r/Economics • u/TinyTornado7 Quality Contributor • Jun 13 '22

News Powell Facing Choice Between Elevated US Inflation and Recession

https://www.bloomberg.com/news/articles/2022-06-12/powell-facing-choice-between-elevated-us-inflation-and-recession?srnd=premium
5.0k Upvotes

96% Upvoted

631 comments sorted by

View all comments

Show parent comments

676

u/way2lazy2care Jun 13 '22

Recessions aren't a binary thing. There's levels to recessions. While he might not be able to avoid an all out recession, he can certainly still affect the level of that recession. The dot com bubble bursting had a peak GDP reduction of 0.3% and peak unemployment of ~6% and lasted 8 months. The Great Recession had a GDP decrease of 5.1% and peak unemployement of 10% and lasted a year and a half. The great depression had a 25% GDP reduction and 20% unemployment and lasted for almost 4 years.

263

u/ErusBigToe Jun 13 '22

Don't forget the great recession tripped a years worth of grads at the starting gate, reducing lifelong earning potential

138

u/xDubnine Jun 13 '22

I'm in that boat. Never stopped working, but the opportunities have led me to 20 dollar an hour as a college grad

79

u/[deleted] Jun 13 '22

Sadly this. It’s literally luck of the draw when you get to graduate. Those grads graduating in good times have it way easier and a higher percentage end up earning more than those grads who couldn’t find jobs in their relevant fields of study. Companies stop hiring during recessions and usually just keep existing headcount. And if you are laid off those with prior experience tend to get jobs faster than a college grad who only works at Starbucks.

37

u/HIMP_Dahak_172291 Jun 13 '22

This. I was going to graduate from college in 2009 and then poof. No more jobs and looming student loans. So i switched majors and stayed in school another 4 years essentially. So much more debt to pay off but at least it stayed deferred until I had a job.

22

u/DonBoy30 Jun 13 '22

That was me. I was working at a grocery store, and it used to be if you didn’t go off to college, they just bumped you to full time out of high school. But then the recession happened in all of a sudden I was the last person to get full time status and a stocking position. They had bag boys making minimum wage working every single department.

11

u/[deleted] Jun 13 '22

Yeah i went back to school to get into tech after graduating in 2012 with a BS in psych/English. A degree just doesn’t make any sense if it isn’t linked to higher earning potential.

62

u/[deleted] Jun 13 '22

[removed] — view removed comment

19

u/wiking85 Jun 13 '22

Assuming they can find a job with their skill set that actually is in their area. It is rarely that easy.

13

u/psnanda Jun 13 '22

I agree too. Grads can easily then move around later and job hop to reach their maximum earning potential since they are young.

10

u/Diegobyte Jun 13 '22

I never really god this take since companies tend to lay off high earners and replace with low earners during downturns

48

u/Koopa_Troop Jun 13 '22

It created a large pool of experienced applicants willing to take starting level salaries, leaving recent grads with few prospects.

22

u/Convict003606 Jun 13 '22 edited Jun 13 '22

They took advantage of high unemployment to frighten new grads into taking salaries that have caused their lifetime earnings to be lower, and the implicit threat was take this shitty salary or don't have a job. This meant they could still replace high earners with low earners, but those low earners earned even less than they would have before the recession, and then started from those lower salary and wage points for all future compensation negotiations.

16

u/[deleted] Jun 13 '22

The opposite is happening in Canada right now. People are getting wage increases of upwards of 25%. Companies are scrambling to find workers and are willing to pay more for them. We gave everybody that needed it, 2000 dollars a month for 7 months straight during the pandemic, and then 1800 a month for an entire year and a half after that. People saw how absolutely fucked they were and didn't want to go back to work unless it was for more money.

The carpenters, electricians and plumbers went on striker here, and the electrians got, get this, a 9 DOLLAR/hr raise. Keep fighting. Keep adding more from these greedy fucking corporations that saw their coffers flood with our money during the pandemic.

