‘Recession remedy’ divides economists

At the heart of the debate between economists and policymakers is a fundamental question with massive implications for America’s future: Which is worse — inflation or a recession?

No one seems to agree on one path or another.

But many economists and lawmakers push back on that idea, arguing that the so-called cure for a recession would be far worse than the disease of inflation.

Of course, the Fed would like avoid both. He aims for a “soft landing” in which he raises interest rates from juuuust enough to slow down demand without completely stifling it. That would be the ideal outcome, although the Fed itself admits that the prospect of holding the landing is getting increasingly difficult.

“The Fed’s actions to date do not guarantee a recession, but they have already made one more likely,” wrote Josh Bivens, director of research at the left-leaning Institute for Economic Policy, in a statement. blog post earlier this month.

That leaves us with two potential outcomes: higher inflation like we’ve seen over the past year, or a recession that drives prices down while likely increasing unemployment and dampening wage growth.

Team inflation

Bivens is firmly in the “high inflation is bad but a recession is worse” camp. This is largely because of what a recession does to the job market. “A recession actually means your economy is poorer on average,” he told CNN Business.

Inflation is clearly eating away at people’s wages, and that’s a bad thing. (Consumer prices rose about 9% last month on an annualized basis, while wages rose 5.3%.) But, says Bivens, “the only thing we know about recessions, it’s that they drive wages down much more reliably than inflation.”

One of the main arguments of its opponents is that inflation comes with a persistent psychological problem. Once the idea of perpetual price increases become embedded in the consumer’s psyche, this can create a self-fulfilling cycle that is difficult to break. It’s no joke, says Bivens, but according to him, we’re just not there yet.

In the United States, inflation has hovered around 2% per year for almost four decades. Because of this, he argues, most people don’t expect recent inflation of around 9% to continue.

“We should take advantage of that expectation and that credibility,” he says.

Senator Elizabeth Warren is another prominent voice in this camp, arguing that the root cause of our current inflation — including the supply chain chaos wrought by the pandemic and the war in Ukraine — is far beyond the purview of the House of Commons. Fed.

Higher interest rates won’t solve soaring energy prices, warren wrote in a Wall Street Journal op-ed last week, and “they won’t break up the corporate monopolies that Mr. Powell admitted in January that they could ‘raise prices because they can'”.

When the Fed raises rates, it becomes more expensive for individuals and businesses to borrow money. This encourages everyone to spend less. Companies are slowing hiring, cutting hours or laying off workers as demand dries up.

This, Warren writes, “will leave millions of people – disproportionately low-wage workers and workers of color – with smaller paychecks or no paycheck at all.”

Team recession

Others argue that recessions, while not ideal, are not necessarily catastrophic. They may even be healthy.

Many who would argue for recession over inflation are pointing to the 1970s, when runaway inflation soared, peaking at 14% in 1980. It took painful rate hikes. interest and two subsequent recessions in the early 1980s, overseen by Fed Chairman Paul Volcker, to finally break the cycle of inflation.

“A mild recession is now far preferable to the severe Volcker-style recession that will be needed to quell inflation if expectations hold true,” economist Noah Smith wrote in a blog post.

Not all recessions are created equal. The United States has been through 34 recessions since 1857, or about one every five years on average, according to data from the National Bureau of Economic Research. On average, each lasted about 17 months.

This means that the United States has ignored many slowdowns.

“People tend to forgive mild recessions, but they really, really rail against high inflation,” Smith wrote in a Sub-stack message titled “Yes, we’re probably in a recession, and that’s okay.”

But can a recession ever really be a good thing? Sometimes, says Lakshman Achuthan, co-founder of the Business Cycle Research Institute, which determines recession dates for 22 economies around the world.

“Recessions can be cleansing events for the economy as a whole, forcing inefficient behemoths out of business and giving way to more nimble competitors that can better meet customer needs,” he said. in an email to CNN Business. “This time around, the economy has changed enough as a result of the pandemic that new business opportunities are bound to have opened up.”

Achuthan mentions some of the innovative companies that have emerged during recent recessions: Airbnb (founded in 2008), Uber and WhatsApp (founded in 2009) all emerged from the Great Recession of 2007-09.

At the end of the line

Whether or not the United States is currently in a recession is largely a semantic debate. There are signs that the economy is cooling: housing demand is slowing and consumer confidence is plummeting.

In most recessions, federal stimulus is a typical way to stimulate the economy and restore consumer confidence. Those financial lifelines aren’t as likely to land this time around.

“If the narrative becomes ‘we must have had the recession because we overspent in 2021,’ that kind of makes you suspect that no relief is coming,” says Bivens. “I just think it’s a mistake all around.”

—Jeanne Sahadi of CNN Business contributed reporting.

Leave a Comment