When US unemployment ticked up to 4.6 percent in November 2025, the Financial Times declared that the Federal Reserve should cut rates to rescue workers. From the Keynesian view, if jobs falter, you throw more money at the problem. Yet those policies create short‑term bubbles and long‑term pain. An Austrian assessment shows why cutting rates merely delays the needed adjustment and why the real cure is higher, market‑driven rates and fiscal restraint.
A Soft Labor Market—And Its Hidden Weaknesses
Data show that the US labor market has softened. The number of people working part time for economic reasons—those who wanted full‑time work but could only find part‑time jobs—rose sharply. Full‑time employment has declined while part‑time employment has risen. In other words, many new jobs are not quality positions. These headline numbers also hide a problem: the Bureau of Labor Statistics often revises job gains downward.
Beyond the revisions, the composition of jobs matters. A full‑time job supporting a family is not the same as a part‑time gig with no benefits. Economist Dan Sanchez notes that artificially low rates spur long‑term investment booms and temporarily raise wages, but as workers spend the new money demand shifts back toward consumer goods, revealing malinvestment and triggering a bust. Austrian theory stresses that easy credit misallocates labor as well as capital. Credit‑fueled booms generate temporary jobs that vanish when the stimulus fades.
How Artificially Low Rates Create the Problem They Are Supposed to Solve
Keynesians equate easy money with more jobs. The Financial Times implies that lower rates will spur borrowing and consumption and thus fix the labor market. This view ignores that interest rates are an intertemporal price—the premium on present goods relative to future goods. Murray Rothbard explains that, in a free market, the rate of interest is determined by individuals’ time preferences. When the government and the Fed artificially lower the rate, they do not conjure up more savings; they create the illusion of more capital than exists, leading businesses to invest in projects that appear profitable only because borrowing costs have been suppressed.
Artificially cheap credit prompts firms to invest heavily in capital goods such as factories and machinery. Wages in those sectors rise, and workers feel wealthier. But consumers’ time preferences have not changed; people still want to save only a certain portion of their income. As workers spend their new wages, demand shifts back toward consumer goods. Businesses then discover that there is insufficient real savings to complete all the new projects. The result is a sharp depression in the industries producing capital goods. Ludwig von Mises captured it succinctly: credit expansion lowers rates and triggers investment, but when credit stops “a slump sets in.”
Illusory Employment Growth and Malinvestment
Why do economists advocate rate cuts despite repeated busts? Partly because the short‑term boom created by cheap credit is seductive: businesses borrow and hire, stock prices rise and voters feel richer. By the time the bust arrives, economists blame “animal spirits,” trade wars or other scapegoats rather than the credit expansion that misled entrepreneurs. Mises warned that credit expansion “creates an illusion of increased capital” and encourages investment in projects that cannot be completed. He added that inflation can lower unemployment only by reducing real wages, which eventually prompts renewed wage demands and further inflation.
Artificially low rates also damage the mechanism that would naturally bring about recovery. Market interest rates reflect the balance between savings and investment; they coordinate the structure of production. When the Fed pushes rates below market levels, it sends false signals to entrepreneurs, causing malinvestment—the misallocation of capital into projects not aligned with consumer preferences. Once inflation slows, these projects are exposed as unprofitable, leading to layoffs and bankruptcies. The current problems in the labor market are the result of earlier bouts of cheap credit, not a justification for more of it.
Why Raising Rates Aids Recovery
Cutting rates to fight unemployment is like giving a patient painkillers instead of treating the disease. Austrian economists argue that higher, market‑driven rates are necessary to liquidate malinvestments and restore healthy growth. Joseph Salerno notes that, after an artificial boom, high interest rates do not stifle recovery but signal that the readjustment of relative prices is proceeding. Attempts to arrest or reverse this decline through monetary or fiscal stimulus retard or derail the process.
