If interest rates go up to 5%, you have $250k in service costs. Most businesses operate close to break-even (in efficient markets), and many will immediately go under. If businesses go under, that triggers a recession cycle: Those businesses lay off employees, who stop buying, driving down revenue for everyone else. People anticipating layoffs/furloughs/etc. stop buying. Hiring goes down too, since businesses start planning for rough times.
People buying on credit (anyone with a credit card debt) also find purchasing much more expensive, together with higher bills on existing debt.
A whole bunch of business opportunities also disappear in a poof of smoke. If a business has even a 1% expected real return, and interest rates are zero, it makes sense to borrow money to start that business (especially if inflation is also high, giving effective negative interest rates). If a business has an expected 1% return and interest rates are 12%, then I'm bleeding money. For these kinds of opportunities, think less SV startup, and more just normal businesses (e.g. I buy something and sell it a month or two later).
All of this piles on to form a recession.
What I think is the better question is whether that 4% dip was better for the respective economies in the context of the aid they had to give up. It seems to me it probably wasn't a good tradeoff if the goal was to improve the economy.
I also understand it may be a moral argument rather than an economic one, but that's another one that could probably be debated without resolution.
>These benefits are being paid by all the rest of us in the form of inflation eating way our income.
I agree, but that's also the price to be paid by living in a society. We could just remove all safety nets whatsoever and deal with whatever instability results, but I don't think that's in most people's best interest. The point of the discussion is finding the right balance that provides a moral yet stable economy.
- Businesses going under
- People losing jobs
- Mortgages going under
... and so on. All of this DOES directly impact the productive output of the economy.
Inflation does distort the economy a little bit. It makes some of us poorer (those with cash), some of us richer (those with debt), and leaves some neutral (this with hard assets). But I think this distortion pales relative to the alternative.