I really liked this observation from Neel Kashkari, president of the Federal Reserve Bank of Minneapolis, on a podcast with Financial Times columnist Soumaya Keynes:
You know, I do a lot of roundtables with small businesses and labour groups and workers. And one of the most profound comments that I’ve heard over the past couple of years was with a group of labour leaders in my region and a labour leader who represents low-income service workers. So these are not autoworkers. These are not welders, really highly paid people. These are low-income service workers who work in grocery stores and hotels. She said to me, inflation is worse than a recession. That is contrary to conventional economic thinking. And I said, I don’t understand that, how can inflation be worse than a recession? In a recession, you lose your job. Inflation, you just pay higher prices, you still have a job. She said, because her members are used to dealing with recessions, and the way they get through a recession is they rely on friends and family. I lose my job, I lean on my sister or my parents or my friends, and they help me through it. But high inflation affects everybody. There’s no one I can lean on for help because everyone in my network is experiencing the same thing I’m experiencing. That was a profound comment for me to hear, and that really flies in the face of conventional economic thinking. And it led me and our economists at the Minneapolis Fed to debate this a lot. But she was on to something.
I’ll just add another observation. In a traditional recession, with a large number of layoffs and higher unemployment, the typical person who loses their job is in a tough spot. And it often feels like no one is hiring, at least in a particular area, even though there are always at least some companies looking to fill positions. But if you’re one of the laid off who does find a new job, your situation gets better. Maybe the new job doesn’t pay quite as well as the old one, or maybe you have a longer commute, or the hours aren’t what you want. But you really just need one employer to take a chance on hiring you to get to a considerably better spot. And while it’s difficult to find a better job, or a higher-paying one, during a recession, it’s not impossible.
In an era of high inflation . . . the inflation is just about everywhere. (Yes, there are some regional differences, but there isn’t any region that is immune from the effects of too much money chasing too few goods and services.) You feel it at the grocery store, you feel it at the gas pump, you feel it at Walmart and Target and at small businesses. You feel it if you’re getting a new mortgage, taking out a loan, or buying a new or used car.
Those who are comfortable or wealthy feel its effects less, obviously, but they’re paying higher prices, too.
Inflation is essentially inescapable. Your only real hope to mitigate or overcome its effects is to get a raise that keeps up with or surpasses the rate of inflation. And that’s particularly tough when inflation is the highest in 40 years, and when inflation has been above the “normal” 2 percent or so for three years.
The highest non-Covid unemployment rate in recent memory was 10 percent, in October 2009. No doubt, that’s pretty bad, but that still means that roughly 90 percent of the people who wanted to work were working or could find a job. (According to the CIA World Factbook, 55 countries had an estimated unemployment rate above 10 percent in 2022.) In a typical recession, life can go on, more or less as normal, for lots of people with minimal belt-tightening. Again, this isn’t to say that recessions aren’t bad, or genuinely painful for those on the lower rungs of the economic ladder.
But the ill effects of a recession are concentrated, while the ill effects of inflation are spread widely throughout the country and society.