The cure for the recession divides economists

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

No one seems to agree, streetwise or otherwise.

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

Certainly, the federation wants it Remove both. It is intended to be a “soft landing” for raising interest rates. From juuuust It’s enough to delay the urge without completely ignoring it. That would be the best outcome, although the federation itself admits that the chances of sticking the landing are becoming increasingly difficult.

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

That leaves two possible outcomes: more inflation of the kind we saw last year, or a recession that lowers prices and lowers unemployment and wage growth.

Group inflation

Bivens is firmly in the “high inflation is bad but a recession is worse” camp. That’s largely because of the recession’s toll on the job market. “A recession means your economy is poor on average,” he told CNN Business.

Inflation obviously eats away at people’s wages, and that’s a bad thing. (Consumer prices rose about 9% last month, while wages rose 5.3%.) But Bivens says, “One thing we know about recessions is that they lower wages more reliably than inflation.

One of the main arguments raised by the opponents is that inflation comes with a psychological problem. Once the Idea Constant price increases are embedded in the consumer’s psyche, creating a self-indulgent cycle that is hard to break. That’s no joke, says Bivens, but in his estimation, we’re just not there yet.

In the United States, inflation has hovered around 2% per year for nearly four decades at best. As a result, he argues, people generally do not expect 9 percent inflation to coexist in the near future.

“We must use these promises and loyalty,” he said.

Senator Elizabeth Warren is another prominent voice in this camp, arguing that the causes of current inflation — including supply chain chaos caused by the pandemic and the war in Ukraine — are far beyond federal jurisdiction.

Higher interest rates won’t eliminate rising energy prices, Warren wrote in a Wall Street Journal op-ed last week, saying, “Mr. Powell won’t dismantle the corporate monopolies he embraced in January because they can raise prices.

When the Fed raises rates, it makes it more expensive for people and businesses to borrow money. That encourages everyone to spend less. When demand dries up, businesses cut back on hiring, cut hours, or lay off workers.

That, Warren writes, “leaves millions of people—disproportionately low-wage workers and workers of color—with minimal paychecks or no paycheck at all.

Group failure

Others argue that recessions, while not good, are not necessarily bad. they In fact, it can be healthy.

Many argue that the decline was due to inflation in the 1970s. Inflation spiked in the 1970s, rising to 14 percent in 1980. Finally, stop inflation.

“A mild recession is now far preferable to a Volcker-style recession,” economist Noah Smith wrote in a blog post.

Not all recessions are created equal. Since 1857, the United States has gone through 34 recessions — or an average of one every five years, according to data from the National Bureau of Economic Research. They lasted an average of 17 months each.

That means the US has missed a lot of setbacks.

“People want to excuse a mild recession, but in reality they’re going to wake up with really high inflation,” Smith wrote in a Substack post.

But a recession really is possible. Being a good thing? Sometimes, says Lakshman Achuthan, founder of the Economic Cycle Research Institute, which sets recession dates for 22 economies around the world.

“A recession can be a cleansing event for the entire economy, forcing inefficient behemoths out of business and making room for competitors who can better meet customer needs,” he told CNN Business in an email. “The economy has changed enough in the wake of the pandemic that new business opportunities will inevitably open up.”

Achutan points to some of the innovative businesses that emerged during the recent downturn: Airbnb (founded in 2008), Uber and WhatsApp (founded in 2009) all emerged from the Great Recession of 2007-09.

at last

Whether or not the United States is currently in a recession is largely a matter of definition. There are signs that the economy is slowing down – demand for housing is falling and consumer confidence is declining.

In most recessions, federal stimulus is a common way to stimulate the economy and restore consumer confidence. Those financial lifelines are unlikely to arrive at this time.

Bivens says, “If the narrative is ‘in By 2021, we should have a recession because we’re overextended,” Bivens says. “I think it’s a mistake all around.”

—Jane Sahadi of CNN Business contributed reporting.

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