Do we need economic pain to have gain?
I started lilting weights when I was in graduate school at
We're going through a similar experience of "no pain, no gain" in today's economy. The
i^^i"®^®® p"^®®-Stated more succinctly, the Fed wants people and businesses to moderate their spending in order to reduce the inflation rate. So far, so good you might be thinking. But there's a catch.
After raising its key interest rate recently, the Fed has signaled it is ready to continue increasing rates until the inflation rate gets near its target of two percent. If the Fed sticks to its plan, economists increasingly are predicting a recession in 2023. But perhaps the most important prediction has come from the Fed itself.
So, just like the head of the barbell club at Cornell, is the Fed saying we have to have some pain before we see some gain? Will we have to endure the economic pain of a recession before we receive the economic gain of lower inflation?
This is a question I'm frequently asked when I speak to community and business groups about the economy. Understandably, people don't understand why we have to go through something bad, a recession in order to achieve something good, lower inflation. People are already suffering from high prices. Why compound the suffering with lost jobs and incomes?
There is a famous example of trying to beat inflation without enduring the costs of a recession. It was the "WIN" standing for "Whip Inflation Now^' campaign during the mid-1970s.
Inflation was surging to double digits and the
But the WIN campaign was a failure. Relatively few people followed the recommendations.
The campaign showed how difficult it is to motivate a majority of people to change their behaviors on their own without strong incentives. It's easy for any person to say to themselves: What I do, as one individual, won't matter. The more people who think this way, the less that is accomplished.
The lesson is that most people need a strong push to behave differently. If the objective is to have people buy less, there must be something that prompts them to buy less. Since borrowing is a big source of buying, raising the cost of borrowing through higher interest rates is a good way to moderate spending.
Even if the Fed has to inflict some pain to make gains against inflation, there is still the question of how much pain. Clearly the best result is to slow the pace of economic progress, rather than putting the economy in reverse. Achieving a reduction in the inflation rate without crashing the economy into a recession is called a "soft landing." We've had several successful soft landings, but, unfortunately, few were achieved when the inflation rate was starting at such a high level as today.
Economics is commonly dubbed the "dismal science." Clearly, a policy designed to reduce inflation by inflicting the pain of a recession is a good example of why economics has earned such a dubious label.
The big question is, does it have to happen? If we could miraculously solve all the supply-chain problems, as well as restore energy supplies to their pre-COVID levels, then we could possibly have gains against inflation without economic pain. But in the meantime, we'll have to decide if my barbell club colleague was correct -there is no gain without pain!
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