Stagflation

I have an op-ed in The Drum today talking about the prospect of stagflation.

High inflation combined with a sluggish, or stagnant, economy is described as ‘stagflation’. The last time the world saw anything like this was in the 1970s.

It is the consequence of pursuing Keynesian economic policy. It should come as no surprise that the return of Keynesianism during and after the Global Financial Crisis could see the return of stagflation.

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27 Responses to Stagflation

  1. Gabrielle

    Good article, Sinclair.

    131 comments and well over 50 of them referring to the IPA, and not the article.

    Why do so many mistakenly believe the IPA is a Liberal front? Idiots.

  2. kennedy

    For an alternative thinking on the Aussie inflation see here.

  3. Fleeced

    Always a pleasure to watch the whack-jobs go psycho over those three letters: IPA

    Heh… IPA Derangement Syndrome = IPADS 🙂

  4. Antipodean

    Good tight article Sinc. Usual munters in the Drum’s comments calling the IPA a front for the Liberal party, Tea Party etc (yawn). Much easier to do this than actually address the points made in the article. Typical laziness of the left…

  5. sdfc

    Stagflation?

    Typical hysteria over what is a so-so inflation number.

  6. Sinclair Davidson

    Thanks kennedy – I’ve added that site to the blogroll.

  7. Peter Whiteford

    Sinclair

    You say “On his watch tax rates for low-income earners will rise – effective marginal tax rates will also increase from next year.”

    But no one will experience an increase in average income tax rates, and for low income earners they will fall. Marginal tax rates will rise for some low income earners, but they will fall for others, and stay the same for most people.

  8. Sinclair Davidson

    Deadweight costs are a function of the square of the marginal rate. As you admit they’re going up. See page 10, chart two of the tax forum document Swan released yesterday. It confirms the recent discussion you and Sleetmute had – and my comment that you dislike.

  9. Peter Whiteford

    But you said that tax rates for low income earners will rise – which they won’t.

    Since you use the word also in the next sentence to refer to increases in marginal rates, the first part of the sentence must refer to average rates.

  10. Don

    I must admit I didn’t get too far into the comments section over there .

    Some douche poster started banging on about wearing a beanie and braving the cold to avoid the evil concept of modern climate control.

    Same “Champion of the People” will hopefully give the same advice to pensioners who will be suffering through the cold winters afraid of heating lest the carbon boogie man takes effect on their power bill.

    Just lie back in your rug and think about the compensation

  11. Sinclair Davidson

    Peter – you’re very desperate. It must be tough for you. Aren’t you embarrassed? Many economies that comprise the OECD – an organisation you have worked for – are in economic strife. Has the OECD actually warned against any of the economic policies that have lead to the current economic problem? If so, could you provide links?

    Genuine question.

  12. conrad

    Sinclair,

    I would have thought that one reason we are getting stagflation is simply because external factors have changed — basically, Asia and all the people that make our cheap goodies have inflation problems, unlike the past decade where it was opposite. Thus we get to spend more for less. They’re also using more commodites and hence pushing the prices up of them as well, so we’re also having to pay more for less for those. The other obvious reason is that people’s workplace productivity is declining. You may well attribute some of that to the economic performance of the government(s) (and some of it may well be), but I seem to remember it’s been going on for quite some time, so it can’t just be recent performance — Perhaps the crudification of our education system is finally catching up with us (things like the Flynn effect, for example, which I think is a good marker of how good our education system is — in someways better than many of the tests — peaked in the early nineties and it’s hard to see how that wouldn’t cause a widespread impact).

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  14. Sinclair Davidson

    conrad – I always prefer to look to ourselves before blaming foreigners on economic problems. That isn’t to say that some economic problems aren’t imported, but most are either home-grown or a local contribution is an important consideration.

  15. Jim Rose

    Sinclair,

    Blaming out-groups is the first stop of populists.

    At the moment, it is the curse of the left: blame foreigners and financial market executives on bonus schemes for all our present discontents

    It all reminds me of Michael Douglas’ closing speech in the movie that was the template for the west wing.

    Douglas spoke about the country facing serious problems needing serious solutions.

    All his Republican opponent could do was telling you what to fear and who to blame.

    Times change.

  16. Jim Rose

    Sinclair, the OECD is the IMF but with less teeth and backbone.

    The OECD produces well-written analysis by smart people with conclusions that swing everyway needed to accommodate member governments.

    The OECD had to dance on the head of a pin, and it did so well, when having to write a country survey on France introducing a 35 hour week.

