Author: Danielle Sobkin, Graphics: Bella Aharonian
The BRB Bottomline:
Stagflation has become a popular and pressing economic issue. Stagflation is defined as slow economic growth during times of relatively high unemployment. These concurrent factors are typically followed by a rise in prices—also known as inflation. Stagflation is most commonly seen during periods of inflation where the gross domestic product (GDP) is on a decline.
Stagflation
The Current Economy
A plethora of problems stemming from the COVID-19 pandemic have surfaced in America, leading the country towards an economic decline. These problems—including stagnating wages and a downward spiral in the production of goods—span across the board, affecting several sectors of the American economy. Together, they converge into the perfect storm, plaguing America with economic issues reminiscent of those of the 1970s. Fundamentally, what was once the nation’s strong economic foundation is struggling—pulling us back into the abyss of the 1970s.
1970s Stagflation— “The Great Stagflation”
To set the scene, it is the early 1970s in the United States. Energy prices are at an all-time high due to the “oil shock”: a newly introduced Organization of the Petroleum Exporting Countries (OPEC) embargo which doubled the price of crude oil from 1973 to 1975. The economic crisis was regarded as a substantial failure with significant aftershocks to the greater macro-economy. The ensuing stagflation fundamentally altered life in America, making it difficult for many households to meet their basic needs. It didn’t end there, happening once more from the years 1978 to 1980, where a subsequent decline in the economy led to further price increases. Point being? America must tread carefully if it does not wish to fall victim to stagflation once again.
Unemployment, GDP, and Productivity
American unemployment grew to concerning rates as COVID-19 broke out in 2020. In fact, the unemployment rate throughout the first three months of the COVID-19 pandemic grew at a faster pace than it did at any point during the Great Recession. Unemployment has since more or less rebounded to pre-pandemic levels as of Q2 2022, but the economy is not out of the woods yet. With the Fed’s recent interest rate hikes, crashes in the cryptocurrency industry, as well as mass layoffs and hiring freezes in certain sectors, unemployment is likely to be on the rise once again. Recent college graduates and even doctoral students are currently left struggling to find positions appropriate for their level of education. As a result, nearly 50% of recent college graduates are unemployed—and that number is expected to go up from there.
Furthermore, the United States’ GDP growth does not bode well for the future. After six straight quarters—stretching from Q3 2020 to Q4 2021—of GDP growth being in the positive, the United States’ GDP has been on the decline for the first two quarters of 2022. This swing in GDP movement, constituting a technical recession, is all the more concerning when considering the fact that a high inflation rate should theoretically drive up consumer spending and therefore GDP.
Alongside a drop in GDP, growth metrics relating to labor productivity have also stalled. Labor productivity, or the real economic output per labor hour, has been below-average since 2005. This long-term productivity slowdown has left substantial effects—ranging from hiring declines to labor market contractions—which are manifested in the experiences of individual workers. This trend has become an unfortunate antithesis to the consistent growth in productivity starting from the early 1980s.
Inflation Surge
Whether caused, correlated, or entirely unassociated with COVID-19, there has been an undeniable surge in U.S. inflation. The recent commodity price surges—seen across almost every industry—have exacerbated the already high inflation rate. Prices have hit all-time highs, while salaries have struggled to grow analogously and match inflation. If the increasing inflation is not contained, it will continue to snowball.
Should Americans Fear the Future to Come?
The pessimistic answer gathered by current data is “yes.” American economic and financial trends are on a consistent decline: inflation remains high, and economic growth remains low. Fear has begun to penetrate our society as 81% of U.S. adults are worried about a recession hitting this year. Hand in hand with inflation is the grade to which central banks will need more forceful policies than currently anticipated. Our current economy is a manifestation of the declinist views that pose difficult questions—like how will American society address the socioeconomic implications of the deteriorating economy?
In his pamphlet titled “The Great Stagnation: How America Ate All the Low-Hanging Fruit of Modern History, Got Sick, and Will (Eventually) Feel Better,” economist Tyler Cowen outlines five forms of “low-hanging fruit” hat underpinned the early development of the American economy. He argues that America and other similarly advanced economies have exhausted their initial easy sources of economic growth and must now pivot towards alternative, forward-looking but riskier avenues of growth. Cowen attributes the stagflation in the 1970s to America’s unwillingness to move on from its fixation with its “low-hanging fruit”—many of which were longer applicable. Unfortunately, that mentality has not since been dropped, and as a result we are facing the same repercussions that we did back in the 1970s. If we wish to break out of our current economic slump, we should take risks and look onwards to new, innovative sources of economic expansion. These sources include the development of emerging economies as potential trade partners and allies, utilizing the Internet to develop the scientific community, and reforming our education system. Critically, none of these proposed solutions to our economic stagnation are easy to reach, “low-hanging fruit.” In fact, some of them may even seem counterintuitive in the sense that substantial investment and therefore risk must be assumed up-front, resulting in further short-term damage. But, taking chances is ultimately necessary to move forward and strengthen our economy in the long-term.
Conclusion
With past mistakes and crises leading to important improvements in the skeleton of our economic structure, the American economy today is vastly different from its previous iterations. Yet, it’s still important to note the similarities of our current situation with those of the past. In particular, the difficulties in the 1970s caused by stagflation can provide significant insight into how to tackle our problems today. Stagflation is a problem, but one that can and should lead to fresh, newfound opportunities to grow our economy and achieve the financial prosperity we so desire. Instead of shaking in fear and wallowing in defeat, we can instead adapt and look ahead for pockets of new opportunities to bring about long-term change.
Take-Home Points
- In the 1970s, the United States experienced significant stagflation, defined as slow economic growth during times of relatively high unemployment.
- Currently, America is plagued with stagflation and other economic issues reminiscent of the 1970s.
- There is a decline in employment and labor productivity rates which is of particular concern for the American economy.
- Prices have hit all-time highs, while salaries have struggled to grow analogously and match inflation. If this trend continues, inflation will snowball.
- In short, American economic and financial trends are on a consistent decline: inflation remains high, and economic growth remains low.
- Unless America instigates change and embraces more forceful policies, Americans should fear the financial future to come.