofed up by policymakers. This, in turn, results in disasters for countless families and individual workers.
Of course, some of those policymakers quickly blame free markets run amok for high prices and related struggles. But it must be repeated that markets, at their very foundation, are sophisticated information systems. We’ve chosen to distort that information rather than use it.
Prices or interest rates grounded in the day-to-day buying, selling, lending and borrowing decisions of people across the world are signals that guide business owners and operators when they are deciding how many people to hire or lay off, how much to produce, and where goods and services are most needed. But as pointed out in 1945 by Nobel laureate Frederick Hayek in “The Use of Knowledge by Society,” bad market signals, which can result from government intervention in markets, can lead to social calamities.
Now we find that Meta, the owner of Facebook, is laying off 11,000 workers; Twitter, 3,700; and Lyft, Redfin, Snap, Stripe and Robinhood are significantly cutting their payrolls. Are Fed-induced higher interest rates the cause? COVID subsidies and government checks in bank accounts? Inflation? Or maybe just a management miscalculation?
Yes, it’s all of the above. Much has been said of miscalculations.
In explaining what’s going on, Stripe CEO Patrick Collison said, “We were much too optimistic about the internet economy’s near-term growth,” and that the company had “underestimated both the likelihood and impact of a broader slowdown.” Meta CEO Mark Zuckerburg apologized to his laid-off workers and said, “The macroeconomic downturn, increased competition, and ads signal loss have caused our revenue to be much lower than expected. I got this wrong.”
But there’s more. Chiming in from the more secure setting of the U.S. Senate and expressing concern over the hardships, 11 Democratic legislators called on Federal Reserve Chair Jerome Powell to provide estimates of the number to be laid off and explain how it might be avoided: “We are deeply concerned that your interest rate hikes risk slowing the economy to a crawl while failing to slow rising prices that continue to harm families.”
The letter, given its purpose, did not ask about the years of Fed-induced low-interest rates that may have encouraged a hot-house economy. Nor did the senators mention the trillions of printing-press dollars that had been sent to citizens nationwide to soften the blow of COVID shutdowns. Is it any wonder that business and government decision-makers are now having trouble making the right decisions?
We know that low-cost money encourages investment in homes, factories, and advanced research and education. And we know that income subsidies lead to higher levels of consumption. And we also know that all of this can lead to higher inflation. What we have difficulty knowing is how much of the resulting economy is real, in some sense of the word, and how much is artificial.
Only when the hot-house door is opened and the heat turned down do we begin to discover the answer. And only then do we begin to learn how much it will hurt, and for how long, to recover a reality-based economic footing — one that leads to fewer “sorry, but you are fired” messages.