    The IMF recently started talking about government as an employer of last resort, and maybe spender of last resort.

    No one has picked up on the tension between the fiscally conservative advice the IMF gives to its developing country members wanting yet another crisis loan and the Keynesian advice it gave to OECD members during the GFC.

    P.S. I once suggested that the OECD close to new staff members its bankrupt under-funded super-generous staff pension scheme. Someone flew across the globe to see me in my office just to point out the error of my ways.

  17. JC

    JIM

    The OECD reports are national propaganda bulletins.

    The IMF is now basically a Keynesian whorehouse that the prick Stuauss-Kahn created. Not only did he screw the maid. He also screwed the world and the place is a economics tip.

    the only 1/2 decent organization is the BIS.

  18. Jim Rose

    JC,

    The BIS had some rather shady connections in WW2. That is now passed.

    always struggled to work out what the BIS does. Friends who were offered jobs by the BIS had the same problem.

  19. JC

    BIS does nothing anymore other than write reports. That’s about it since the break down of the Bretton Woods system.

    Every entity in continental Europe has a shady WW2 story.

  20. Sinclair Davidson

    Jim – the OECD and IMF and World Bank have some great people working there and when you read their research it’s often very good. Their official stuff, though, is far too statist and far too supportive of poor government policy for my liking. I understand why and how that happens, but I don’t see why those organisations shouldn’t be called out for their support of poor policy.

  21. Jim Rose

    Thanks Sinclair,
    I agree about the quality of their staffs.

    the IMF staff write papers that will get passed the executive board

    These board members are senior treasury and central bank officials who are still on the way up. They will still be motivated by back-home career concerns.

    The Australian EDs spent a lot of time making sure any criticisms of Oz were muted.

    the criticism of developing countries was the price of passage for their loans being rolled over.

  22. How, after the 1970s, can economists possibly adhere to a doctrine that says stagnation can’t happen? I wonder if the government will crack after recession is official in September.

    Or will they try to cook the books and precipitate an endless distracting shitfight?

  23. That’s ‘stagflation can’t happen’. Sorry.

  24. kennedy

    Sinc – Billy bong’s conclusion is as follows:

    The inflation rate has risen steadily this year mainly due to transitory factors such as natural disasters and external factors (petrol prices). Only the energy price issue is of concern. The farms damaged by the floods etc will be back into production before long and then the supply boost will see food prices fall sharply.

    At present, there is no evidence that demand pull factors emanating from within Australia are driving the inflation trend.

    How do you reconcile that with the possibility of stagflation?

  25. Jim Rose

    before we are lost in transitory factors and underlying inflation rates and other talking points I commend the following.

    Historical origins of the cost-push fallacy, Thomas M. Humphrey, http://www.richmondfed.org/publications/research/economic_quarterly/1998/summer/pdf/humphrey.pdf

    “Seasoned scholars accept recent cost-push theories of disinflation with a sense of d´ej`a vu.

    They know that exactly the same theories—albeit with signs reversed—flourished in the 1950s, 1960s, and 1970s.

    Those decades saw cost-pushers attribute wage and price inflation to such forces as the increased monopoly power of trade unions, oil price shocks, the competitive struggle for relative income shares, crop failures, commodity shortages, and even the
    disappearance of anchovies (a key ingredient of livestock feed) off the coast of Peru…

    …Reichsbank spokesmen during the German hyperinflation of 1923—all were cost-pushers
    with a vengeance.

    And if cost-push is at least two centuries old, then so too is the opposing monetary view that finds such theories erroneous.

    Since the early 1800s, a succession of quantity theorists including David Ricardo, John Wheatley, Henry Thornton, Knut Wicksell, Irving Fisher, Gustav Cassel, and others have criticized the theory.

    … despite its flaws, cost-push theory survives today because of its simplicity, its appeal to those
    whose knowledge is primarily microeconomic, and its gratifying implication that the stock of monetary purchasing power can safely be allowed to expand to meet the needs of trade.”

  26. nicomedean

    Interesting proposition, yet you don’t talk about the elephant in the room that wasn’t extant in the 1970’s – private debt.

    At 160% of GDP vs 22% of GDP for government debt, the ongoing deleveraging is deflationary – and requires higher wages to clear. The alternative is a decade(s) long funk of low/zero GDP growth and asset deflation across the board, particular for that big bunch of Aussies just about to retire.

    I do agree with your premise about is tax reform, including getting rid of a lot of corporate welfare, middle class welfare (PPL/FTA/FTB, CCR), defence welfare (submarines/JSF) and useless regulation.

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