Stagflation: From Tragedy to Farce

Yves here. This article explains that because economists are failing to treat the current inflation as supply-side driven, they’re administering the wrong medicine.

By Anis Chowdhury, Adjunct Professor at Western Sydney University and University of New South Wales (Australia), who held senior United Nations positions in New York and Bangkok and Jomo Kwame Sundaram, a former economics professor, who was United Nations Assistant Secretary-General for Economic Development, and received the Wassily Leontief Prize for Advancing the Frontiers of Economic Thought. Originally published at Jomo Kwame Sundaram’s website

Half a century after the 1970s’ stagflation, economies are slowing, even contracting, as prices rise again. Thus, the World Bank warns, “Surging energy and food prices heighten the risk of a prolonged period of global stagflation reminiscent of the 1970s.”

In March, Reuters reported, “With surging oil prices, concerns about the hawkishness of the Federal Reserve and fears of Russian aggression in Eastern Europe, the mood on Wall Street feels like a return to the 1970s”.

Stagflation in the 1970s

Worse, it seems few lessons have been learnt from the last stagflation episode. There is no agreed formal definition of stagflation, which refers to a combination of economic stagnation with high inflation, e.g., when unemployment and prices both rise.

When growth is weak and many are jobless, prices rarely rise, keeping inflation low. The converse is true when growth is strong. This inverse relationship between economic activity and inflation broke down with supply shocks, particularly oil and other primary commodity price surges during 1972-75.

Non-oil primary commodity prices on The Economist index more than doubled between mid-1972 and mid-1974. Prices of some commodities, e.g., sugar and urea fertilizer, rose more than five-fold!

As costlier energy pushed up production expenses, businesses raised prices and cut jobs. With higher food, fuel and other prices, rising costs, coupled with income losses, reduced aggregate demand, further slowing the economy.

Fed Chokes Economy To Cut Inflation

Years before becoming US Fed chair in 2006, a Ben Bernanke co-authored paper noted, “Looking more specifically at individual recessionary episodes associated with oil price shocks, we find that … oil shocks, per se, were not a major cause of these downturns”.

They concluded, “an important part of the effect of oil price shocks on the economy results not from the change in oil prices, per se, but from the resulting tightening of monetary policy”. Their findings corroborated others, e.g., by James Tobin.

Following Milton Friedman and Anna Schwartz, other economists also found “in the postwar era there have been a series of episodes in which the Federal Reserve has in effect deliberately attempted to induce a recession to decrease inflation”.

The US Fed began raising interest rates from 1977, inducing an American economic recession in 1980. The economy briefly turned around when the Fed stopped raising interest rates. But this nascent recovery soon ended as Fed chair Paul Volcker raised interest rates even more sharply.

The federal funds target rate rose from around 10% to nearly 20%, triggering an “extraordinarily painful recession”. Unemployment rose to nearly 11% nationwide – the highest in the post-war era – and as high as 17% in some states, e.g., Michigan, leaving long-term scars.

Interest rate hikes reduced needed investments. Outside the US economy, these sharp and rapid interest rate hikes triggered debt crises in Poland, Latin America, sub-Saharan Africa, South Korea and elsewhere.

Earlier open economic policies meant “the increase in world interest rates, the increased debt burden of developing countries, the growth slowdown in the industrial world…contributed to the developing countries’ stagnation”.

Countries seeking International Monetary Fund (IMF) financial support had to agree to severe fiscal austerity, liberalization, deregulation and privatization policy conditionalities. With per capita incomes falling and poverty rising, Latin America and Africa “lost two decades”.

Stagflation Reprise

The IMF chief economist recently reiterated, “Inflation is a major concern”. The Bank of International Settlements has warned, “We may be reaching a tipping point, beyond which an inflationary psychology spreads and becomes entrenched.”

Central bankers’ anti-inflationary efforts mainly involve raising interest rates. This approach slows economies, accelerating recessions, often triggering debt crises without quelling rising prices due to supply shocks.

Economic recoveries from the 2008-09 global financial crisis (GFC) remained tepid for a decade after initially bold fiscal responses were quickly abandoned. Meanwhile, ‘quantitative easing’, other unconventional monetary policies and the Covid-19 pandemic raised debt to unprecedented levels.

GFC trade protectionist responses, US and Japanese ‘reshoring’ of foreign investment in China, the pandemic, the Ukraine war and sanctions against Russia and its allies have reversed earlier trade liberalization.

