Don’t Worry About a Return to ‘70s Stagflation 21 comments
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Recent months have resurrected a potent economic villain of the past—stagflation.
The U.S. economy is seeing little to no growth, while at the same time inflation has risen to levels not seen in the better part of two decades due in large part to soaring food and energy prices.
How much should we fear stagflation now? Could we be looking at a replay of the pain and suffering of the Ford and Carter years?
While the current environment is trying for many consumers, we don’t see it evolving into outright stagflation due to the relatively low inflation rate (by historic standards) and structural changes in the U.S. economy in recent decades that provide more protection from a damaging spiral.
For one thing, there’s more flexibility in the economy as a result of improved technology, deregulation and increased competition that has resulted in more efficiencies.
A story from Bloomberg this week cites energy use as an example: Economic production in the U.S. in 2007 was 10 times greater than it was in 1973, but the nation’s energy usage has risen by a third over that time period.
A big part of that energy efficiency is the continuing transition from manufacturing to services, which has also helped control inflation by keeping labor costs down.
Goods-producing jobs are now less than 20 percent of the national labor force, down from 34 percent three decades ago (see chart above). At the same time, the service sector has grown to 58 percent of all employment, up from 41 percent in 1978.
The manufacturing sector tends to be more volatile than the service sector because of its cyclical nature.
The history of the domestic car industry is a good example of this. Lower demand creates higher inventories, which leads to layoffs and plant closures as supply is cut back. When demand bounces back, more workers are hired as production is ramped up to increase supply. This works until demand again falls off.
Unionized labor accounted for 20 percent of the U.S. workforce in the early 1980s, but now that membership is down to about 12 percent, according to Bloomberg. And the percentage of unionized workers whose contracts include automatic cost-of-living raises is only 22 percent now, down from 61 percent in the mid-1970s.
In addition to these fundamental changes in the economy, there are other factors that reduce the risk of stagflation.
A big mitigator is the memory of what happened in the late 1970s—a brutal combination of double-digit inflation, double-digit interest rates, rising unemployment and falling output. The awareness of the negative impacts of stagflation will almost certainly lead top policymakers in the White House, at the Federal Reserve and on Capitol Hill to move quickly to head off stagflation, as we’ve already seen with the economic stimulus checks and interest rate cuts.
On top of that, exchange rates are far more flexible than they were several decades ago, and the surplus of worldwide labor will serve to hold down any upward pressure on wages.
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This article has 21 comments:
Of course goods-producing jobs are now less than 20 percent of the national labor force; we sent it all overseas. What do you suggest when we can no longer afford to import stuff from China? I will be generous and call that happening in 2010. What then?
The author does make one point that is pertinent: today's economy is not like 1975's economy. That means tomorrow's problems will be totally unlike yesterday's problems. We're about to find out if that is a good thing...
I think this rough patch for the next five years will be worse then the 1970's. We are ignoring the history of the Great Depression or the 1987 market crash and financial pain (real-estate driven, these numbers and malfeasance between lawmakers and i-Banks MUCH BIGGER in scope)
It is the fact that we produce six times the amount of food then the 1930's with only twice as much population and that the U.S. has excellent communications technology why the U.S. will quickly recover from cumulative downward spiral of short-term depression like conditions 2-3 years from now.
Pain in the free market will correct all, but I can't say I approve of the treatment for the stupidity, greed little understanding of fundamentals and lack of honor. I am not particularly looking forward to this time but began preparations in June of 2007. Good luck to you all and on the bright side, there is much money to be made in the worst of times when companies and entire markets conduct firesales.
And then this, quote:
The awareness of the negative impacts of stagflation will almost certainly lead top policymakers in the White House, at the Federal Reserve and on Capitol Hill to move quickly to head off stagflation, as we’ve already seen with the economic stimulus checks and interest rate cuts. Unquote.
