I started lifting weights when I was in graduate school at Cornell University in the early 1970s. I joined a group—appropriately called the “barbell club”—that trained in a small room in the clock tower. Fortunately, the clock wasn’t very loud when it sounded at the hour and half-hour.
After joining and paying my initial dues, the president of the club pulled me aside. Speaking in a friendly, yet firm, voice, he gave me the two rules of the club. First, if I left any plates I had used on a barbell or on the floor, I would immediately be expelled from the club. Second, there would be no complaining about aches and pains after a workout. The club president believed if there was “no pain,” there would be “no gain.”
We’re going through a similar experience of “no pain, no gain” in today’s economy. The Federal Reserve, also known as the “Fed”, which is the central bank of the country, is raising interest rates in order to slow the pace of economic growth, “cool” the economy and hopefully reduce the increase in prices. 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. The Fed doesn’t have the knowledge to precisely guide the economy. Indeed, we wouldn’t expect any institution to be able to exactly steer an annual $25 trillion economy. So, there is a risk the Fed will raise interest rates so high that the goal of slower spending will turn into lower spending. And when spending drops, there’s a large chance businesses will reduce their workforce and the unemployment rate will jump. In other words, we’ll face the pain of a recession.
The Fed knows this – it has happened many times before. The most famous recent example was the late 1970s and early 1980s when the annual inflation rate reached 13%. Interest rates had to be raised so high—indeed, just shy of 20%—that it was almost a foregone conclusion a bad recession would occur. And it did. But the benefit was that within three years, the annual inflation rate was down to 3%. It has stayed relatively modest—no higher than 5%—until the last two years.
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 2%. 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. The Fed’s latest official forecast is now showing the possibility of negative economic growth and higher unemployment in 2023. This is a condition that just about everyone would agree is a recession.
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 Ford Administration was looking for another way to curtail price hikes without using the standard policies of higher interest rates, more unemployment and slower growth. They settled on a public relations campaign of encouraging car-pooling to reduce gas consumption, setting thermostats higher in the summer and lower in the winter to decrease energy use, planting vegetable gardens to substitute for high priced food, as well as other initiatives. “WIN” buttons were produced and distributed. I still have mine!
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!
Walden is a William Neal Reynolds Distinguished Professor Emeritus at North Carolina State University.
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