Higher interest rates in the rich North have triggered capital flight, causing developing country currencies to depreciate, especially against the US dollar. The slowing world economy has reduced demand for many developing country exports, while most migrant worker remittances decline.

Interest rate hikes have worsened debt crises, particularly in the global South. The poorest countries have seen an $11bn surge in debt payments due while grappling with looming food crises. Thus, developing country vulnerabilities have been worsened by international trends over which they have little control.

Lessons Not Learned 

Supply-side cost-push inflation is very different from the demand-pull variety. Without evidence, inflation ‘hawks’ insist that not acting urgently will be costlier later.

This may happen if surging demand is the main cause of inflation, especially if higher costs are easily passed on to consumers. However, episodes of dangerously accelerating inflation are very rare.

Acting too quickly against supply-shock inflation can be unwise. The 1970s’ energy crises sparked greater interest in energy efficiency. But higher interest rates in the 1980s deterred needed investments, even to reverse declining or stagnating productivity growth.

Raising interest rates also accelerated recessions. But similar commodity price rises before the 1970s’ and imminent stagflation episodes – involving energy and food respectively – obscure major differences.

For instance, ‘wage indexing’ – linking wage increases to price rises – enhanced the 1970s’ inflation spiral. But labour market deregulation since the 1980s has largely ended such indexation.

The IMF acknowledges globalization, ‘offshoring’ and labour-saving technical change have weakened unionization and workers’ bargaining power. With both elements of the 1970s’ wage-price spirals now insignificant, inflation is more likely to decline once supply bottlenecks ease.

But the wage-price spiral has also been replaced by a profit-price swirl. Reforms since the 1980s have also enhanced large corporations’ market power. Greater corporate discretion and reduced employees’ strength have thus increased profit shares, even during the pandemic.

In November 2021, Bloomberg observed the “fattest profits since 1950 debunks wage-inflation story of CEOs”. Meanwhile, the Guardian found “Companies’ profit growth has far outpaced workers’ wages”.

Corporations are taking advantage of the situation, passing on costs to customers. The net profits of the top 100 US corporations were “up by a median of 49%, and in one case by as much as 111,000%”!

Meanwhile, many more consumers struggle to meet their basic needs. Interest rate hikes have also hurt wage-earners, as falling labour shares of national income have been exacerbated by real wage stagnation, even contraction.

Hence, policymakers should ease supply bottlenecks and address imbalances to accelerate progress, not raise interest rates causing the converse. Thus, they should rein in corporate power, improve competition and protect the vulnerable.

Allowing international price rises to pass through, while protecting the vulnerable, can accelerate the transition to more sustainable consumption and production, including cleaner renewable energy.

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  1. Tom Pfotzer

    This is the part I agree with:

    * Corporations are taking advantage of market conditions to raise prices. They have pricing power, and are using to fatten profit margins

    * Consumers are struggling to meet their basic needs.

    * Labor’s share of national income continues to fall

    That part is right, so far as it goes. It doesn’t actually identify the root cause of these symptoms, but it does identify the symptoms.

    The proposed remedy is:

    “policymakers should ease supply bottlenecks and address imbalances to accelerate progress, not raise interest rates causing the converse. Thus, they should rein in corporate power, improve competition and protect the vulnerable.”

    Nice ideas, but they’re not effective solutions. Why?

    Policymakers don’t control the bottlenecks. Corporations control the bottlenecks.

    “Addressing imbalances” is too vague to be actionable

    “improving competition” would have to include anti-trust. Regulatory capture precludes this option at the moment, and maybe for a long while

    The remedy doesn’t address the root problems:

    a. Wages will continue to fall because labor is being systematically factored out of the production equation. Labor has little pricing power, and what it has will continue to decline over time.

    b. Corporations create pricing power by creating supply bottlenecks. That’s the game. “identify and create a sustainable competitive advantage” and “create barriers to entry” are strategies taken right out of Corporate Strategy textbooks. It’s the game, it’s how corporations make their money, and it’s not going away

    To summarize: so long as labor has no pricing power, it’s going to get a progressively smaller share of the national income pie. So long as corporations control supply, they will use that control to exact higher profits.

