I think this is correct, however, it doesn't completely explain why I'll go months without meeting a better applicant. If there were a surplus of capable mid-level engineers then wouldn't I see them too?
I've been on your side of the table for a similar role and had the same experience. Literally 20-30 candidates who can't answer basic questions for every 1 who can (and usually the 1 is "just ok").
I think it's just due to the particular pool your company is dealing with. Maybe there is a surplus, maybe there isn't, but you're not able to judge that objectively from your vantage point.
I'm not saying this to be snarky. If you don't have a good answer to this, that probably points to your issue. If you have to think a bit to answer that, it's probably also an issue.