The “cure of the recession” divides economists

At the heart of the debate between economists and politicians is a fundamental question with huge implications for America’s future: what’s worse: inflation or recession?

Nobody seems to agree one way or the other.

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

Actually, the Fed would like avoid both. Aim for a “soft landing” where interest rates increase right enough to slow down the question without completely suffocating it. It would be the ideal result, even if the Fed itself admits that the prospect of maintaining the landing is becoming 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-wing Economic Policy Institute, in a blog post at the beginning of this one. month.

This leaves us with two potential outcomes: higher inflation of the kind we’ve seen in the last year, or a recession that drives prices down while likely driving up unemployment and holding back wage growth.

Team inflation

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

Inflation clearly eats people’s wages, and that’s a bad thing. (Consumer prices rose about 9% last month year on year, while wages rose 5.3%.) But, says Bivens, “the only thing we know about recessions is that they reduce wages far more reliably than inflation.”

One of the main arguments of its opponents is that inflation has a sticky psychological problem. Once the idea perpetual price increase takes root in the consumer’s psyche, can create a self-fulfilling cycle that is difficult to break. It’s not a joke, says Bivens, but according to him we simply aren’t there yet.

In the United States, inflation has been stable at around 2% per year for nearly four decades. For this reason, he argues, people mostly don’t expect recent inflation of around 9% to stay the same.

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

Senator Elizabeth Warren is another prominent voice in this area, arguing that the root cause of our current inflation, including the supply chain chaos caused by the pandemic and the war in Ukraine, is well beyond the Fed’s jurisdiction.

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

When the Fed raises rates, it becomes more expensive for individuals and businesses to borrow money. This pushes everyone to spend less. Companies slow hiring, cut hours or lay off workers when demand runs out.

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

Team recession

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

Many who would argue for an inflation recession point to the 1970s, when uncontrolled inflation shot up, peaking at 14% in 1980. It took painful interest rate hikes and two successive recessions in the early 1980s. , under the supervision of then Fed Chairman Paul Volcker, to finally break the inflation cycle.

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

Not all recessions are created equal. The United States has gone 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 US has shrugged off a lot of downturns.

“People tend to forgive mild recessions, but they really get mad at high inflation,” writes Smith in a Substack post titled “Yeah, we’re probably in a recession, and that’s okay.”

But a recession can never really be a good thing? Sometimes, says Lakshman Achuthan, co-founder of the Economic 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 giants to close deals and making room for more agile competitors who can better meet customer needs,” he said in an email to CNN Business. . “This time around, the economy has changed enough following the pandemic that new business opportunities are inevitable.”

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

Bottom line

Whether the US is in a recession now or not is largely a semantic debate. There are signs that the economy is cooling down: housing demand is easing and consumer confidence is slipping.

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

“If the narrative becomes, ‘we must have the recession because we spent too much in 2021’, it makes you suspect that no relief is coming,” says Bivens. “I just think it’s a mistake everywhere.”

—CNN Business’ Jeanne Sahadi contributed to the report.

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