    Therefore, it’s in labor’s interest to:

    a. Own the production mechanism in order to get the benefits of automation, instead of being the victim of that (inexorable) automation

    b. Exert more control over the inputs that households need to operate. One good way of exerting that control is to own part of, or actually be, the supplier of the inputs your household needs in order to function

    If production is moved from the (current) centralized, high-capital, high-entry-barrier, big-scale model to a locally-owned, modest-capital, low-entry-barrier model, then labor has:

    a. a better opportunity to capture the benefits of their _own_ productivity
    b. more control over prices paid for key inputs
    c. an expanding .vs. contracting market for the household’s labor

    Those solutions, while difficult and time-consuming, actually offer long-term viability for laborers (e.g. almost all of us that aren’t in the 1%).

    1. Bruno

      This article, and this comment, totally avoid the real issue: the planet-wide, constantly accelerating, ecological crisis. Every significant “natural” cycle, especially in temperature and hydrology, plus soil exhaustion and pollution of all sorts, is drastically reducing the effective biological productivity of the Earth, on which the life of all creatures, especially humans, depends. Falling real incomes of workers (plus falling real profits of capital, as reflected in the overwhelming preference for “buybacks” and speculation as against new investment) is the absolutely inevitable effect of the planetary crisis, for which nothing but worldwide ecosocialist revolution offers the slightest hope of solution.

      1. hunkerdown

        Well, Khrushchev has already disproven that a PMC is competent to rule anything or anyone in the general interest, so that’s not going to happen. What’s the real next move?

      2. JTMcPhee

        Change “productivity” “capacity” and maybe you have a winner. That, and maybe the punt to “worldwide eco social revolution.” Which has pretty much zero chance of happening. While there’s still an internet or equivalent, maybe small groups of health-of-the-planet-minded individuals who can overcome the tendency to dogma and schism might work out ways to refresh the capacity of their locales, ever mindful of corporate global scale depredations that send the waves of destruction over the planet. Maybe enough of those “awakened” Russell Brandians might sprout to deflect the various global catastrophes. The part of me that still cares about what happens to my daughter and grandkids hopes that is a possible and even likely outcome, there are lots of little articles and books and hints that a lot of people have grokked the problem and imagined solutions. The nasty-old-man part of me inclines toward the “Gaia, please hurry and chew us up and spit us out, we certainly deserve it” future as being more realistic.

        Amazing that a few Banksters can have their flabby hands on all the levers of power, when it comes to effing up the political economy to suit their fantasies of how economies operate. They have two tools to beat us mopes with: that lever on the interest rate dial, and their flood of oracular pronouncements to “signal” the actors in the political economy about movements of the interest rate dial. Oh, and of course, thanks to their defalcation with the money supply and the connivance of wholly owned politicians with the keys to the vault of legal legitimacy, the lever that opens the Treasury floodgates which only sluice toward the people who already have the hugest piles of fiat money. How to fix that, so that some kind of homeostatic meta-stability can be erected in the middle of all this?

        Maybe if there was an agreed answer by the many on what kind of political economy they want… but that question is seldom raised, let alone answered, except by the people who already wield all the power… and how many of the rest of us like and want to live with their formulation?

        1. Tom Pfotzer

          JT: Respectfully….why don’t you raise the question you asked?

          Why wait for someone else to do it, when you’re clearly competent to both ask and possibly answer it well?

          What kind of political economy do _you_ want?

          The sooner we get that conversation started, the sooner we arrive at enough of a consensus as to start work on it.

      3. Tom Pfotzer


        While the comment I made above surely did _not_ address the planetary biosphere meltdown you identified, I have addressed that issue elsewhere.

        In prior posts on this subject, I’ve asserted that local econ has a unique potential to:

        recycle materials and nutrients. Build to last, fix local many times before mat’l reclamation
        reduce all energy inputs. Less mining, mfg’g, transport, hvac (no commute, no office hvac)
        provide the time and means for people to restore and fix the part of the planet they live upon. Plant some habitat.

        If you add in “two kids or less per family” as a (possibly attainable, voluntary) goal, that’ll put a major dent in the biosphere meltdown.

        If you add in the ethic to “fix the planet as you make your living”, then you gradually get 8 billion people _fixing_ the biosphere 24 x 7, rather than trashing it.

        Furthermore, the local econ devel route has enough incentives such that even people that don’t currently care as much as you do about the biosphere will still be highly motivated to participate.

        Local econ can provide for household needs when the rest of global supply chain doesn’t want or pay for your labor. That is already a big problem for many households, and it’s going to get much worse.

