Has Stagflation Returned?

April 18, 2005
OP-ED COLUMNIST
A Whiff of Stagflation
By PAUL KRUGMAN

n the 1970's soaring prices of oil and other commodities led to
stagflation - a combination of high inflation and high unemployment,
which left no good policy options. If the Fed cut interest rates to
create jobs, it risked causing an inflationary spiral; if it raised
interest rates to bring inflation down, it would further increase
unemployment.

Can it happen again?

Last week fears of a return to stagflation sent stock prices to a
five-month low. What few seem to have noticed, however, is that a mild
form of stagflation - rising inflation in an economy still well short of
full employment - has already arrived.

True, measured unemployment isn't bad by historical standards, and
inflation is in the low single digits. But inflation is creeping up, and
it's doing so despite a labor market that is in worse shape than the
official unemployment rate suggests.

Let's start with the jobs picture. The official unemployment rate is 5.2
percent - roughly equal to the average for the Clinton years.

But unemployment statistics only count those who are actively looking
for jobs. Every other indicator shows a situation much less favorable to
workers than that of the 1990's. A lower fraction of the adult
population is employed; the average duration of unemployment - a rough
indicator of how long it takes laid-off workers to find new jobs - is
much higher than it was in the 1990's.

Above all, the weak job market leaves workers with no bargaining power,
so they aren't getting ahead: wage increases have been minimal, and
haven't kept up with inflation.

Underlying these disappointing numbers is sluggish job creation.
Private-sector employment is still lower than it was before the 2001
recession.

Things could be, and have been, worse. But those whose standard of
living depends on wages, not capital gains - in other words, the vast
majority of Americans - aren't feeling particularly prosperous. By two
to one, people tell pollsters that the economy is "only fair" or "poor,"
not "good" or "excellent."

Why, then, has the Fed been raising interest rates? Because it is
worried about inflation, which has risen to the top end of the 2 to 3
percent range the Fed prefers.

What's driving inflation? Not wages: labor costs have been falling,
because wages are growing less than productivity. Oil prices are a big
part of the story, but not all of it. Other commodity prices are also
rising; health care costs are once again on the march. And a combination
of capacity shortages, rising Asian demand and a weakening dollar has
given industries like cement and steel new "pricing power."

It all adds up to a mild case of stagflation: inflation is leading the
Fed to tap on the brakes, even though this doesn't look or feel like a
full-employment economy.

We shouldn't overstate the case: we're not back to the economic misery
of the 1970's. But the fact that we're already experiencing mild
stagflation means that there will be no good options if something else
goes wrong.

Suppose, for example, that the consumer pullback visible in recent data
turns out to be bigger than we now think, and growth stalls. (Not that
long ago many economists thought that an oil price in the 50's would
cause a recession.) Can the Fed stop raising interest rates and go back
to rate cuts without causing the dollar to plunge and inflation to soar?

Or suppose that there's some kind of oil supply disruption - or that
warnings about declining production from Saudi oil fields turn out to be
right. Suppose that Asian central banks decide that they already have
too many dollars. Suppose that the housing bubble bursts. Any of these
events could easily turn our mild case of stagflation into something
much more serious.

How do we get out of this bind? As the old joke goes, I wouldn't start
from here. We should have spent the years of cheap oil encouraging
conservation; we should have spent the years of modest growth in medical
costs reforming our health care system. Oh, and we'd have a wider range
of policy options if the budget weren't so deeply in deficit.

So if any of these things does come to pass, we'll just have to see how
well an administration in which political operatives make all economic
policy decisions, and the Treasury secretary is only a salesman, handles
crises.

E-mail:

Copyright 2005 The New York Times Company




[
If you search the Google archive, you will find that I had been
predicting the return of stagflation for quite a while.

And it seems to be turning out that way.

Very good news for natural resource funds.
Very bad news for aggressive stock funds.

One way we could have gotten out of this bind, which Krugman didn't
mention, is that we should have made our military operations to liberate
Iraq contingent on the new Iraqi government promising to withdraw from
OPEC and sell oil at a free-market price. That hasn't happened, and the
new Iraqi government is still a proud member of OPEC.
]



--
Steven D. Litvintchouk
Email:

Remove the NOSPAM before replying to me.

Re: Has Stagflation Returned?