Allowing rates to rise encourages saving, which replenishes the pool of real capital. Higher rates attract more savings and discourage marginal investment. When rates are suppressed, consumers save less and funds for legitimate investment dry up. The Austrian prescription is thus the opposite of the Keynesian one: rather than artificially depress rates to conjure up spending, let rates rise to reflect real time preferences.
Monetary Policy and the Decline of Real Wages
Proponents of rate cuts claim inflation benefits workers because employers can pay higher nominal wages. Mises dismantled this idea. Inflation may temporarily reduce unemployment, but only by eroding the purchasing power of wages. Eventually workers realize their real wages have fallen, demand increases and the cycle repeats until inflation collapses. Mises observed that a central bank can continue inflation only while people believe it will end; once the public realizes the government will not stop printing money, prices surge and the monetary system breaks down. Under a true gold standard, the quantity of money is independent of government, providing a check on politicians’ spending. Under inflation, politicians simply order the printing office to produce more money.
These warnings are especially relevant today. Government deficits are soaring, and the Federal Reserve has monetized trillions in debt. Consumer prices have risen persistently and real wages have stagnated. Cutting rates now would fuel another wave of asset bubbles and further erode the dollar’s purchasing power.
Structural Unemployment and Labor Restrictions
Another point absent from the mainstream debate is the role of wage rigidity and regulations in creating unemployment. Murray Rothbard shows that when unions impose wages above market levels they necessarily reduce the number of workers employers can hire. The wider the scope of union wages, the more a permanent mass of unemployment develops. Policies like higher minimum wages and strengthened unions make labor even more expensive. Combined with artificially low interest rates, these interventions distort the labor market, leading to underemployment and stagnant real wages.
The Myth of Government‑Created Prosperity
Proponents of easy money treat government as an inexhaustible source of funds. Mises mocked the belief that politicians could conjure prosperity by appointing “clever bankers” to create wealth from nothing. In reality, there is no secret method for governments to acquire money other than taxation or borrowing; printing money merely transfers purchasing power from savers to spenders and distorts price signals. Austrian economists warn that debt‑financed spending and monetary expansion are unsustainable. Mises noted that inflation can continue only while people expect it to end; when confidence is lost, the currency collapses. Past attempts to inflate away recessions triggered high inflation and forced policymakers to reverse course. This history supports Joseph Salerno’s point that high real interest rates signal the renewal of entrepreneurial boldness.
A Way Forward: Sound Money and Market Rates
The cure for today’s labor malaise is not another dose of cheap credit but sound money, fiscal restraint and market‑driven interest rates. Key reforms include:
- Let rates rise to their market level. Suppressing rates distorts investment and encourages malinvestment. Allowing rates to rise reveals unprofitable projects, encourages saving and lays the foundation for sustainable growth.
- End monetary experimentation and rein in deficits. Halt policies that inflate the money supply. Fiscal discipline—cutting spending or raising taxes—prevents politicians from relying on the printing press.
- Remove barriers to employment. Wage laws, licensing requirements, and union restrictions prevent wages from adjusting and create structural unemployment. Reforming these rules would allow the labor market to clear and match workers more efficiently.
The notion that cutting rates will rescue the labor market is a dangerous illusion. It reflects the Keynesian belief that prosperity can be engineered with cheap money and deficits. Austrian economists have shown that artificially low rates sow the seeds of future unemployment and stagnation. By distorting the relationship between saving and investment they generate malinvestments and misallocate labor. When the bust arrives it exposes these mistakes, causing the very job losses politicians hoped to avoid. Meanwhile, spending financed by inflation erodes workers’ wages and pushes them into precarious part‑time roles.
Real prosperity requires rejecting the easy‑money temptation. Allow interest rates to find their natural level, let wages adjust freely, restrain government spending and restore a sound monetary regime. These policies may impose short‑term pain but they are essential to rebuild a healthy foundation. As Mises warned, continuing to inflate and spend in the face of scarcity leads not to full employment but to “a sudden sharp and continuing depression.” The sooner we abandon the fantasy that central banks can print prosperity, the sooner the labor market can recover on solid ground.