Comment: the stimulus package is only a bit more borrowed money and is only 150 to 160 billion US$ in size. As a comparison: In 2005 US house owners withdrew a staggering 750 billion US$ from their home value (in the form of HELOC or second mortgages); most of that was used for consumer spending or large goods but not that much went into decreasing of the house value.
If 750 billion did not do the trick, why whould the stimulus package work now?
And the FED keeping stagnation out of the door? Wake up, it is an election year so from the FED nothing but rethoric...
If the stand alone investment bank is history, and it may be, then the world will be looking for new financial money centers. London? Shanghai? Abu Dhabi?
The short-sigtedness and stupidity of Greenspan and Bernanke are hastening that demise. The latter is now out of control of events and world markets sense it too. The former is left to collect $70,000 a speech talking about the past. What a pathetic sight.
Poor John McCain has been dealt a terrible hand and he's going to take the Republican Party down to the worst defeat since 1932.
While it's great to have more service sector jobs, you can't export them. Most high tech within 15 years will come from India, eastern europe, Israel, and the middle east . Our high tech centers, Raleigh-Durham, northern Virginia, Boston area, the west coast, are living on borrowed time. They are not price competitive and never were.
Like Dorothy in "The Wizard of Oz" ,we'll all wake up from our dream to discover our real roots as an economy now lie in Kansas, or some other agricultural setting.
Just one example:
The reason we use less energy per unit of GDP is that we don't MAKE as much STUFF as before! We IMPORT IT! So it doesn't show up as us using oil but instead in the cost of things we import, because the costs of the people manufacturing it overseas are going up!
And the whole premise of the column...."don't worry, we sell insurance, mow lawns, and give haircuts to each other" is scarily missing the point.
If anything it may be easier to cut payrolls from service jobs, as they do not tend to be linked to high capital cost equipment (factories). Reducing 2 or 3 burger flippers is easy, cashiering 10% of your bank staff (expensive, but an opportunity to remove the dead wood).
The only jobs safe in the short term would probably be the public sector, as the Government would not want to be seen to be influencing the voting intentions before an election.
US bond yields are a joke.
I agree with the others that 1) inflation is double digits, don't believe the government numbers, and 2) the fact that wages are not rising is not evidence of the lack of inflation, but rather the powerful forces of globalization.
Moreover, the following quote is absurd:
"A big mitigator is the memory of what happened in the late 1970s—a brutal combination of double-digit inflation, double-digit interest rates, rising unemployment and falling output. The awareness of the negative impacts of stagflation will almost certainly lead top policymakers in the White House, at the Federal Reserve and on Capitol Hill to move quickly to head off stagflation, as we’ve already seen with the economic stimulus checks and interest rate cuts.
On top of that, exchange rates are far more flexible than they were several decades ago, and the surplus of worldwide labor will serve to hold down any upward pressure on wages."
We currently have double digit inflation, unemployment is understated and rising, interest rates have no where to go but up, and are poised to raise considerably after the fall election.
The fact that wages are held down by surplus wages is irrelevant to inflation. Inflation results from the government(s) creating money, and credit globally faster that economic growth. Prices rise in such an environment, and wages can actually fall in the face of rising prices. The authors analysis gets cause and effect wrong, and has waaaaaaayyy too much confidence in the politicians.
economic stimulus checks are more than offset by the rising cost of energy, and falling interest rates are a very temporary phenomenon that must reverse. Please take off your rose colored glasses.
There will be twists and turns, but it's really no different than any other boom bust cycle. Unfortunately, some of those twists could be really bad for the USA including removing the USD as the world's reserve currency and petrodollar, hyperinflation due to foreign gov'ts dumping dollar denominated assets to avoid losing their wealth through our inflation, etc. A big difference this time is that we have standing armies in place to physically threaten anyone who resists our monetary shenanigans. Wow, it feels just great to be an American these days. And hey, those higher taxes on the horizon sure bode well for those entering retirement, huh?