"Steven L." <> wrote in message
news:nOG8e.7912$
> April 18, 2005
> OP-ED COLUMNIST
> A Whiff of Stagflation
> By PAUL KRUGMAN
>
> n the 1970's soaring prices of oil and other commodities led to
> stagflation - a combination of high inflation and high unemployment,
> which left no good policy options. If the Fed cut interest rates to
> create jobs, it risked causing an inflationary spiral; if it raised
> interest rates to bring inflation down, it would further increase
> unemployment.
>
> Can it happen again?
>
> Last week fears of a return to stagflation sent stock prices to a
> five-month low. What few seem to have noticed, however, is that a mild
> form of stagflation - rising inflation in an economy still well short of
> full employment - has already arrived.

How does he know "stagflation" caused the stock market retreat? Post hoc
ergo propter hoc?

>
> True, measured unemployment isn't bad by historical standards, and
> inflation is in the low single digits. But inflation is creeping up, and
> it's doing so despite a labor market that is in worse shape than the
> official unemployment rate suggests.

Or is it? I was laid off in 1991 and haven't had a job since. Still, I
make a lot more than I ever did when I had one. I read that there are a lot
of people like me and nobody is mesuring the effect, at all.

>
> Let's start with the jobs picture. The official unemployment rate is 5.2
> percent - roughly equal to the average for the Clinton years.
>
> But unemployment statistics only count those who are actively looking
> for jobs. Every other indicator shows a situation much less favorable to
> workers than that of the 1990's. A lower fraction of the adult
> population is employed; the average duration of unemployment - a rough
> indicator of how long it takes laid-off workers to find new jobs - is
> much higher than it was in the 1990's.

Tough labor markets bode well for inflation.

>
> Above all, the weak job market leaves workers with no bargaining power,
> so they aren't getting ahead: wage increases have been minimal, and
> haven't kept up with inflation.

I guess it depends on the type of "job" you are doing.

>
> Underlying these disappointing numbers is sluggish job creation.
> Private-sector employment is still lower than it was before the 2001
> recession.

I thought I heard that Bush had finally created as many jobs as he had
destroyed for a net gain (4 years later).

>
> Things could be, and have been, worse. But those whose standard of
> living depends on wages, not capital gains - in other words, the vast
> majority of Americans - aren't feeling particularly prosperous. By two
> to one, people tell pollsters that the economy is "only fair" or "poor,"
> not "good" or "excellent."

Again, good for inflation (or lack thereof). It's nice to ask people's
opinions but it's more accurate to observe their actual behavior. Consumer
spending is up even if by a disappointing amount.


>
> Why, then, has the Fed been raising interest rates? Because it is
> worried about inflation, which has risen to the top end of the 2 to 3
> percent range the Fed prefers.

It seems like only yesterday, they were worried about disinflaton. They
need to put some more bullets back in the gun. They were down to the last
few.

>
> What's driving inflation? Not wages: labor costs have been falling,
> because wages are growing less than productivity. Oil prices are a big
> part of the story, but not all of it. Other commodity prices are also
> rising; health care costs are once again on the march. And a combination
> of capacity shortages, rising Asian demand and a weakening dollar has
> given industries like cement and steel new "pricing power."

For how long? Rising prices increase productive capacity over time.

>
> It all adds up to a mild case of stagflation: inflation is leading the
> Fed to tap on the brakes, even though this doesn't look or feel like a
> full-employment economy.

Ultimately, the Fed will always choose low inflation over full employment.
It's not like the Fed governors represent working people. The charter says
that they are supposed to do both but we all know which way they will decide
(have always decided).

>
> We shouldn't overstate the case: we're not back to the economic misery
> of the 1970's. But the fact that we're already experiencing mild
> stagflation means that there will be no good options if something else
> goes wrong.
>
> Suppose, for example, that the consumer pullback visible in recent data
> turns out to be bigger than we now think, and growth stalls. (Not that
> long ago many economists thought that an oil price in the 50's would
> cause a recession.) Can the Fed stop raising interest rates and go back
> to rate cuts without causing the dollar to plunge and inflation to soar?

They can as long as foriegn interest rates are even lower, as they are now.

>
> Or suppose that there's some kind of oil supply disruption - or that
> warnings about declining production from Saudi oil fields turn out to be
> right. Suppose that Asian central banks decide that they already have
> too many dollars. Suppose that the housing bubble bursts. Any of these
> events could easily turn our mild case of stagflation into something
> much more serious.

Declining production? The Saudis can increase productive capacity whenever
they choose. This guy just doesn't understand how much oil they have.

>
> How do we get out of this bind? As the old joke goes, I wouldn't start
> from here. We should have spent the years of cheap oil encouraging
> conservation; we should have spent the years of modest growth in medical
> costs reforming our health care system. Oh, and we'd have a wider range
> of policy options if the budget weren't so deeply in deficit.

