Jul 18, 2022 - Economy

A recession would be worse than this

Illustration of a hand pushing the bars of a chart like dominos onto a small man

Illustration: Sarah Grillo/Axios

A recession would be worse than the inflation the U.S. is seeing now, which is actually showing signs of easing up, some progressive economists are now arguing.

Why it matters: The Federal Reserve has been hiking interest rates to tamp down inflation, and is expected to continue — but this runs the risk of triggering a downturn. And at this point, that "cure" might be worse than the illness Dr. Powell is treating.

  • "The data is saying we have time to be flexible," says Josh Bivens, who makes this point in a new column from the Economic Policy Institute.

Details: The high rate of inflation the government reported for June freaked a lot of people out, but energy prices mostly drove the surge. This month, gas prices have fallen at their fastest rate since the pandemic.

  • Other commodity prices are down, too. Lumber, a leading indicator of the pandemic inflation, is well off its recent highs.
  • Meanwhile, inflation expectations are receding, as Axios Macro reported last week.

"There are a lot of reasons for believing that inflation has peaked," Dean Baker, senior economist at the progressive Center for Economic and Policy Research, tells Axios.

The big picture: With inflation, there are actually winners and losers. "One person's cost is another person's income," Bivens notes, pointing to record oil company profits, for example.

  • Rents and home prices go up; landlords and home sellers benefit.
  • Bivens — who is typically on the side of labor, not capital — doesn't applaud this kind of redistribution of wealth, he adds. But a recession "would have worse distributional consequences."

With a recession, everyone loses — not just the unemployed. Even if you hang on to your job, raises vanish, advancement opportunities narrow or disappear. "The economy overall is poorer," Bivens says.

  • Young adults starting their careers would have fewer job options, too.

This is especially significant, considering how the recent economic expansion has benefited those at the bottom of the ladder. The lower-paying jobs that have improved in quality recently would worsen significantly, as employers took back the upper hand.

  • And, typically in a recession, the first to lose jobs are lower-income or less-educated folks, or those with criminal backgrounds, Baker emphasized.
  • Yes, higher prices also hurt those people — but unemployment isn't going to make that better.

The other side: Some note that recessions can be short, while longer-term, structural inflation can eat away at affordability for years.

What to watch: All eyes are on the Fed meeting next week when it is expected to announce another rate increase of at least 0.75 percentage points.

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