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Economists consider the tradeoffs of fighting inflation and killing economic growth

RACHEL MARTIN, HOST:

The Federal Reserve has been aggressive in trying to bring inflation down by raising interest rates and doing it fast. Some economists say this is the wrong move. And they're using dramatic metaphors to try and explain what's happening. Here's Wailin Wong and Darian Woods of the Indicator podcast.

DARIAN WOODS, BYLINE: In 2006, Knut the polar bear was born in Berlin Zoo. Knut was rejected by his mother. He then needed 24-hour care and bottle-feeding to survive. Another zookeeper argued that this wasn't humane. The polar bear had an autoimmune disorder. And it would feel like its mother was abandoning it each time the zookeeper left. He said that Knut should be euthanized.

(SOUNDBITE OF PROTEST)

UNIDENTIFIED PROTESTERS: (Chanting in non-English language).

WAILIN WONG, BYLINE: Children protested at the zoo. A media storm ensued. And the Berlin Zoo vowed to keep Knut alive. Knut was spared and was a popular attraction. Although, he did die in an accident four years later. And, look; there's a real point about economics to be made here.

ALEX BRAZIER: Right now, lots of central bankers are sounding very tough on inflation. And that may be the right thing to do. But actually, this is such a difficult trade-off that it deserves a much wider debate, we think.

WOODS: Alex Brazier is the deputy head of the BlackRock Investment Institute. And with his co-author Jean Boivin, he used the metaphor of Knut the polar bear to describe a situation where he thinks that not enough people are arguing in defense of saving the polar bear's life. In other words, there's not enough of a debate over how quickly to raise interest rates.

BRAZIER: There had been more debate about Knut the polar bear than actually there is about how central banks should deal with the brutal trade-off that they are facing.

WONG: First, the argument in favor of killing the bear - inflation is terrible for an economy. It makes people on fixed incomes poorer, and it makes it really hard for businesses and people to know how to invest because everything's so uncertain. Also, when inflation is high, it gets into people's psyches. And central bankers worry a lot about this.

WOODS: But Alex says central bankers, like Jerome Powell, are underplaying just how much pain there will be, like polar bear life-threatening levels of pain. And that's because there is another cause of the inflation today, the pandemic.

BRAZIER: We shifted the composition of our spending away from services and towards goods, reversing 18 years of change in the opposite direction.

WONG: Another reason - employers can't hire as easily as they used to. For one thing, there is a mismatch between what employers want and the skills that out-of-work people have.

BRAZIER: Effectively, people lost their jobs in the pandemic shutdown and didn't come back. And for all those reasons, the economy's less able to produce the things that it demanded than it was.

WOODS: So if production constraints are driving inflation, the Fed raising interest rates only deals with the symptom of the disease, high inflation. It doesn't deal with the disease itself, pandemic changes to the economy.

BRAZIER: To get inflation down to 2% any time soon would require the Federal Reserve to put 3 million people out of work. There's no good choice.

WONG: Millions of people might have to be laid off, effectively a very costly insurance policy against the risk that inflation might get further out of hand.

WOODS: Alex isn't saying don't try to bring down inflation at all. But he questions how fast the Fed says it's aiming to bring down inflation.

BRAZIER: We need a debate about whether that's right. We had a big debate about saving a polar bear's life.

WONG: Wailin Wong.

WOODS: Darian Woods, NPR News.

(SOUNDBITE OF MOKHOV'S "SOUL BREEZE") Transcript provided by NPR, Copyright NPR.

Darian Woods is a reporter and producer for The Indicator from Planet Money. He blends economics, journalism, and an ear for audio to tell stories that explain the global economy. He's reported on the time the world got together and solved a climate crisis, vaccine intellectual property explained through cake baking, and how Kit Kat bars reveal hidden economic forces.
Wailin Wong
Wailin Wong is a long-time business and economics journalist who's reported from a Chilean mountaintop, an embalming fluid factory and lots of places in between. She is a host of The Indicator from Planet Money. Previously, she launched and co-hosted two branded podcasts for a software company and covered tech and startups for the Chicago Tribune. Wailin started her career as a correspondent for Dow Jones Newswires in Buenos Aires. In her spare time, she plays violin in one of the oldest community orchestras in the U.S.