Do what they did, the last time: tax the rich more and increase the earned
income credit. Republicans (not one of whom voted for it) predicted that it
would lead to disaster. Instead, it led to a balanced budget.

>
> So if any of these things does come to pass, we'll just have to see how
> well an administration in which political operatives make all economic
> policy decisions, and the Treasury secretary is only a salesman, handles
> crises.

'Twas ever thus. Presidents worry more about politics than economics.

I thought Greenspan was a radical departure in that he actually held a
doctorate in economics. I'm not surprised that he has been so much more
effective than his predecessors.

>
> E-mail:
>
> Copyright 2005 The New York Times Company
>
>
>

Re: Has Stagflation Returned?

Herb wrote:

> Declining production? The Saudis can increase productive capacity
whenever
> they choose. This guy just doesn't understand how much oil they
have.

But can they? There's no independent information available on the
subject, or is there? What happens if Saudi production peaks?

Re: Has Stagflation Returned?

<> wrote in message
news:
> Herb wrote:
>
>> Declining production? The Saudis can increase productive capacity
> whenever
>> they choose. This guy just doesn't understand how much oil they
> have.
>
> But can they? There's no independent information available on the
> subject, or is there? What happens if Saudi production peaks?

I don't think they can increase output whenever they choose. They can
increase productive capacity anytime they wany to though. The emerging
markets will keep pressure on Saudi production and when they increase
production they are pumping sour crude.

Re: Has Stagflation Returned?

"Steven L." <> wrote in message
news:nOG8e.7912$
>
> Can it happen again?
>
Man, the sky is falling again? Yesterday it was disinflation, today it is
stagflation. One of these days, someone will be right, and he'll say it was
obvious to him all along 8>

Re: Has Stagflation Returned?

<> wrote in message
news:
> Herb wrote:
>
> > Declining production? The Saudis can increase productive capacity
> whenever
> > they choose. This guy just doesn't understand how much oil they
> have.
>
> But can they? There's no independent information available on the
> subject, or is there? What happens if Saudi production peaks?

I guess it depends on whether or not you believe in the concept of "proven
reserves." If you do, they are sitting on 400,000,000,000 barrels of oil.
If their production peaks they could just build more pumps. Don't get me
wrong, it will run out someday but not soon.

-herb

>

Re: Has Stagflation Returned?

Herb wrote:
> > Or suppose that there's some kind of oil supply disruption - or
that
> > warnings about declining production from Saudi oil fields turn out
to be
> > right. Suppose that Asian central banks decide that they already
have
> > too many dollars. Suppose that the housing bubble bursts. Any of
these
> > events could easily turn our mild case of stagflation into
something
> > much more serious.
>
> Declining production? The Saudis can increase productive capacity
whenever
> they choose. This guy just doesn't understand how much oil they
have.

Less a consideration by late decree while nonetheless a reality. Read
something recently about the President trying to open national wildlife
parklands in Alaska for exploration. Point I'm hearing is in the auto
industry hybrid technology is coming off the back and to the
foreburners. This year alone will experience six hybrid displays in an
industry scheduled asian show. The stranglehold and antipathy
surrounding G7 fossil fuel refineries is loosening its grip. The
Musclehead is dead - Long live the New Regeme. "Cocoon" engines, a
smaller combustion engine surrounded by core electronics providing
principle thrust, will intercept and supplant the combustion chamber of
the Industrial Revolution. Tool and diewise, 2015 is the projected
breakover for an Hybrid Era. Electronic suppliers allied within
transportation indexes may by scale dwarf present production outlays.

Re: Has Stagflation Returned?

Well, unemployment is historically low, as is inflation, and corporate
profits are doing well. So, I would say no.


