Inflation in August was 8.3%, according to the Consumer Price Index. This has caused some to worry about the economy and others to be confused. What caused this to happen? Is a recession inevitable, and how will it affect students?
To answer these questions, Assistant Professor of Economics Xi Mao points to the stimulus check, which increased the supply of money and, therefore, decreased its value.
“Let me give you an example, so, I think this is like someone’s getting cancer and it was in zero stage cancer,” Mao said. “The case we’re facing was [when the] pandemic just kicked in. … What we could do, was just let it go and it goes to a recession.”
However, the government decided to issue stimulus checks as a remedy.
“It makes you feel better or good temporarily, but it’s not for real,” Mao said about the government assistance. “You have to remove it. If you don’t remove it today, you have to remove it tomorrow.”
A decision made during the pandemic has caught up with the United States. However, there are differing opinions on the stimulus checks.
“It was a good idea, because otherwise there would have been a bigger reduction in [gross domestic product],” said Gautam Hazarika, department chair of Economics.
Hazarika said a lot of people lost their jobs during the pandemic, which led to less consumer spending, hurting businesses. The stimulus check allowed people to support businesses, which could then provide jobs to consumers.
Economics Professor Diego Escobari said the economy experienced a negative shock during the pandemic, and to treat this the government implemented expansionary fiscal policy to increase the money in circulation.
“The first two years, we would say they were good, because they were able to keep the economy moving,” Escobari said. “Now, looking backwards … I would say, probably, it was too much.”
He said this policy pushed consumer demand too far while supply decreased, resulting in the highest inflation in decades. To fix this, the government has to increase interest rates and, therefore, slow down the economy. The result is likely a recession.
However, according to Mao, interest rates on student loans is a special case.
“It won’t affect the student loans that much, because it’s a political right,” she said. “But it will affect the business loans for sure.”
As for the job market for graduating students, Escobari said, “I think, in general, getting a college degree is good, because the higher your skill level is the more you’re protected. So, people who are [the] most likely to lose their jobs are typically people who have very low level of skill. … I would have to think more about it but, in general, [a] higher level of education is a safe bet.”
People also tend to apply to master’s or doctoral programs when there is a slowdown in economic activity.
“That’s typically what we see,” Escobari said. “So when, usually, economic activity slows down, we usually see more applicants that are essentially trying to delay their entrance into the job market.”
The Rio Grande Valley’s high poverty rate could mean a lot of people in the Valley will face challenges meeting their basic needs as prices rise, Mao said.
As for trade across the border, Mao speculates a weaker currency might lead to more exporting and less importing, however, it is difficult to say anything for certain due to the complexity of a global economy.
“That’s normally what we will prepare for recession,” she said. “Just holding some cash in your hand, be prepared. If you have a very stable job, that’s great. If you have a pension, that’s great. But if you don’t, get some cash in the hand. … Be prepared.