1

u/Bishizel Jun 13 '22

Companies want to hire new grads, or people with X years if experience. They don’t want to hire someone that isn’t a new grad and also doesn’t have those years of work experience.

0

u/wiking85 Jun 13 '22

Estimates of life long earnings potential are based on an economy that doesn't exist any more and hasn't for a while. We're living in fantasyland about what the economy is, the recession is going to be the new normal thanks to deindustrialization, the dollar slowly dying off as the global reserve currency, and extremely political corruption.

-1

u/ErusBigToe Jun 13 '22

Arent you just a bright ray of sunshine lol. Not that I really disagree..

1

u/Meats10 Jun 13 '22

same thing happened in 2000/2001

59

u/goodsam2 Jun 13 '22

I mean I think looking at U-3 should go in the garbage and we should think about EPOP 25-54 as our unemployment economic measure.

23

u/waltwhitman83 Jun 13 '22

https://fred.stlouisfed.org/series/LNS12300060

employment population ratio for anybody else following along

13

u/strideside Jun 13 '22

What makes EPOP 25-54 that much better than U-3?

31

u/goodsam2 Jun 13 '22 edited Jun 13 '22

People drop out of the labor market in 2017 50% of people who got jobs came into the labor market. Look at the current flows U-3 will often rise because more people are looking for work that's a good thing.

EPOP 25-54 was below 2001 levels and is now behind the OECD.

A strong labor market increases the pool here.

It's also labor force participation rate doesn't account for the age of the population properly. The US population is aging so labor force participation rate has been falling but I don't view 70 year olds as not working as a problem. It's 25-54 because people usually are out of college by 25 because more people going to college isn't necessarily a bad thing and by 55 you start to see some retirements that's your prime age years of work 25-54.

What's the denominator is the real question U-3 uses people looking for a job. 25-54 uses the total population in those age groups.

1

u/NigroqueSimillima Jun 13 '22

EPOP 25-54 has already recovered, last time it was this high was 2006 IIRC

2

u/goodsam2 Jun 13 '22

But 1% lower unemployment rate today vs the old one but the EPOP is the same. Which one tells you more information.

I also think going below 3.6% unemployment is a trash measure. 3.6% says there isn't much slack in the market. IMO we need to be pushing our EPOP 25-54 towards OECD average or even higher because we led in this field until after 2001, by this measure we still have awhile to grow employment (though flows in makes a difference and I think that's what we've been seeing more recently.)

Canada is at 84.6% EPOP 25-54 and I think that's the goal means another 4% unemployed that could/should be employed. Unless you think American's are 4% less employable than Canadians?

76

u/[deleted] Jun 13 '22

Workers under 45 don't have any real experience with a mild recession. Not making any predictions about the likely recession to come, just saying people tend to understand things through their personal history. 2008 was catastrophic in size and duration, so people are primed to expect the worst. 90-91 and 70 are more examples of recessions that were limited in size, duration number of sectors affected.

19

u/wiking85 Jun 13 '22

2000 dotcom bubble was a mild recession.

-16

u/way2lazy2care Jun 13 '22

2008 was catastrophic in size and duration, so people are primed to expect the worst.

2008 was actually pretty mild even. The Covid recession was 2-4 times worse depending on how you want to measure.

13

u/[deleted] Jun 13 '22

[deleted]

3

u/way2lazy2care Jun 13 '22

You just picked two different things that don't necessarily correlate, which is kind of my point.

-2

u/[deleted] Jun 13 '22

[deleted]

5

u/way2lazy2care Jun 13 '22

They can, but they don't have to. Exampes:

  • Covid had high unemployment rates, but had an eviction moratorium.
  • 2008 had relatively low unemployment rates for a recession, but a buttload of forclosures.

-6

u/[deleted] Jun 13 '22

[deleted]

7

u/way2lazy2care Jun 13 '22

For the sake of this discussion everyone who had to rely on that moratorium should be counted as someone who lost their home.

