No one seems to agree one way or the other. But many economists and lawmakers balk at the idea, arguing that the so-called cure for a recession would be far worse than the disease of inflation. Certainly, the Fed would like to avoid both. It aims for a “soft landing” in which it raises rates enough to slow demand without completely suffocating it. That would be the ideal outcome, although the Fed itself admits that the prospect of holding 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,” Josh Bivens, director of research at the left-leaning Economic Policy Institute, wrote in a blog post earlier this month. This leaves us with two possible outcomes: More inflation as we have seen in the past year, or a recession that lowers prices while likely increasing unemployment and reducing wage growth.
Group inflation
Bivens is firmly in the “high inflation is bad, but recession is worse” camp. This is largely due to what the recession is doing to the job market. “A recession actually means your economy is poorer on average,” he told CNN Business. Inflation is clearly eating into people’s wages and that’s bad. (Consumer prices rose about 9% last month on a year-over-year basis, while wages rose 5.3%), but, says Bivens, “the one thing we know about recessions is that they reduce wages much more reliably than inflation.” One of the main arguments of its opponents is that inflation comes with a sticky psychological problem. Once the idea of ever-increasing prices is embedded in the consumer’s psyche, it can create a self-fulfilling cycle that is difficult to break. This is no joke, Bivens says, but in his estimation, we’re just not there yet. In the United States, inflation has remained stable at around 2% per year for the better part of four decades. Because of this, he argues, people for the most part do not expect the recent inflation of around 9% to persist. “We should take advantage of that expectation 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 the supply chain chaos caused by the pandemic and the war in Ukraine — is well beyond her jurisdiction. Fed. Higher interest rates will not fix skyrocketing energy prices, Warren wrote in a Wall Street Journal op-ed last week, and “will not break up the corporate monopolies that Mr. Powell admitted in January could “raise prices because they can .’” When the Fed raises interest rates, it makes it more expensive for people and businesses to borrow money. This prompts everyone to spend less. Businesses are slowing hiring, cutting hours or laying off workers as demand falls. This, Warren writes, “will leave millions of people — disproportionately lower-wage and workers of color — with less pay or no pay at all.”
Group recession
Others argue that recessions, while not ideal, are not necessarily disastrous. They may even be healthy.
Many who would argue for an inflationary recession point to the 1970s, when imperceptible inflation soared, peaking at 14% in 1980. It took painful interest rate hikes and two subsequent recessions in the early 1980s under the watch of then Fed Chairman Paul Volcker to finally break the cycle of inflation.
“A mild recession now is far preferable to the severe Volcker-like recession that will be necessary to suppress inflation if expectations materialize,” economist Noah Smith wrote in a blog post.
Not all recessions are created equal. 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 US has escaped many downturns.
“People tend to forgive mild recessions, but get really, really upset about high inflation,” Smith writes in a Substack post titled “Yes, We’re Probably in a Recession, and That’s OK.”
But can a recession really be a good thing? Sometimes, says Lakshman Achuthan, co-founder of the Business Cycle Research Institute, which sets recession dates for 22 economies around the world.
“Recessions can be cleansing events for the economy as a whole, forcing inefficient behemoths out of business and making room for more nimble competitors who can better meet customer needs,” he said in an email to CNN Business. “This time, the economy has changed enough since the pandemic that new business opportunities are sure to have opened up.”
Achuthan points to some of the innovative businesses 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.
Conclusion
Whether or not the United States is in a recession now is largely a semantic debate. There are signs that the economy is cooling – demand for housing is falling and consumer confidence is slipping. In most recessions, federal stimulus is a standard way to stimulate the economy and restore consumer confidence. Those financial lifelines aren’t as likely to land this time. “If the narrative goes, ‘we had to have the recession because we overspent in 2021,’ it makes you suspect that relief is not coming,” Bivens says. “I just think this is a mistake. —Jeanne Sahadi of CNN Business contributed reporting.