Like so many issues in economics, it is a matter of degree. A severe enough recession lasting for years would do the job, but at a terrible cost to the nation in terms of millions of unemployed workers and billion of dollars worth of lost output.
A modest recession -- all that most forecasters think is in the cards for 1979 and 1980 -- will help to slow inflation but hardly come close to curing it. So long as wages keep going up by 7 percent or 8 percent a year, prices will also. The question is, to what extent will a recession reduce the increase in wages?
A recession involves a decline in economic activity that continues for an extended period of time and broadly affects the economy. People who otherwise would be at work become unemployed. Machines become unemployed, too, as assembly lines run only a few hours a day or get shut down entirely.
It is the presence in the economy of those unemployed resources, both labor and capital, that works to slow down inflation.
Unemployed workers, anxious to get paychecks again, may decide to accept jobs that pays less than they would have accepted had they not been without work for a while. Fearing that they, too, might become unemployed, workers still on the job may moderate their wage demands.
There are a number of theories about how wage rates are determined, but for industries lacking strong unions, at least, an increase in the level of unemployment usually has meant that wage rates will rise more slowly. Theoretically there is no reason they could not fall, but that is rare in today's economy.
Because payrolls are the largest single cost for most businesses, when they rise more slowly over time, selling prices usually go up more slowly as well.
But the recession may not have that much impact in situations in which there is an inadequate level of competition. If employes in an industry are represented by a very strong union -- perhaps one that bargains on a national basis simultaneously with all the major companies -- an employer knows that whatever wage increases it grants, each of its competitors within the industry will have to grant them, too. Since everyone's costs will be going up simultaneously, the companies can be reasonably confident that they can increase their selling prices to cover the higher costs without fear of losing sales to someone else. The union members, meanwhile, have no fear that unemployed job seekers will be hired to replace them.
A business benefiting from a slower rate of increase in wages nevertheless may find itself with shrinking profit margins because of a substantial drop in sales.
Typically, both profit margins and total profits fall during recessions. When a company is forced to cut production to keep it in line with sales, that usually means some part of its invested capital is idle at least part of the time. And that means that the firm's cost for each unit of output goes up.
In an attempt to bolster sales, even though it may cut margins further first, a company may decide to cut prices. But as soon as possible, the company will try to boost its margins back to normal levels, which means part of the recession-induced reduction in inlfation will be temporary.
Thus the recession cuts inflation, partly at the expense of workers who have become unemployed, are working part time, or whose wages are rising less rapidly. Meanwhile, business' profit margins and total profits are down, too.
But how large will the reduction be? That will depend in large part on how large the pool of unemployed labor and capital becomes, and how long it stays large. The social costs are high, and understandably so are the political costs.
At the same time, the whole range of government income support programs intended to limit those social costs has changed the behavior of individuals in ways that make the economy more inflation-prone. For instance, more generous unemployment compensation programs may make people receiving the aid less anxious to find new jobs, and thus put less downward pressure on wages.
Many other forces help to keep inflation high. The most important is past inflation itself.
After a decade of sharply rising prices, people expect inflation to continue and behave accordingly. More and more unions have cost-of-living escalators in their contracts, which means any increase in prices -- even if it is the result of a drought in the Soviet Union or higher world oil prices -- quickly gets built into the wage structure in many unionzied industries.
Social Security benefits, government pensions, even rents in some commercial office buildings, now are linked to changes in consumer prices. When the Consumer Price Index goes up, so do they.
Businesses that used to change prices once a year when they put out a new catalogue now make sales noting that prices may change without notice.
In short, the transmission belt of inflation has speeded up as people try to protect themselves from expected future inflation. That means that even in the midst of a recession many people will be getting higher incomes solely on the basis of past inflation.
Because of the impact of inflation on financial assets -- corporate stocks, bonds, savings accounts and so forth -- people are trying to protect themselves in another way, too, by turning to tangible assets as a store of value. In the process, the increased demand for those assets -- such as homes -- has produced its own inflationary spiral. Except to the extent that during a recession would-be buyers become unable or unwilling to trade up to a larger home, this self-generating spiral may well continue.
Meanwhile, government has forced consumers of many products to bear, for the first time, many of the "social" costs of production of those products such as dirty air that formerly were borne by society at large.
Higher Social Security taxes and higher federal minimum wage rates also have added to business costs and to inflation.