This is an edition of Up for Debate, a newsletter by Conor Friedersdorf. On Wednesdays, he rounds up timely conversations and solicits reader responses to one thought-provoking question. Later, he publishes some thoughtful replies. Sign up for the newsletter here.
Last week I wrote, “Pick your poison: high inflation or a recession. Which would you prefer and why?”
Dan makes a strong case for recession over inflation. “The reasons are many,” he writes:
1. Recessions fix supply/demand imbalances that create inflation.
2. Recessions let the air out of unsustainable asset bubbles, allowing investors the chance to purchase assets at fair values or even exceptional bargains in some cases.
3. Inflation is functionally a tax on everyone, including those on fixed incomes or those who get smaller raises than what is necessary to keep up with rising prices.
4. Recessions (though their association with Fed rate hikes) give savers the rare opportunity to invest in safer securities like Treasuries at far more attractive interest rates, which might even keep up with inflation once the recession at least takes the edge off rising process.
5. Recessions increase unemployment temporarily, but even if unemployment doubles, that’s perhaps an additional 5 million Americans out of work collecting benefits for a while, whereas inflation raises prices for every American family until it’s subdued.
6. Remember that the inflation of the 1970s destroyed more spending power than the Great Depression despite a more modest drop in equity values. The reason is the incredible loss in value of the U.S. dollar, which masked the devastation to investors during that period.
7. Recessions tend to be relatively short/sharp downturns in growth, whereas if inflation expectations are allowed to become well entrenched, they can lead to inflation spirals. Once the inflation genie is released from the bottle, it’s not easy to get it back in. In fact, the typical cure for inflation is a recession (soft landings are mostly fairy tales the Fed tells to worried investors to prevent panic or to avoid leveling with the public for political reasons).
8. Fiscal policy can help mitigate the pain of a recession (fiscal help being economically stimulative), but fiscal policy intended to alleviate inflation’s impacts on consumers only makes inflation even worse.
The Fed’s QE infinity and ZIRP [zero interest-rate] eternity policies plus congressional pandemic largesse contributed substantially to the rampant inflation, not just the exogenous supply shocks.
The coming recession is merely the hangover consequence of the fixing of the policy error of failing to raise rates and reducing the Fed balance sheet at least 18 months ago. Therefore the question of which is “better” is like asking if it’s better to drink way, way too much, to the point of blacking out, or better to wake up with the worst hangover one has ever had. You chose to get blackout drunk, and the hangover is a natural consequence. Even if more drinking the next day might put off the hangover for a few more hours, a “hair of the dog” strategy is still a terrible idea and only serves to compound the original error in judgment. Accept the recession while trying to mitigate its impacts, and endeavor to stop blowing asset bubbles with artificially stimulative monetary policy.
Emily will take the recession too:
I was in elementary school in 2008. So I have less experience with recessions. But inflation is getting to the point where my same-age friends are choosing between gas and food, or are being forced to move as they’re priced out of their apartments. That’s not okay.
I’d rather just rip the bandaid off than watch as life slowly becomes unaffordable for more and more people. I feel like I’m being left behind and the people in power haven’t noticed. Maybe if there’s a 2% rate hike then the government and the wealthy will actually pay attention.
But Harold claims that “inflation, as painful as it is to society at large, is preferable to a recession.” He writes:
At our home we had a retaining wall that was, well, dilapidated. It has been that way since we purchased the house in 2019. There were more pressing issues to address that year, but 2020 was going to be the year that it was rebuilt. It turns out that being stuck at home made everyone want lumber, and prices for 8 ft. 6x6 treated pine soared to near $50 per unit. Finally last week I completed the project and only paid $28.50 per unit. Sure we had to deal with an eyesore and safety hazard for 2 years, but by simply delaying gratification and waiting to purchase the material, inflation in this one instance was not so bad.
I understand there are commodities that cannot be put off, but I am uncertain what effect the Fed’s intervention will make to achieve the goal of reducing the prices of products more impacted by war and supply constraints than “high” demand. People should vote on when a price is too high by their decision whether or not to purchase it. The freedom to make that decision should not be taken away by economic manipulations that largely impact those who have made more recent gains in the economy or just entered it. If in a recession those making the most or having the longest tenure were first on the chopping block, would public support of a recession be different?
Catherine wonders whether “inflation or recession” is a false choice:
In the same way that starting wars in oil producing countries is not the answer to securing an energy supply, maybe hiking interest rates is not the answer to the current bout of inflation. Sure, hiking interest rates will surely cause a recession—but is that the only solution?
The root causes of inflation are currently primarily the embargo on Russian oil and too many shipping containers in the ‘wrong’ place post-pandemic. The shipping container issue is a practical one and should be fixable for a calculable investment (the US govt and the EU hire a merchant fleet to return them to China, problem solved in weeks—and maybe provide training opportunities for apprentice merchant seamen as a bonus).