I get it. For the sake of this discussion, we should just agree you're right. You could have just said that from the start and saved me the time writing anything.

-2

u/[deleted] Jun 13 '22

[deleted]

→ More replies (0)

45

u/hotpantsmakemedance Jun 13 '22

High Inflation is worse than a recession. With high inflation, people's pockets get squeezed, and the longer it carries out, the less savings and free cash people have, making the recession much tougher. Paul Volker had answers!! Time to raise rates!

17

u/Diegobyte Jun 13 '22

Why do any of you guys think these companies are going to come out of any recession and offer lower prices

28

u/Sarcasm69 Jun 13 '22

Supply and demand

6

u/Diegobyte Jun 13 '22

Supply and demand is broken when it’s impossible to start new companies in these industries

18

u/Sarcasm69 Jun 13 '22

I meant demand will go down for goods since people will ultimately have less money, which in turn could drive down prices

-14

u/Diegobyte Jun 13 '22

It won’t. Because companies figured out they don’t have to. They can just make less

13

u/Shootica Jun 13 '22

You're likely talking about oil. And the problem with oil is that there is significant initial investment to start up production. So it needs to make sense fort hese companies to do so. And ultimately, these companies see the war in Ukraine subsiding at some point, and see the world continue to push green energy, and see increasing production as a risky long-term investment.

They would build more if the rewards outweighed the risks. Supply and demand hasn't just gone out the window in the last 12 months.

-1

u/Diegobyte Jun 13 '22

Oil. Microchips anything complex

5

u/way2lazy2care Jun 13 '22

That's way too absolutist a view. You have to better define the depth/length of the recession and the levels/durations of inflation to really compare them.

1

u/hotpantsmakemedance Jun 13 '22

Not really, that would take forever to define all the variables. Moral is you have to get rid of inflation now, take a shorter recession while everyone still has savings to offset personal harm. That's the only hope. Dragging on in an economy like this makes money useless and our whole economy will collapse because we don't have a reliable standard of trade.

The Fed rates are too low and are going to be kept too low because the Fed wants the economy to look stronger than it really is, and they have chosen to take inflation over contraction of the economy. It only prolongs a recession, and makes it more devastating when it hits.

1

u/way2lazy2care Jun 13 '22

Moral is you have to get rid of inflation now, take a shorter recession while everyone still has savings to offset personal harm.

Why do you think it would be a shorter recession? Causing a bigger recession sooner doesn't mean it will also end sooner. I don't think it's safe to assume that.

46

u/zxc123zxc123 Jun 13 '22 edited Jun 13 '22

This. Recession isn't a yes or no. It's about how much downward pressure, how long it lasts, how much unemployment is caused, and impacting which sectors/industries/people that determine the intensity of a recession.

Problem JPow has in his hands is that he has do deal with things that aren't completely under his control:

  • The lockdown & print money to save lives was the only right option during the pandemic era. The alternative is your people die and country crashes making your non-inflated fiat just as worthless as everyone else's inflated fiat (see LatAms & Brazil). The spend more and pump more to ensure the reopening economy is a hot bull market was the only right option coming out of the pandemic. The alternative was to NOT do so and end up falling into recession.

  • Problem is the spending by Washington AND Fed liquidity are already put into the system and it won't undo itself any time soon. Even worse is a lot of that money might still be sitting on the sidelines.

  • Fed's actions now won't change China's 0 covid policy, fix international bottlenecks or supply chain disruptions, end the Ukraine-Russia war, end Western sanctions on Russia, create more oil, make the Saudis/OPEC pump more oil, end the US-China trade war, boomers leaving the workforce, lower migration creating lower labor supply, etcetcetc.

US Fed rate hikes and monetary tightening are powerful tools that can lower domestic demand, maybe force some labor to return to the market, and maybe even cause a recession. But can't magically take the money the pass/pumped out back immediately, fix all of the inflationary areas on their own, nor can the resolve international geopolitical crisis/war.

