Blogs > Liberty and Power > This is Not Your Father's Stagflation

Mar 30, 2004 6:36 pm

This is Not Your Father's Stagflation

It's easy to find lots of economic problems to blame on over-reaching government, but I think the issues raised by Wendy are more complex than the overall tone makes it appear.

First, when we talk about prices going up, we also need to consider wages. As the work of Cox and Alm and others has argued, the prices of nearly all goods and services have been falling when calculated in terms of the labor-time needed to purchase them at the average industrial wage. Stuff's never been cheaper, including food and all the rest. This is, of course, a long-term trend, but even as wages rise in the short run, and the costs of production of goods fall, things get cheaper. A hundred years ago Americans spent about 75% of their income on food, clothing, and shelter. It's half that today.

Second, there is a long-standing belief among many economists that the official measures overstate inflation because the fixed market baskets that are used to measure it do not take into account the real-world substitution that people engage in when prices rise. If the price of chicken rises, people switch to pork or beef. Keeping chicken in the basket will then overstate its impact on consumers. The general belief is that the CPI overstates inflation by about 1%. Both of these points are address in the "Economic Myths" section of my website.

Third, calling what we have "stagflation" reflects a pretty short historical memory. The current unemployment rate of 5.6% compares to an average annual unemployment rate of 6.2% during the 1970s, and an annual average of 5.4% during the first half of the 70s. Calling that "elevated" is really questionable. The inflation rates of the 1970s were:

Year Inflation Rate
1970 5.94
1971 4.31
1972 3.31
1973 6.20
1974 11.11
1975 8.98
1976 5.75
1977 6.62
1978 7.59
1979 11.28

Even if 2.05% understates the real inflation rate, it's hardly in the range we saw during the "stagflation" years.

Bottom line: yes the economy could be performing better, but by historical standards we are hardly in bad shape. Considering that we're still, in some sense, in the recovery phase after the dot-com boom, things could be a lot worse. Comparisons to the really bad old days of the 1970s are, in my view, really far-fetched.

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