America Needs a Good Recession

Let’s be blunt. What America needs right now is a recession. Not just a recession triggered by some Black Swan event, but a good recession. We need a recession that is driven by increases in interest rates that will cool overheated demand and give supply chains, work force participation and employer/employee relationships time to heal from the sweeping socioeconomic disruptions of Covid and our self-absorbed efforts to recover from it.

I am not here to argue that we are already in a recession or that a recession is inevitable, although I think both points will likely be proven correct over time. I want to convince you that an interest-rate driven recession would help clean up our present economic and workplace challenges far more effectively than we have been able to achieve in our overheated post-Covid rebound fueled by dreams that once again we can have it all, but this time without working so hard.

I am not suggesting that a recession would be painless. Economic activity would slow. People would lose their jobs. But that’s the point. Reducing demand and increasing unemployment will deliver the benefits we need. Here’s why.

1.      Curbing demand will reduce inflation and the risk of a deadly wage/cost spiral. The Federal Reserve increases interest rates to reduce economic activity and stem demand in an overheated economy. If they move too far too fast the economy can lapse into a recession. If they fail to move fast enough, the inflation in goods and services can trigger an ugly wage/cost spiral, where increased wage demands spurred by increased costs drive even higher cost increases and inflation.

 The risks are real. After a decade of low rates, the Fed is facing a unique confluence of inflationary factors including the shortage of people willing to work and the related increases in wages, the Black Swan effects of the global Covid shutdowns and the robust but uneven recovery, and the impact of the U.S. government largess on the economy—not to mention Russia’s invasion of Ukraine and its impact on global commodities. Although politicians and the media may dream about a soft landing where the Fed stems inflation without causing a recession, America cannot afford to risk a repeat of the Fed’s lukewarm interest rate increases in the seventies that eventually required 18% mortgage rates to break inflation’s back in the early 1980’s. If consumers and the markets believe that the Fed’s current tightening is just a temporary annoyance before easy money returns in the spring, we will just be kicking the can down the road as we did in the seventies. If it takes a recession to curb the post-Covid spending spree, let’s get on with it before things really get out of hand.

2.      Curbing demand will also give our supply chains time to heal. Reduced demand alone will not cure the global logistical deficiencies that Covid exposed, but it will help reduce the impact while adjustments are made. Fewer purchases need fewer trucks and fewer ships backed up in congested ports, as well as fewer people to make the raw materials and finished goods, drive the trucks and sell the goods and deliver them to your door. The need for fewer people along the way will also help reduce the worker shortages currently plaguing our economy.

3.      Increasing unemployment will shake up the work force and add some healthy reality back to employer/employee relationships. In a recession, some of the people who are working will lose their jobs and be forced to look for work elsewhere. The inflation that leads to the recession can also increase the work force participation rate by prompting more people to look for work as inflation weighs on household budgets. Again, our current economic circumstances are unique. Our low unemployment rate is rare for the outset of a recession, giving employees unusually strong bargaining power. Working from home and remote work from anywhere have altered the workplace and created new employee demands and ways for employers to compete for talent.

The issues here go well beyond wages. As Microsoft reported in its Work Trend Index 2022, “What people want from work and what they’re willing to give in return—has changed. The power dynamic is shifting, and perks like free food and a corner office are no longer what people value most.” In Microsoft’s study, 47% of respondents said they were more likely to put family and personal life over work than they were before the pandemic. In addition, 53% (including parents at 55% and women at 56%—said they were more likely to prioritize their health and wellbeing over work than before. As a result, “Employees everywhere are rethinking their ‘worth it’ equation and are voting with their feet.” According to Microsoft, 58% of Gen Z are considering changing jobs in the year ahead versus 43% overall and 52% for Gen Z and Millennials combined. Losing and replacing workers adds costs and operational challenges that are particularly hard on small businesses.

While some may prefer to applaud these recent trends as a new age of enlightened work-life balance, the impact for many businesses—especially small businesses—and the economy at large is far less magical. While our largest tech companies may be able to adapt to these new employee priorities, many other businesses cannot. We are seeing this play out all around us as service and quality suffer, productivity declines and businesses curtail hours or shutter their doors.

4.      Increasing unemployment will improve productivity. Rising productivity is the magic that lets businesses raise wages without raising prices and fueling inflation. In the second quarter this year, U.S. productivity fell at its steepest rate on an annual basis since 1948, while unit labor costs (the price of labor per single unit of output) continued to accelerate. In our present economy, businesses are essentially paying workers more to produce less, which is unsustainable.

Although some of workplace trends discussed above may translate to happier employees who are also more productive, I worry that higher wages, decreased loyalty, and new employee expectations about where and when they are willing to work are already leading to employees who are more focused on their personal needs and feelings than what it takes for a business to serve its customers well so it can stay in business and give people jobs. (By the way, the adverse impact of these factors on small businesses is particularly relevant to employment levels. The U.S. Small Business Administration reports that American small businesses have accounted for 66% of the jobs added to the economy over the past 25 years.)

According to The Wall Street Journal , economists say that “more slack in the labor market will likely lead to workers having less leverage over hours, pay and benefits.” For now, that could be a good thing for our economy.

The pendulum needs to swing. Bring on that recession. #economy #recession #inflation #humanresources #employees