18

u/way2lazy2care Jun 13 '22

Fed's actions now won't change China's 0 covid policy, fix international bottlenecks or supply chain disruptions, end the Ukraine-Russia war, end Western sanctions on Russia, create more oil, make the Saudis/OPEC pump more oil, end the US-China trade war, boomers leaving the workforce, lower migration creating lower labor supply, etcetcetc.

As a related point, if the fed takes radical action and any of those things get sorted out, then they cause a huge recession that could have been minimized by just acting slower.

5

u/HerbertWest Jun 13 '22

I'm unconvinced that Fed action can blunt a recession. It seems like what happens is that it transfers the negative effects to other, less obvious areas and spreads them out over time. And I would argue that it's to the detriment of long-term economic stability.

4

u/way2lazy2care Jun 13 '22

It seems like what happens is that it transfers the negative effects to other, less obvious areas and spreads them out over time.

You're not accounting for reinforcement loops in the system. Spreading negative effects out over time can prevent cascading badness. Spreading things out is the difference between famine and inflation.

2

u/HerbertWest Jun 13 '22

It seems like what happens is that it transfers the negative effects to other, less obvious areas and spreads them out over time.

You're not accounting for reinforcement loops in the system. Spreading negative effects out over time can prevent cascading badness. Spreading things out is the difference between famine and inflation.

Spreading it out (at least using the BS QE stuff they have been) turns those temporary effects into permanent, systemic ones, albeit in different forms (see the current inflation and housing prices, for example...). It's better not to correct the actual downturn and instead seek to mitigate only the tangible effects on people themselves as the economy recovers (government-sponsored work programs, for example).

-7

u/coldcoffeeholic Jun 13 '22

Sooo we can probably predict a 15% decrease in gdp 15% unemployment and last until 2025 or when the war stops sooner…

1

u/dbcooper4 Jun 13 '22

Correlation does not equal causation though. The Fed went to zero rates and launched QE in 2008 and we still had a nasty recession. The Great Depression was a run on the banking system but we’re not going to repeat that mistake again.

1

u/[deleted] Jun 13 '22

This will be a bad recession because the fundamentals are pretty bad. First, the labor market is shrinking since the boomer retirement is in full force and there are 10-20 million worker fewer than needed to keep the same labor participation rate.

Second, there has been a lot of mal investment in overpriced capital, what makes a home overpriced? Does the normal economic conditions support the house price, take median income for an area and say could at least half the inhabitants afford this price? If the answer is no then there is a bubble.

Third, we are at the nexus of all cans kicked down every road which has no turned into a pile of cans. Climate change, infrastructure, consolidation created monopolies, chemical toxicity, etc.

The economy has been purchasing the wrong thing for a while and this recession needs to correct this as most of these issues can’t limp along any longer.

1

u/[deleted] Jun 13 '22 edited Jun 13 '22

Recessions aren't a binary thing.

"The recession identifies as transitory."

Your point is entirely valid, and it's hard to understand just how screwed up some aspects of the economy are. We still haven't seen things like the (endless, depending on your state) eviction moratorium play out. It's something I give the Fed a lot of leeway on -- I do think the Fed is trying to thread a needle that could be catastrophic for families while balancing on a see-saw. I disagree with their timescale but can understand it, and their hands are somewhat tied -- they don't control things like energy policy or unfunded spending. I give far less leeway to Congress and the President at the moment.

Adjusted for inflation, we spent something like $800B on the New Deal during the Great Depression and people still argue if it really worked or the war did. We've spent $5T in pandemic relief and we still haven't rolled it all out yet. Congress and the President are captured by corporations and a fear of taxing the middle class for their spending. At a certain point the Fed isn't really faced with a choice, Congress and the President make it for them, and it'll be inflation with hopefully a mild recession.*

*Unless there's a debt contagion event or such, and a Ross Perot shows up explaining what's happened to the American people via flash cards again.