    2. Susan the Other

      When you think about it, automation is the apex method for the socialization of costs. “We don’t need no stinkin’ employees.” I’d love to see an itemized list of all the tricks of socialization of costs – right down to dumping toxic garbage. It would go a very long way to explaining why corporations have become so exponentially rich. And people so much poorer. Corporations have gone rogue. They have had to do so in order to survive the competition and profit imperative. And Congress allowed it like religious zealots because capitalism uber alles. It has been a fiasco. Destroying both capital and labor. If I could have one dream come true it would be the one where competition is finally locked in a cage. In chains. In a zoo.

      1. Tom Pfotzer


        Yes, Corps have gone rogue.

        I suggest we stop expecting them to help us. If it was going to happen, it would have happened already.

        I say it’s time for _us_ to go rogue.

        I think we just need to finally accept that we are the only ones with the motivation to fix the planet and our livelihoods.

        So let’s cash in our good-little-consumer chips, take the proceeds, and start building a local economy.

        What we lack right now is a common, shared image of what our situation actually is, and a big cafeteria menu of actions we can take to advance our own cause.

        Once somebody figures out a new cafeteria item, put it onto the menu for everyone else to see and copy.

        And modify, and improve. And re-post that for all to see, etc.

        1. Susan the Other

          The Earth really is a “big cafeteria.” Local economies could use a cafeteria model. With all we know now about ecology and healthy ecosystems, local economies could network for a lot of synergy as well.

  2. marieann

    I also keep a reserve…though I don’t usually speak about it.

    Here we just had a good use for the “stash” when the debit system went down and that partly affected the credit system also…never a problem with cash
    We also have a credit card for online with a $500 limit,for security reasons

    1. ambrit

      The same here. Stash cash as we can afford it, and a limit to the online credit card bank account. Plus, mandate a disconnect between the online card account and the savings account. No automatic overdraft “protection” for us. Basic kitchen table accounting sessions weekly. Done on hand marked paper, hand counted in “public.” [For some definition of ‘public.’]
      We have already had our credit card “hacked.” I suspect it was a card reader at a gas station self serve pump. I wasn’t the only person to have it happen in our small neighbourhood. We all used the same gas station at the time. I check for such hacker tools now when I use such machines.
      The big drawback to credit cards is that they make it ridiculously easy to go “over budget” and into debt.
      Do the schools still teach Home Economics? Household economy should be a requirement for graduation.

    1. c_heale

      From his webpage it looks like he graduated from Jahangirnagar University in Dhaka Bangladesh (not taking anything away from him, it’s just he doesn’t come from Australia).

      One iconoclastic Australian economics professer is Steve Keen, who is now based in London I believe, having had to leave his university in Australia when his position at his university was abolished (please correct me if I am wrong).

      1. Grebo

        Steve Keen left London over 3 years ago for Amsterdam. When the pandemic hit he decamped to Thailand but returned to Australia to run for the Senate (unsuccessfully) in the recent election and I believe he is still there. He no longer needs a ‘position’ as he is doing quite well out of crowdfunding.

  3. Peter Whyte

    Are the critics of current central bank policy hoping to see a federal funds rate return to 0 – 0.5%?

    1. GramSci

      No, they just don’t want the Fed to be only bailing out the bankers. But, of course, the Fed is the bankers, who want you to believe that bank money is the only money. Especially GOLD! OIL!

      So who would one expect the Fed to give it to? Giving it to Main Street was supposed to be the job of the US House, but we see how that has worked out.

    2. eg

      I have seen claims that a permanent ZIRP regime is consistent with fiscal policy dominance and a reduction in the concentration of power in the hands of commercial banks.

      1. Yves Smith Post author

        Please provide links, since what you said looks like Making Shit Up. A search shows all of five hits (second link was an Australian PhD thesis from 2006) and none say what you assert.

  4. GeoCrackr

    This article explains that because economists are failing to treat the current inflation as supply-side driven, they’re administering the wrong medicine.

    Refusing is not “failing”.

  5. spud

    clintons policies are still fully enforced, the austerity, the wars, free trade, deregulation, privitization, tax cuts for rich parasites, jim crow laws, gutted safety nets.

    Pete Peterson’s Fiscal Summit: The
    World According to Bill Clinton

    While attending the Fiscal Summit hosted by Blackstone’s Peter Peterson, former U.S. president Bill Clinton makes a compelling argument that addressing America’s long-term debt and deficits requires a bipartisan solution.

    1. c_heale

      Bipartisan solution = the corporations etc. give the politicians more money, and they’ll enable them to steal more from the people and the planet.

    2. orlbucfan

      That garbage went into high gear action when the Raygun Cabal consolidated their electoral gains in early 1981.