"Steven L." <> wrote in message
news:nOG8e.7912$
> April 18, 2005
> OP-ED COLUMNIST
> A Whiff of Stagflation
> By PAUL KRUGMAN
>
> n the 1970's soaring prices of oil and other commodities led to
> stagflation - a combination of high inflation and high unemployment, which
> left no good policy options. If the Fed cut interest rates to create jobs,
> it risked causing an inflationary spiral; if it raised interest rates to
> bring inflation down, it would further increase unemployment.
>
> Can it happen again?
>
> Last week fears of a return to stagflation sent stock prices to a
> five-month low. What few seem to have noticed, however, is that a mild
> form of stagflation - rising inflation in an economy still well short of
> full employment - has already arrived.
>
> True, measured unemployment isn't bad by historical standards, and
> inflation is in the low single digits. But inflation is creeping up, and
> it's doing so despite a labor market that is in worse shape than the
> official unemployment rate suggests.
>
> Let's start with the jobs picture. The official unemployment rate is 5.2
> percent - roughly equal to the average for the Clinton years.
>
> But unemployment statistics only count those who are actively looking for
> jobs. Every other indicator shows a situation much less favorable to
> workers than that of the 1990's. A lower fraction of the adult population
> is employed; the average duration of unemployment - a rough indicator of
> how long it takes laid-off workers to find new jobs - is much higher than
> it was in the 1990's.
>
> Above all, the weak job market leaves workers with no bargaining power, so
> they aren't getting ahead: wage increases have been minimal, and haven't
> kept up with inflation.
>
> Underlying these disappointing numbers is sluggish job creation.
> Private-sector employment is still lower than it was before the 2001
> recession.
>
> Things could be, and have been, worse. But those whose standard of living
> depends on wages, not capital gains - in other words, the vast majority of
> Americans - aren't feeling particularly prosperous. By two to one, people
> tell pollsters that the economy is "only fair" or "poor," not "good" or
> "excellent."
>
> Why, then, has the Fed been raising interest rates? Because it is worried
> about inflation, which has risen to the top end of the 2 to 3 percent
> range the Fed prefers.
>
> What's driving inflation? Not wages: labor costs have been falling,
> because wages are growing less than productivity. Oil prices are a big
> part of the story, but not all of it. Other commodity prices are also
> rising; health care costs are once again on the march. And a combination
> of capacity shortages, rising Asian demand and a weakening dollar has
> given industries like cement and steel new "pricing power."
>
> It all adds up to a mild case of stagflation: inflation is leading the Fed
> to tap on the brakes, even though this doesn't look or feel like a
> full-employment economy.
>
> We shouldn't overstate the case: we're not back to the economic misery of
> the 1970's. But the fact that we're already experiencing mild stagflation
> means that there will be no good options if something else goes wrong.
>
> Suppose, for example, that the consumer pullback visible in recent data
> turns out to be bigger than we now think, and growth stalls. (Not that
> long ago many economists thought that an oil price in the 50's would cause
> a recession.) Can the Fed stop raising interest rates and go back to rate
> cuts without causing the dollar to plunge and inflation to soar?
>
> Or suppose that there's some kind of oil supply disruption - or that
> warnings about declining production from Saudi oil fields turn out to be
> right. Suppose that Asian central banks decide that they already have too
> many dollars. Suppose that the housing bubble bursts. Any of these events
> could easily turn our mild case of stagflation into something much more
> serious.
>
> How do we get out of this bind? As the old joke goes, I wouldn't start
> from here. We should have spent the years of cheap oil encouraging
> conservation; we should have spent the years of modest growth in medical
> costs reforming our health care system. Oh, and we'd have a wider range of
> policy options if the budget weren't so deeply in deficit.
>
> So if any of these things does come to pass, we'll just have to see how
> well an administration in which political operatives make all economic
> policy decisions, and the Treasury secretary is only a salesman, handles
> crises.
>
> E-mail:
>
> Copyright 2005 The New York Times Company
>
>
>
>
> [
> If you search the Google archive, you will find that I had been predicting
> the return of stagflation for quite a while.
>
> And it seems to be turning out that way.
>
> Very good news for natural resource funds.
> Very bad news for aggressive stock funds.
>
> One way we could have gotten out of this bind, which Krugman didn't
> mention, is that we should have made our military operations to liberate
> Iraq contingent on the new Iraqi government promising to withdraw from
> OPEC and sell oil at a free-market price. That hasn't happened, and the
> new Iraqi government is still a proud member of OPEC.
> ]
>
>
>
> --
> Steven D. Litvintchouk
> Email:
>
> Remove the NOSPAM before replying to me.
>

Re: Has Stagflation Returned?

Herb wrote:
> <> wrote in message
> news:
> > Herb wrote:

> > > Declining production? The Saudis can increase productive
capacity
> > whenever
> > > they choose. This guy just doesn't understand how much oil they
> > have.

> > But can they? There's no independent information available on the
> > subject, or is there? What happens if Saudi production peaks?

> I guess it depends on whether or not you believe in the concept of
"proven
> reserves." If you do, they are sitting on 400,000,000,000 barrels of
oil.

Sure, but proven by the secretive Saudi national oil company and there
is no independent proof, to my understanding.

> If their production peaks they could just build more pumps. Don't
get me
> wrong, it will run out someday but not soon.

The central limit theorem takes care that the production peak will
happen when approximately half of the oil is pumped out. It cannot be
solved by simply building more pumps. The question is, when is the
peak? Hopefully not soon..

