The 2022 Inflation/Recession for Dummies

“Teach a parrot to say ‘supply and demand’ and you have an economist.”

That’s the first thing my microeconomic theory teacher said to our class on the first day fall semester. Although he proceeded to explain why we should never think his class would be that simplistic, the quote always stuck with me. Throughout the class, and still now, whenever there is a complicated short answer question I get stuck on I always think to myself, “bring it back to supply and demand”.

Inflation is currently at the highest it’s been in the past 40 years, and although it seems to be all anyone is talking about, it’s unclear whether anyone has a true understanding of what’s happening. Having endless time with nothing to fill it now that my job has ended, I really sat down to think about how it all connects. So, I decided to bring it back to the basics – supply and demand.

The basics are a) the economy is currently seeing an influx in demand, but supply has still not recuperated from when producers cut their supply at the beginning of COVID and b) recessions are all about either putting money into the economy or taking it out – right now, we need to take money out of the economy. Let’s go more in-depth on these points…

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The economy is seeing an influx of demand because throughout 2020, consumers did end up buying less than they normally do. There was less unemployment than predicted because many companies quickly transitioned online, therefore people kept receiving wages. There were also stimulus checks. Throughout 2021, there was a surge of economic activity as people were able to go out in person and buy things with the money they saved during the lockdown. 

The economy is seeing low supply because producers reduced their supply numbers in 2020 to prepare for less consumerism. The supply has still not bounced back to the numbers it once had in 2019. Part of this is because of the big labor shortage problem.

In economics, there is a ‘labor-leisure model’ that basically determines how much one will work based on their wage, overall time they have, amount of leisure time they want, and their non-labor income. This means the more non-labor income one has, the less they need to work because they are getting money somewhere else. During the initial COVID surge when many people got laid off, or quit their jobs, they realized that collecting unemployment and the government-provided stimulus checks equaled, or exceeded, what they were making from their previous wages. This means an individual had to choose between working eight hours a day for a wage, or collecting their non-labor income while gaining much more leisure time, in addition to avoiding the risk of working during a global pandemic. When framed in this model, it’s easy to see why some are choosing not to go back to traditional work.

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We’ve heard about inflation for a while now, but the new world floating around prolifically is “recession”. Even though we’re not technically in a recession yet, we’ve been experiencing its effects for the entirety of 2022. A recession is characterized by a negative GDP (the value of all goods and services bought in a certain country), and rising levels of unemployment. In Q1 (January-March) and Q2 (March-June) of 2022, the US has seen this negative GDP. However, expert economists from NBER’s Business Cycle Dating Committee are the ones to declare if there is a recession, and it has yet to be announced.

With the labor shortage, you would think unemployment would be very high, contributing to the decision to announce a recession. However, according to the Bureau of Labor Statistics, unemployment is the lowest it’s been in years…

“Unemployment” in its professional case doesn’t refer to every person who does not have a job. People are only classified as unemployed if they do not have a job, have been actively looking for work for the past four weeks, and are currently available for work. Those people we discussed before who found their non-labor income could be greater than their wage so they stopped working? They’re not labeled as “unemployed” because they’re not currently looking for a job.

So we’re not currently in a recession yet, but the most basic idea of a recession is that it’s just a generalized dropoff in economic activity.

“Generalized dropoff in economic activity” sounds bad, but it’s actually exactly what our economy needs right now. There is currently too much money circulating in the economy from consumers wanting to purchase things, so the government needs to work to take money out of the economy. By creating a recession, consumers will spend less, meaning demand decreases, and it will give time for supply to catch back up.

Most of the things we may have learned about recessions in the past don’t generally work for the recession we’re currently having. In the 2008 recession, the government needed to work to put money into the economy. We are having a different kind of recession though since, in order to get the high inflation down (the 2008 recession didn’t experience inflation), money needs to be taken out of the economy.

According to models and economic data, a recession is the best thing that can happen to the US economy. However to take a more humanistic look at it, countless people get laid off or lose their jobs during a recession, there is more budgeting that has to be done, and it causes a certain level of blanket anxiety over the American people.

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To include a quick blurb about the gas prices – the rising prices are being affected by inflation, but also because a majority of fracking in the US was ceased. When Biden took office, he took a bold stance in trying to help the deteriorating environment by shutting down the pipelines and prohibiting fracking in the US. Taking it back to supply and demand, if there is a far lesser supply of oil now that these sources have been cut off, but the demand does not change, the price will increase. This, in addition to the inflation we're currently experiencing, is why gas prices are so high.

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Right now we are at the peak of inflation, and the government is trying everything they can to push the economy into a recession to decrease this inflation. We are still waiting for the experts to declare the US in an official recession.

Until they do declare a recession, the best thing to do is to save money instead of purchasing things. Spending less money in an already overflowing economy is a small part you can play in taking money out of the economy. Having a comfortable savings/emergency fund will also benefit those who might find themselves getting laid off, or experiencing budget cuts at work during the recession.

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As the only female economics major at my university, I’ve been in plenty of situations where I’m surrounded by a group of people who don’t think I’m as knowledgeable as they are. Even if you’re not an expert on the subject being discussed, it’s never a fun feeling to automatically be assumed not as intelligent. I hope this guide allows you to understand the economic happenings in your country, and make sure to comment/email any questions you might have to help you prove yourself in some of those unfriendly interactions!

Yours truly,

Calihan