Why Some People Really Want A Recession (And Others Say It’s Crazy)

Why Some People Really Want A Recession (And Others Say It's Crazy)

(CNN Business) — The US economy is on the razor’s edge, perhaps already in recession after a second quarter of contraction in activity. But the indicators are mixed, fueling uncertainty about the way forward.

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

No one seems to agree on either.

By raising interest rates, the Federal Reserve is making a big bet that a recession is worth risking if it relieves consumer prices, which are rising at their fastest pace in four decades.

But many economists and policymakers reject that idea, arguing that the supposed cure for a recession is far worse than the inflation disease.

Certainly, the Fed would like to avoid both. He talks about a “soft landing” in which he raises interest rates enough to slow demand without stifling it completely. 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 it more likely,” Josh Bivens, research director at the left-leaning Economic Policy Institute, wrote in a longer blog post. early 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 slowing wage growth.

in favor of inflation

Bivens is firmly in the “high inflation is bad, but a recession is worse” camp. This is largely due to what a recession does to the job market. “A recession actually means that your economy is, on average, poorer,” 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 is c is that they reduce wages much more reliably than inflation.”

One of the main arguments of its opponents is that inflation comes with a complicated psychological problem. Once the idea of ​​perpetually rising prices has become entrenched in the consumer’s psyche, it can create a self-fulfilling cycle that is difficult to break. It’s no joke, says Bivens, but in his opinion, we’re not there yet.

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

“We have to build on that expectation and that credibility,” he says.

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

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

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

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

pro recession

A possible recession in Europe is mitigated 0:50

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

Many who would argue for an inflation-fueled recession are pointing to the 1970s, when runaway inflation peaked at 14% in 1980. It took painful interest rate hikes and two subsequent recessions until the early 1980s, overseen by then-Fed Chairman Paul Volcker. , to finally break the inflationary cycle.

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

Not all recessions are the same. 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 skipped many recessions.

“People tend to forgive mild recessions, but they really worry a lot about high inflation,” Smith wrote in a Substack article titled “Yes, we’re probably in a recession, and that’s okay.”

But can a recession 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 giants out of business and giving rise 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 after the pandemic that new business opportunities 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.

The conclusion

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

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 makes you suspect that no relief is coming,” says Bivens. “I just think it’s wrong everywhere.”

Jeanne Sahadi of CNN Business contributed to this report.

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