August 13, 2022

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'Recession cure' divides economists

‘Recession cure’ divides economists

At the heart of the debate among economists and policy makers is a fundamental question with enormous implications for America’s future: Which is worse – inflation or recession?

No one seems to agree one way or the other.

But many economists and lawmakers reject this idea, arguing that the so-called cure for stagnation would be much worse than the disease of inflation.

The Fed would surely like that Avoid both. It aims for a “soft landing” in which interest rates are raised juuuust Enough to slow the demand without stifling it completely. That would be the ideal outcome, although the Fed itself admits that the prospect of holding on to the downside is becoming increasingly difficult.

“The actions taken by the Fed so far do not guarantee a recession, but they have made a recession more likely,” wrote Josh Bivens, director of research at the left-leaning Economic Policy Institute. Blog post advance this month.

This leaves us with two possible outcomes: an increase in inflation of the kind we have seen over the past year, or a recession that leads to lower prices with the potential to increase unemployment and reduce wage growth.

team swell

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

Obviously, inflation is eating away at people’s wages, which is bad. (Consumer prices rose about 9% last month on an annual basis, while wages rose 5.3%.) But, says Bivens, “The only thing we know about recessions is that they lower wages more reliably than inflation.”

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One of the main arguments put forward by his opponents is that inflation comes with a sticky psychological problem. Once in idea From constantly rising prices in the consumer psyche, it can create a self-fulfilling cycle that is hard to break. This is no joke, says Bivens, but in his estimation, we’re not there yet.

In the US, inflation has held steady at around 2% per year for the better part of four decades. Because of that, he argues, people often don’t expect the recent inflation of around 9% to last.

“We have to build on those expectations 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 supply chain chaos caused by the pandemic and the war in Ukraine — is beyond the Fed’s purview.

Higher interest rates will not fix higher energy prices, Warren Books In an editorial in the Wall Street Journal last week, “They won’t break up the monopolies of companies that Powell admitted in January might raise prices because they could.

When the Fed raises interest rates, it makes it more expensive to borrow money for individuals and businesses. This pushes everyone to spend less. Companies slow hiring, reduce hours or lay off workers as demand dries up.

Warren writes that it “will leave millions of people – disproportionately low-paid workers and workers of color – with lower salaries or no salaries at all.”

team stagnation

Others argue that recessions, while not ideal either, are not necessarily disastrous. that they It may be healthy.

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Many who argue about stagflation point to the 1970s, when hyperinflation soared, peaking at 14% in 1980. It required painful interest rate increases and a subsequent recession in the early 1980s, under the direction of then-Fed President Paul Volcker, to finally break the cycle of inflation.

“A mild recession is now much better than the severe Volcker-like recession that will be necessary to cool inflation if expectations take hold,” economist Noah Smith wrote in a blog.

Not all recessions are created equal. The United States has gone through 34 recessions since 1857 — or roughly 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 of the downturns.

Smith wrote in his book Post Substack titled “Yeah, we’re probably in a recession, and that’s okay.”

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

“Recessions can be a purge of events for the economy as a whole, putting ineffective giants out of business and making way for smarter competitors that can better meet customer needs,” he said in an email to CNN Business. “This time around, the economy has changed enough in the wake of the pandemic that new jobs are bound to open up.”

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

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Whether or not the US is in a recession now is a largely indicative debate. There are signs that the economy is cooling – housing demand is declining and consumer confidence is declining.

In most recessions, federal stimulus is a typical way to stimulate the economy and restore consumer confidence. Financial lifelines are not likely to go down this time.

“If the narrative becomes, ‘We had to suffer a slump because we overspent in 2021,’ it kind of makes you suspect there’s no relief coming,” says Bivens. “I think this is wrong everywhere.”

– Jane Sahadi of CNN Business contributed to this report.