Stagflation is the worry of the moment. Talk about a '70s flashback. The term refers to the combination of high inflation, high unemployment and weak growth -- trends that weren't supposed to go together. As Robert Samuelson has pointed out, the current troubles likely won't be a repeat of the disco age, unless the Fed overreacts. Recessions are natural economic phenomena and sometimes trying to avoid them can make the eventual reckoning worse.
But we shouldn't stop thinking there. As long as the popular conversation is on stagflation and the 1970s, it's a chance to follow those themes to some provocative and disturbing questions.
Compare and contrast. The era of stagflation ended with high interest rates and high inflation, a poisoned combination, fueled by high oil prices. Yet it had been brewing for years with inflation stoked by a Fed that wanted to avoid downturns. On the other hand, 1979 was the zenith of the old blue-collar middle class, and good union jobs with benefits, security and a safe retirement. It was the apex of American manufacturing.
Today only the energy situation seems similar. Even that is different. Now oil production has stagnated while demand has skyrocketed. The future will involve expensive energy, no easy alternatives and a dangerous world as a result. Meanwhile, the U.S. is the world's biggest debtor nation. It has fallen way behind in education. Its infrastructure languishes. The gap between rich and poor is at levels not seen since the eve of the Great Depression. Average incomes have stagnated, at best. Poverty has risen. Many of our institutions are struggling under scandal, lack of funding or pure exhaustion. Our manufacturing base has dwindled and many corporate crown jewels have been sold off. All this is very different from the 1970s.
There's two ways to see what followed stagflation. After a new Fed chairman went after inflation in 1980 -- provoking a deep recession -- American businesses retooled for a new world of competition and technological breakthroughs that were lightspeed different from the post-war era of U.S. dominance. Or, greedy businessmen and right-wing ideologues achieved the deregulation and other policies that planted the seeds of today's troubles. Also, the social contract that took decades to create began to unravel, and the middle class has been under pressure ever since. There's truth to both views.
Stagflation, at its most profound level, was the breakdown of economic orthodoxy and the old political order. It discredited what became known as Keynesianism (although Lord Keynes might not have agreed with it), and the "big government" liberalism that had ruled since the New Deal.
Today the neo-classical economics that emerged from 1980 has been twisted and calcified into a highly ideological orthodoxy. Tax cuts, deregulation and "the free market" are the pillars of this faith, and all have been challenged, not just by the current downturn, but by the blowups of recent years, such as the frauds of the Enron et al, and the steady erosion of average paychecks. The political order is less challenged. In the late 1970s, the Democratic party consisted of old-time machines, especially in cities, that were slowly dying. Today's conservative movement remains robust and unchastened, despite its disasters. We'll see what voters say in November.
A serious conspiracy theorist might wonder if the hollowed-out American economy can only lurch from bubble to bubble, merger to merger, until there's nothing left. That the transnational corporate power that really rules will keep dismantling the wealth it took a hundred years to create, and in the end, most of America will be one big Youngstown, Ohio. And an American electorate addled by television, electronic distractions and cheap stuff from China, an electorate ignorant of history and the fragility of this republican experiment, will let it all happen.
One reality is that America worked best when it was more in balance. FDR never got the New Deal his most ardent advisers wanted; the Republican right didn't get to roll it back in 1952. The result was a mixed economy of private enterprise and regulation; powerful moguls and powerful unions; tough antitrust enforcement that ensured competition; economic mobility and a secure middle class. It created the greatest economy in the history of the world, and the largest middle class -- a legacy we're now living off rather than replenishing.
All that has been lost, and not merely because of the competition from 3 billion new capitalists in the world.
Finding our way out of this will require solutions that take into account both the new competitive realities -- and the need to return balance to public policy.
How awesome it is that you have a blog! I once asked you how you got away with your columns in the AZ Republic, and you were politely circumspect about the "support" from the editors.
That is, I can see now that you were being politely circumspect. :)
Anyway, I'm glad to have access to your musings once again, and one facet of my ongoing economic education may now resume. I hope you don't mind that I am adding a link to Rogue Columnist at my humble blog.
Now to catch up with your posts...
Yours, from the belly of the beast (Central Phoenix),
Michael J. Petro
Posted by: Petro | February 29, 2008 at 07:56 AM