The embargo on Russian oil is quite a lot thornier and has no such easy short-term fix—so please explain why you (and the Fed) think hiking interest rates will fix it in a constructive way? We’re not talking about an overheated consumer economy running on household debt here, we’re talking about raw material for industry and basic utilities for households, so not ‘discretionary’ spending. Nobody buys a tank of gas or turns all their appliances on for fun. So apart from teenagers and kids buying plastic gewgaws at the mall—who’s ‘overspending’? If no one, really, why hike interest rates in the hope of bringing inflation down?
What will actually happen if interest rates are hiked is, on the domestic household scale, people’s mortgages will become difficult to service, leading to foreclosures and even more homelessness. For the business economy, the higher payback for loans will stymie expansion and the higher cost of raw materials, which won’t be tempered by rate rises, will still cause currently profitable businesses to have weaker margins—and some to go bust, leading to redundancies, which will feed the negative feedback loop to households, etc. Yes, inflation is a massive problem—but interest rate hikes aren’t the answer in this particular circumstance.
Still, the question was which would I prefer—so my vote goes to a recession. I’ve survived several already, [as] most people do over the course of a lifetime (at least in the developed world). High inflation, however, ruins the masses (it ruined my grandparents’ retirement in the 70s) whilst inflating the values of assets held by the rich like quantitative easing on steroids, so unless you want to further empower the oligarchy / plutocracy / global financial elite, which I assume you don’t, then the recession has to be the better choice.
Jaleelah reflects on the uncertain nature of economics before sharing her preferences:
It seems insane to me that people have strong opinions on individual economic policies. It is impossible for me to determine whether a recession or inflation would be better for society. It is even impossible for me to determine whether a recession or inflation would be better for me. So instead of picking a side, I will give my strongest arguments for each scenario (like the true university debater I am).
A recession is unlikely to put me out of work. I am a computer science student. As much as people like to whine about tech bros, the industry is never going away. We will always need workers to keep servers running and test out new technologies. Furthermore, a recession may spur companies to look for ways to automate tasks that they can no longer afford to pay humans to carry out. Contrary to popular belief, automation goes a lot further than replacing factory workers with machines. Self-checkout machines and virtual secretaries are better examples of machine-handled tasks that used to be carried out by humans. Many tasks can be carried out far more cheaply and efficiently by code and/or machines. As industries look to cut costs, companies that were too lazy or uninformed to look into automation will be forced to catch up. Since they will need programmers to help them cut their costs, my base career prospects would probably be alright.
Inflation, if it keeps gas prices insanely high for a sustained period of time, may be the only way for the U.S. to make a dent in its climate commitments. The country’s pathetic political representatives are unlikely to curb emissions through policy. But if it becomes completely unaffordable for consumers and corporations alike to use gas, they will be forced to create alternatives. Perhaps investors will compete even more intensely to bankroll the next big breakthrough in renewable energy. Perhaps cities will invest more money into bike lanes in a desperate attempt to motivate workers to continue commuting to offices (where they will inevitably spend money on coffee and lunch). I don’t really know for sure. But if it would even make a dent in the U.S.’s seemingly unbreakable commitment to oil, I would happily sacrifice my own (and everyone else’s) ability to afford a more secure life.
Alison and her husband would prefer a recession but understand that many young people may feel differently:
We are retired and living on a fixed income. If prices for goods continue to rise, we can afford less, but if the economy contracts into recession, there will be less to buy anyway—and it’s much easier to not buy something if that something isn’t available! Of course, recessions cause big problems for working-age people (I was in my late teens/early 20s during the recessions of the 1970s and remember very well being unable to find work and having to apply for food stamps for a time; a system designed to humiliate the applicant, by the way) and I’m not sure that I wouldn’t be happier with high inflation now if I were younger. My basic feeling is that jobs generally come back over time (if not the *same* jobs, of course), whereas prices very rarely go lower once they’ve been raised.
Victoria offers a lament for her generation:
Lucky us, the Millennial barely-middle-class: We graduated into a recession, made significantly less than our forebears in the early, crucial years of our careers, and now as we are settling into more solid senior roles and salaries, we get inflation to put us back to living paycheck to paycheck. The solution? Another recession, so all those who watched their parents lose their homes in 2008 can now lose their own. But don’t worry, we’ll still be called entitled.
Jack is feeling pessimistic:
A recession seems like the slightly lesser of two evils. Prices are out of control, with many people not being able to afford decent housing, transportation or food. I’m a hospital administrator, and healthcare has been ravaged by a labor shortage, in part because nurses and advanced practice providers (PAs and NPs) have been lured away to take ridiculously inflated travel contracts in other labor-starved states at hospitals willing to pay the ransom. Biden and the Democrats will get the blame, raising the specter of another psychopathic Trump or Trump clone presidency. The future looks grim.