Stagflation: What Really Happened in the 70’s

If you argue long enough about economics, you are bound to run into the stagflation argument. The stagflation argument claims that the big state and stimulus caused high inflation, high unemployment, and poor growth during the seventies. Usually this argument is not fully argued by those who believe in it–it is merely asserted, and the rest of us are expected to accept that it is simply the case that the seventies happened that way. Today I’d like to endeavour to illustrate what actually happened in the seventies, what the real causes of stagflation were, and what sort of lessons might be pulled from it.

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Rise of the Machines: The Robot Economy of the Future

My attention has been drawn to a rather interesting phenomenon by Paul Krugman–that of a gradual shift in the distribution of wealth from labour to capital. As a percentage of the economic total, workers are earning less and less over time, and more and more of our output is landing in the hands of people who own capital–the land, the buildings, the tools, the machines that make things tick. This has interesting implications, and, if I might be permitted to speculate today, those implications may demand changes in how we view what we produce.

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Boehner’s Hindenburg

Remember a few days ago when we were discussing a possible fiscal cliff deal that Obama might or might not go for? Well, Speaker of the House John Boehner discovered that his republicans would not support the tax increases on the those earning more than $400,000, the increase in capital gains and dividends taxes, and the cap on deductions at 28% of income. So Boehner abandoned that arrangement–it’s dead. Instead, Boehner proposed something called “Plan B”. (British readers are familiar with a different Plan B that proposes a stimulus alternative to their coalition government’s austerity policy; this is not that.) Plan B was substantially more favourable to the republican position, but nonetheless, the republicans in the house refused to support it, and now it is dead too. So where does this leave us in our struggle to avoid the fiscal cliff, the combination of large spending cuts and tax increases that kick in on January 1st and which the CBO forecasts will lead to a recession in 2013?

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The Decision: Obama’s Difficult Position

Rumour has it the republicans have given Obama an offer to avert the fiscal cliff, the combination of deep, immediate spending cuts and tax increases that the CBO predicts would send the country into a new recession. The offer gives Obama something he cannot get without a deal–most notably, an extension of emergency unemployment benefits. The offer comes at a cost, however. In exchange, the republicans demand a small but painful cut in social security benefits.

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If You Believe in the Fiscal Cliff…

Lest we forget, the fiscal cliff is still coming–the dismal set of negative economic consequences that come from cutting government spending and raising taxes too fast in the face of a weak economic recovery. While 87% of the general public do not realise that the fiscal cliff is about preventing spending cuts rather than making them, regular readers (and those of you who read the linked pieces) know better. That’s all ground we have covered. However, that there is a particularly interesting implication of belief in the danger of the fiscal cliff that I have yet to discuss, and this I seek to remedy.

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