February 27, 2008


The Specter of Stagflation (Robert J. Samuelson, February 27, 2008, Washington Post)

"Stagflation" is back in the headlines -- but the term is being misused. Eminent commentators describe stagflation as the messy mixture of high inflation and high unemployment. It isn't. Stagflation, at least as the concept was initially understood in the 1970s, meant something different. Yes, it signified the simultaneous occurrence of high inflation, high unemployment and slow economic growth, but its defining feature was the persistence of this poisonous combination over long periods of time.

Let's see why this is a distinction with a difference. The coexistence of high (or rising) inflation and high (or rising) unemployment is not an abnormal event. But it's usually temporary, because the higher unemployment -- stemming from an economic slowdown or recession -- helps control inflation. Companies can't pass along price increases; they're stingier with wage increases. It's only when this restraining process is not allowed to work that inflationary psychology and practices take root, creating a self-fulfilling wage-price spiral. Higher wages push up prices, which then push up wages. Then we get stagflation: a semipermanent fusion of high joblessness and inflation.

And not only does economic growth prevent that joblessness but the Reagan/Thatcher breaking of Labor and the globalized economy mean that workers have no power to command higher wages.

Posted by Orrin Judd at February 27, 2008 7:25 AM
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