At the core of the debate among 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 way or another.
But many economists and lawmakers are pushing back on that idea, arguing that the so-called cure of a recession would be far worse than the disease of inflation.
To be sure, the Fed would like to avoid both. It’s aiming for a “soft landing” in which it hikes interest rates juuuust enough to slow demand without choking it off completely. That would be the ideal outcome, though the Fed itself admits the prospect of sticking the landing is getting increasingly difficult.
That leaves us with two potential outcomes: More inflation of the kind we’ve seen over the past year, or a recession that brings prices down while likely raising unemployment and crimping wage growth.
Team Inflation
Bivens is firmly in the “high inflation is bad but a recession is worse” camp. That’s largely because of what a recession does to the labor market. “A recession actually means your economy is on average poorer,” he told CNN Business.
Inflation clearly eats into people’s wages, and that’s a bad thing. (Consumer prices rose around 9% last month on annualized basis, while wages rose 5.3%.) But, Bivens says, “the one thing we know about recessions is they drive down wages much more reliably than inflation does.”
One of the main arguments his opponents make is that inflation comes with a sticky psychological problem. Once the idea of perpetual rising prices gets embedded in the consumer’s psyche, it can create a self-fulfilling cycle that’s tough to break. That’s no joke, Bivens says, but in his estimation, we’re simply not there yet.
In the United States, inflation has held steady at around 2% a year for the better part of four decades. Because of that, he argues, people mostly don’t expect recent inflation of around 9% to stick around.
“We should take advantage of 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 wrought by the pandemic and the war in Ukraine — is far beyond the Fed’s jurisdiction.
When the Fed raises rates, it makes it more expensive for people and businesses to borrow money. That prompts everyone to spend less. Businesses slow hiring, reduce hours or lay off workers as demand dries up.
That, Warren writes, “will leave millions of people — disproportionately lower-wage workers and workers of color — with smaller paychecks or no paycheck at all.”
Team Recession
Others argue that recessions, while also not ideal, aren’t necessarily catastrophic. They may even be healthy.
Many who would argue for a recession over inflation point to the 1970s, when runaway inflation soared, peaking at 14% in 1980. It took painful interest rate hikes and two subsequent recessions in the early 80s, overseen by then Fed Chair Paul Volcker, to finally break the inflation cycle.
“A mild recession now is far preferable to the severe, Volcker-like recession that will be necessary to quell inflation if expectations become entrenched,” wrote economist Noah Smith in a blog post.
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…
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