A Whiff of Stagflation by Paul Krugman

[BrklynLiberal]

In the 1970's soaring prices of oil and other commodities led to stagflation - a combination of high inflation and high unemployment, which left no good policy options. If the Fed cut interest rates to create jobs, it risked causing an inflationary spiral; if it raised interest rates to bring inflation down, it would further increase unemployment.

Can it happen again?

Last week fears of a return to stagflation sent stock prices to a five-month low. What few seem to have noticed, however, is that a mild form of stagflation - rising inflation in an economy still well short of full employment - has already arrived.

True, measured unemployment isn't bad by historical standards, and inflation is in the low single digits. But inflation is creeping up, and it's doing so despite a labor market that is in worse shape than the official unemployment rate suggests.

Let's start with the jobs picture. The official unemployment rate is 5.2 percent - roughly equal to the average for the Clinton years.

But unemployment statistics only count those who are actively looking for jobs. Every other indicator shows a situation much less favorable to workers than that of the 1990's. A lower fraction of the adult population is employed; the average duration of unemployment - a rough indicator of how long it takes laid-off workers to find new jobs - is much higher than it was in the 1990's.

Above all, the weak job market leaves workers with no bargaining power, so they aren't getting ahead: wage increases have been minimal, and haven't kept up with inflation.

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more...
http://www.nytimes.com/2005/04/18/opinion/18krugman.html?hp

[mhr]

1. Unemployed 61 Months Now

The experts agree on employment.

"Overall, this level of (job) creation represents the worst job performance since the Bureau of Labor Statistics began collecting monthly jobs data in 1939 (at the end of the Great Depression)."

http://www.jobwatch.org /

"In the previous five expansionary economic cycles the average increase in employment over the first 39 months was 10.1%. In the current cycle the increase is 1.5%.

If employment had climbed by 10.1 % since November 2001, we would have added 13.2 million jobs instead of the 1.9 million actually reported. That’s a difference of 11.3 million jobs."

http://www.comstockfunds.com/screenprint.cfm?newsletterid=1165

My Conclusion: The American middle class is fast approaching demise and will need life support to survive!

[nodictators]

2. Bush has a solution: A 30% Consumption Tax

Bush has a commission co-chaired by former senators John Breaux and Connie Mack working on it now.

The Bush comsumption tax would hit middle-income families, the unemployed, and retirees very hard. These groups have little or no taxes now, but would be gouged by the consumption tax. Retirees would get the Bush double-whammy: sharp cuts in Social Security benefits and a 30% tax on what little benefits they did get.

However, the rich would get very low taxes. A family with $1 million household income would pay about 9% of their income in federal taxes. Someone making $10 million per year (for instance, a TV network "news" anchor) would have a tax rate below 1%.

Krugman Is Great!

[Eloriel]

3. How did we get out of the stagflation of the 70s under Carter

(I'm so paranoid and ultra-cynical about my govt, I'm now wondering if that wasn't staged too, to make Carter look bad and NOT get re-elected, esp. since we did come out of it and fairly quickly and gracefully once Reagan was in office -- I just don't know the particulars. Anyone?)

[teryang]

4. High interest rates

...killed the inflation part after a prolonged application. Then there was the resultant severe recession which was treated treated with huge government deficit spending (primarily on the military as I recall).

[dsc]

5. As an Ohioan I have to disagree with the notion that it was gracefully

Places like Cuyahoga, Ashtabula, Lorain, and Lake counties in Ohio as well as Allegeney in PA had a depression to get out of it. Unemployment lines stretched for blocks in 1981 and 1982 in my area.

[dcfirefighter]

6. 30% consumption tax

Also eliminates payroll and income taxes.

When taxes against something with an elastic demand are removed, use thereof rises. In this case employment.

When employment rises, workers gain the upper hand in wage negotiations. Wages rise.

The rich would get richer, but so would everyone else.

The plan, as I understand it, is to take that 30% rate, multiply it by poverty level spending (~$10,000) getting $3,000, and give each adult a $3,000 rebate. Additionally, guardians of minors would get another $1,000 for each dependent. This makes the net tax 0 for anyone living at the poverty level. Currently, a single person living at the poverty level pays $1600 in payroll taxes and approximately $2000 in corporate taxes passed on to them as a consumer.

Anyone living under the poverty level would actually receive more in the rebate than they pay in sales tax.

The biggest winners wouldn't be super rich, it would be small businesses who now have lower employment costs, and a tax system that hasn't been tuned to the highest bidder.

The biggest losers wouldn't be the poor, it would be those who have currently wrung the tax code for all it's worth.