Choose your poison: inflation or recession? Some economists say inflation is worse than a recession, while others disagree. Economists can simply not agree on anything!
Here, I will try to resolve that debate. Both inflation and recession are evils, but which evil is worse for our economy?
Let’s begin with the definitions. A recession is a period of “sustained” weak or negative growth in real gross domestic product (GDP), that is accompanied by high unemployment and weakness in many other economic indicators. Inflation is a general rise in price levels, which erodes purchasing power.
So, in a recession, the economy's performance decreases for an extended period of several months, marked byGDP contraction, higher unemployment rates and lower consumer spending, weak economic activity, such as lower production of goods and services, and lower consumer demand. Feel free to plug in the word “unemployment” next to recession.
With inflation, prices are high, people are working, and many can afford to spend the additional income from their wages to pay the higher prices which are then received by the suppliers, who hopefully pass them on to their workers in the form of higher wages, sustained employment and continued purchasing power. In lay person’s terms, someone somewhere is receiving and benefiting from the high prices that we are paying for the products that we consume. Can somebody say gas companies? Inflation amounts to a redistribution of income; however, it affects the lower income earners disproportionately in that it takes a higher percentage of their income to purchase the same products.
With a recession, there is stagnating or declining incomes due to reductions in employment hours or workforce, increases in the unemployment rate as companies lay off workers, businesses reduce production, manufacturing activity declines, and consumer spending (retail sales) declines because people have less money to spend (www.forbes.com/advisor/investing/what-happens-during-a-recession/).
In a recession, unemployment tends to be high, wages low and people are not able to afford to buy even lower-priced items because they do not have the purchasing power.
According to the Economic Policy Institute (EPI), “many voices in this debate have implicitly or explicitly argued that recession and inflationcause equivalent damage, or that inflationactually causes worse damagethan recession. This view is clearly wrong — the economic damage wrought by recessions is far greater than that by single-digit inflation rates. Inflation, on the other hand, is pure redistribution in the short run, but does not directly reduce incomes in the aggregate.” (www.epi.org/blog/a-recession-would-be-worse-than-todays-inflation/)
Those who say inflation is worse argue that inflation affects everyone, while a recession only affects some people (as they lose their jobs). Yes, only certain people become unemployed in a recession, while everybody pays higher prices with inflation. So, a recession is fine, unless you are one of those who is unemployed. Which would you rather have, a job while paying higher prices, or no job and not be able to buy or afford anything? Yes, inflation punishes the poor, but recession punishes them more and makes them even poorer. When inflation gets worse, it is known as hyperinflation, and when a recession worsens, then you have a depression. The two combined are known as the “misery index.” Recession and inflation are two evils that we do not want to deal with, neither do we want to trade one for the other. So choose your poison, recession or inflation? Neither for me, thanks!
Kojo Quartey is president of Monroe County Community College and an economist. He may be reached atkquartey@monroeccc.edu
