The Ghost of Stagflation (Script & Sources)
Added 2021-10-13 17:46:34 +0000 UTCGood morning, bad news: a ghost from the 70s is haunting the economy. With higher prices across unrelated industries, slower domestic financial growth, consistently higher rates of unemployment, and a broken global supply chain, all of this has some economists terrified that we’re about to experience an economic catastrophe we’ve already seen before: the ghost of stagflation.
Stagflation is an extremely harmful economic imbalance where economic growth is stagnant, while both inflation and unemployment rise simultaneously. It was thought to be impossible because historically, higher inflation was correlated to higher employment, which is an economic model called the Phillips curve. On paper, this makes sense: if there is higher demand, then goods are more expensive, which means that companies make more money, which means they can raise wages and hire more people, and in theory - this stimulates economic growth, so technically a small amount of inflation can be good for stimulating the economy, especially after a recession - as long as wages go up too.
In fact, in the early 1970s, Richard Nixon and his chief advisors depended on this idea in the face of rising inflation, and not only were they wrong, but they basically invented a new kind of recession that is particularly devastating to the working class, and impossible to get out of without causing extreme unemployment and deep economic depression. Which is exactly what happened towards the late 70s, and is one of the major reasons Ronald Reagan was elected.
Stagflation is a death spiral because rising inflation means companies need to raise prices, but slow economic growth means companies make less money, which means they need to lay off employees, which hurts the economy because people can’t afford to spend money anymore once they’ve been laid off. So technically, higher prices should lead to higher wages and more employment, but when those prices are higher because of say, the oil price spike in the 1970s, or perhaps, a global pandemic that crashes the supply chain indefinitely and creates a supply price spike without raising wages, economists do start to worry that we’re in danger of seeing another era of stagflation.
Now, other economists don’t agree - some believe that what we’re seeing is a natural response to an economic recovery, and that the price spikes, unemployment, and inflation are all independent and temporary. Even economist Stephen Roach, who worked at the Federal Reserve during the stagflation era, and has been warning of another period of stagflation since last year, admits that if it does happen, it likely won’t be as severe as it was in the 70s.
But that doesn’t mean that the economy isn’t in danger, or that stagflation isn’t a threat. Because it is, and it is.
