Blogs > Liberty and Power > Stagflation Once More

Mar 31, 2004 3:22 am


Stagflation Once More



With all due respect to William's experiences, I simply don't believe the data support the sort of negative picture of the economy that he and Wendy are painting. Again, I'm not a Pollyana here, and I can think of a whole bunch of ways the Bush administration has made matters worse than they could be (e.g., out of control spending, trade barriers, resources devoted to destruction here and abroad), and I can think of lots of ways things could get worse down the road, but the bigger picture right now isn't that bad. Responding to a couple of specifics:

The market basket that comprises the CPI does get adjusted from time to time, but not nearly as quickly as individuals can react to price movements. Additionally, in composition of the basket always lags behind the real consumption choices of households.

And yes, the Fed continues to increase the money supply. As someone whose professional work has been one long sustained critique of the Fed, including calling for closing its doors, I'm hardly a Fed fan. I've also written a great deal on the costs of inflation. I also agree that increases in the money supply during the 90s had much to do with the dot.com run-up and collapse, especially during the last few years. However, at the moment, the growth rates in M2 are not particularly high. During the last quarter of 2003, M2 actually fell in absolute terms. As of February 1, it was growing at an annual rate of 4.19%, hardly rampant inflation although higher than it probably should be.

The claim that the job situation has led people to exit the labor force has some truth to it. The number of people not in the labor force is up by 1.8 million from last February to this February. Is that "many persons?" That's a subjective call. Is there "considerable" unemployment? Again, a subjective call. The current unemployment rate of 5.6% is more or less precisely what it was during 1995 and early 1996, when that rate was considered "dangerously" low.

Economic data can't deny the reality of people's personal experiences of the economy, but if we're going to talk about the economy as a whole, and particularly if we're going to propose policy or assess credit/blame, then we need to get beyond individual experiences to look at the larger picture.


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Bill Woolsey - 3/31/2004

I believe that the sort of economic performance
that interests most people will be good for a
while. The surprising increases in labor productivity
is all to the good. Only if one suffers from
the most naive failure of economic understanding,
does this look like a problem. That is, failure to
understand that scarcity, including scarcity of labor,
is the key problem.

The possibilities is that monetary policy is such that
even slower inflation or mild deflation is necessary to
generated increaced employment, monetary policy is
such that employment and production will grow rapidly
at current prices, or else, monetary policy is such
that employment and output will grow rapidly and price
inflation will rise.

It seems likely to me that the second is likely and
the third will happen unless Greenspan and company
change policy. Their skill along those lines will
determine whether inflation rises slowly with another
mild recession or else we move into another long
boom.

The problem is long term fiscal problems--especially
unfunded liabilities for social security and medicare.

Rapid run ups in labor productivity don't fit in with
anything but a very transitional stagflation. And
it seems to me that any apparent stagflation would
involve leads and lags. Some prices rising before
employment in response to growing demand.

While it is possible that anti-market regulations would
restrict productivity and result in shrinking employment
and production and higher inflation, or at least slow
growth in output, that just isn't what seems to
be happening.

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