Re: Has Stagflation Returned?

Herb wrote:

> Do what they did, the last time: tax the rich more and increase the earned
> income credit.

Clinton didn't have to deal with stagflation. Inflation was very low in
both the Bush 41 and Clinton administrations.

Clinton didn't have to deal with a $200 billion dollar a year war in Iraq.

So whatever Clinton did, is simply not applicable to today's situation,
any more than it would have worked in the 1930's or 1970's either.

The causes of stagflation today are the same as the causes of
stagflation in the 1970's: War and energy.


> Republicans (not one of whom voted for it) predicted that it
> would lead to disaster. Instead, it led to a balanced budget.

Clinton's budget would never have been balanced if Pentagon spending had
increased as sharply in inflation-adjusted dollars as it is now. In
fact, under Clinton, Pentagon spending declined in search of a
chimerical "peace dividend" after the Cold War. (The reason our troops
are now stretched so thin is that Clinton idled 3 army divisions during
his adminstration. Last year, Kerry campaigned on reactivating 2 of
those 3 army divisions.)

If you add the supplementals for Iraq into the Pentagon budget, we are
now spending over $500 billion dollars a year on the military--that's
50% higher than under Clinton. If Clinton's Pentagon budget had been
that high, the Federal budget would never have been balanced in his
administration despite his tax increases.

Historically, the last President who dealt successfully with stagflation
was Ronald Reagan.

Before that, Franklin Roosevelt kept the economic stresses of World War
II from causing hyperinflation, by methods I'm sure you are aware of:
War bonds, rationing, etc.



--
Steven D. Litvintchouk
Email:

Remove the NOSPAM before replying to me.

Re: Has Stagflation Returned?

"Steven L." <> wrote in message
news:gSz9e.9441$
> Herb wrote:
>
> > Do what they did, the last time: tax the rich more and increase the
earned
> > income credit.
>
> Clinton didn't have to deal with stagflation. Inflation was very low in
> both the Bush 41 and Clinton administrations.
>
> Clinton didn't have to deal with a $200 billion dollar a year war in Iraq.

Well, he certainly didn't have to deal with stagnation, despite raising
taxes on the rich, investment boomed and we all got richer, including the
rich.


>
> So whatever Clinton did, is simply not applicable to today's situation,
> any more than it would have worked in the 1930's or 1970's either.

I see: it's different this time.

>
> The causes of stagflation today are the same as the causes of
> stagflation in the 1970's: War and energy.

Both were problems but there was a lot more to inflation than that.
Stagfaltion never happened before or since that time.

>
>
> > Republicans (not one of whom voted for it) predicted that it
> > would lead to disaster. Instead, it led to a balanced budget.
>
> Clinton's budget would never have been balanced if Pentagon spending had
> increased as sharply in inflation-adjusted dollars as it is now. In
> fact, under Clinton, Pentagon spending declined in search of a
> chimerical "peace dividend" after the Cold War. (The reason our troops
> are now stretched so thin is that Clinton idled 3 army divisions during
> his adminstration. Last year, Kerry campaigned on reactivating 2 of
> those 3 army divisions.)

The reason our forces are strecthed so thin is because a bunch of chicken
hawks who campaigned against "nation building" have engaged in a jingoistic
adventure, spending American lives and treasure as if it were available in
limitless supply. And, like LBJ before them, they don't dare tax the
American people to pay for it. Politics trumps economics.

>
> If you add the supplementals for Iraq into the Pentagon budget, we are
> now spending over $500 billion dollars a year on the military--that's
> 50% higher than under Clinton. If Clinton's Pentagon budget had been
> that high, the Federal budget would never have been balanced in his
> administration despite his tax increases.

What happened to all of your arguments that war was stimulative?

>
> Historically, the last President who dealt successfully with stagflation
> was Ronald Reagan.

You gotta be kidding. Paul Volker got Jimmy Carter thrown out of office by
killing inflation with a severe recession. All Reagan accomplished is a
false sense of prosperity based on borrowed money that we still owe.
Despite screwing up or national finances with deficit spending and tax cuts,
he still managed two recessions during his term. These DID, however, keep
inflation relatively tame.


>
> Before that, Franklin Roosevelt kept the economic stresses of World War
> II from causing hyperinflation, by methods I'm sure you are aware of:
> War bonds, rationing, etc.

Don't compare WWII and our current Vietnamization of Iraq.

>
>
>
> --
> Steven D. Litvintchouk
> Email:
>
> Remove the NOSPAM before replying to me.
>