  6. VT Digger

    Whole thing is being engineered by present-day captains of industry in response to the unionization wave and increased worker bargaining power.

    They know exactly what they’re doing.

  7. Karl

    Recession as “solution” to cost-push (supply induced) inflation puts the entire burden of the inflation fight on the sector least able to carry it: the working poor and their families. Also, the relatively indebted farm sector. The PMC tends to be largely insulated, and in fact can buy more on their salaries when the economy “cools”. The top 20% probabnly accounts for (roughly, per Pareto’s rule) the same demand as the bottom 50% yet it’s the latter that gets hammered. Is this sane economic policy?

    Moreover, States and cities, which face higher social service demands, cut budgets in the face of lower tax receipts and higher interest charges on their bonds.

    The Fed can do something to alleviate some of these stresses during the recessions they create: engage in targeted QE by buying perhaps all State and municpal bonds, federal farm loans (e.g. FSA), Student Loans, etc. and signal to these sectors that the Fed will indeed be the lender of last resort to these sectors, not just to banks.

    Maybe there are some show-stoppers in this proposal….Of course, banks would not like the Fed to be giving relief to anyone other than banks. And maybe that’s part of the problem.

  8. Ignacio

    Thought I generally agree with the ideas in the article, particularly with the damage done to ever-emerging economies loaded in $ denominated debt — I also believe that more profound discussion is necessary. Interest rates are considered a blunt tool to fight inflation but I sense that it is not as blunt as claimed and it will hurt some sectors before others. For instance, new home construction looks like the prime victim. Home construction demands raw materials which are energy intensive and it might be the case that curving this demand is exactly what is needed with current energy shortages. The problem then would be that construction itself is labor intensive so you have there layoffs. Another problem would be for those already indebted with variable rates facing increasing costs everywhere.

    Could there be some interest rate management within some reasonable margins (not Volcker crazyness) done while addressing the collateral damage in some other way?

    1. GramSci

      MMT explains how to control inflation: tax the entities holding the inflated dollars. Everybody knows who that is. Unfortunately the “democratically elected” “representatives” of the
      “free world” know too. And they’re not working for my grandchildren.

      1. 10 to 1

        “Tax the entities holding the inflated dollars”

        What if those entities live outside the reach of the US to tax them? Part of the reason there is inflation is because those entities exist outside the US and reinvest those dollars back into the US driving up asset prices.

        How do you remove all those dollars from overseas and prevent the asset inflation we see today? Not to mention how are those foreign entities using those dollars to influence US policy makers toward foreign policies which continue the monetary inflation? In other words, more wars and conflict.

        1. Yves Smith Post author

          This is inconsequential in terms on inflation.

          Inflated prices of private equity investee companies do not bleed into the real economy. What can and does are the practices of private equity firms, which wield massive economic clout. They engage in asset stripping, headcount-cutting, and aggressive price increases when they acquire enough market power, which is often. Kolimoisky level money is couch lint by comparison.

  9. TomDority

    The tax system has favored unearned income, lower capital gains, fictitious capital gains, fictitious rates of depreciation and huge loopholes that have driven real investment in real capital off the rails. Through our elected officials are the tax laws written with little public input or oversight from the public. The politicians must pay their way onto the ways and means committee and the finance committee – I don’t know if the old rules of secrecy are still in effect but, the writing of these laws behind closed doors and the number of companies that don’t pay taxes and the complexity of the carve outs, loopholes, deductions, set-asides, deferrals has massively distorted the economy — how else do you get the crazy disparity in wealth and unaffordable basics of life with the life ending environmental consequences.
    The latest 15% minimum tax on corps that MAY raise revenues 44 billion over 10 years sounds just great and dandy – the companies that talk about corporate tax rates and individuals who complain of high income taxes are but playing at kabuki – as is known – no one or no company that is a high earner ever pays the rates and not even the old scare of death taxes is never paid full rate (it would just make you look a sucker) – anyway as sure as I sit here – I guarantee that none of that 44 billion will get collected…I mean 4.4 billion a year is but one of the easiest to get around – particularly if you got your men on the ways and means and finance in congress – just get your top tax folks to write in a little deferral here or exemption their it it all goes away – to be picked up by the rest of us suckers
    A good reading – although the book is dated the content is not dated. This book spells out a lot of what ails us
    The Rape of the Taxpayer – Why you pay more while the rich pay less – by Philip M. Stern

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