Word of The Day – Stagflation

Those of us who lived through recession during Jimmy Carter’s Presidency will remember this word—stagflation.

During Carter’s time in office we had long-lasting rise in unemployment and even gasoline rationing – one could only fill up on certain days of the week. 

It was a frustrating time for me as, with two graduate college degrees I stood in a line of 200 unemployed workers in South Carolina trying for a grocery store’s cashier job. 

Stagflation is a word that conflates inflation with stagnation into one word.

First inflation comes about because there is “too much money chasing too few goods”. (And since our tariffs on imports are a tax on U.S. consumers, we expect prices of U.S.-made goods will go up in a trade war).

Then, if the government does nothing to curtail inflation, will come layoffs of workers.

After that, if too many Americans aren’t able afford to buy higher-priced U.S. goods, we’ll have stagnation occur in our economy because the production of goods and services slows down or even starts to decline.

Note too that the US. is a debtor country. We import $3.1 trillion and export only $2.5 trillion in goods and services.

Trump’s tariffs are threatening us with this fate again. Here’s why. 

Today the stock market is plunging downwards. The reason is Trump’s tariffs. China has retaliated. 

And China is angry. We import around three to four times as many goods from China as China imports from us. China has more to lose from Trump’s two hundred- to over three hundred-billion dollar tariffs on its imports to the U.S. 

As the costs of buying Made in China exports rise, consumers will pay more for Made in America goods. That will cause inflation in the short run as American shoppers vie for the limited supply of U.S. consumer goods. 

Supposedly that will create more jobs over the long run. But here’s the rub. 

The 2018 tax change shifted billions of dollars from the poor and middle class to the rich. Now even more Americans will be unable to bridge the financial gap to pay higher prices for American goods. 

The rich know this and they are selling their shares of stocks. This means less in the pockets of corporations. 

Even if that tax law hadn’t weakened the market for domestic American consumer goods already, there was little expectation that U.S. corporations were going to create a significant number of new jobs in manufacturing or raises in wages for working people.

That’s because corporations are spending their money on buybacks, buyouts of other companies, bonuses to managers, and and dividends to shareholders. This is where they will cut down on their expenses.

In addition, many manufacturing industries such as steel and aluminum have already disappeared in the U.S. as China and other countries, including our now-tariffed allies in Canada and Europe, as we bought more and more of their exports of good to us. 

The costs of starting up those defunct industries again will be very high.

Already we have seen farmers complaining about what is happening to them in the U.S. from the effects of tariffs on food products. Uncertainty is the anathema for markets.

This is where the danger of stagflation comes in. When inflation (people chasing limited supplies of goods) causes shortages in the goods markets, there has to be an expansion of the supply of those goods.

In other words supply-side economics does not work unless the demand-side is working too. Here the long-term outlook is grim. Who is going to pay for manufacturing to start up again? 

A statistic I heard recently is is from a study that found three men in the United States hold half of the wealth of our country. Bill Gates, Jeff Bezos, and Warren Buffett are worth a combined total of $2,68 trillion dollars.

Meanwhile “one in five US households live in what the report’s authors call the ‘underwater nation,’ with either zero or negative wealth.”

Without huge government support for farming and manufacturing in the U.S., declining demand for non-essential consumer goods will in the long-run lead to stagflation. 

But where are the taxpayers who are supposed to pay for the vital increasing demand for starting up or funding existing farming, manufacturing, and other sectors of the economy? Our economy could stagnate if the minority of U.S. taxpayers are struggling to survive—and/or working at jobs paying minimum wage jobs, $7.50 an hour. All the while wealthy people are paying zero taxes.

Our services sector is the biggest industry sector is the U.S. today. Many of the workers in this sector are paid minimum wages. Many of those work in service and retail industries will be the first to become unemployed. Those in other sectors may soon find themselves out of work as well.

Stagflation was a word created after the Japanese economy in the 1970s had stalled after a huge period of inflation set in. 

I can’t predict the future, but given what I see happening and not happening now, it is far more likely that in the long run, the U.S. will be unable to pull out of a period of inflation without falling backwards into stagflation. 

And those of us who remember stagflation, recall that it took a years for the U.S. to recover from stagflation and decades for the Japanese economy to rebound from stagflation. 

1 comment so far ↓

#1 Raoul A. Martinez on 05.13.19 at 7:28 pm

This is an excellent definition of Stagflation. Being an old timer I remember gasoline rationing and the many other inconveniences of the time. I think its helpful to be reminded. Thank you.

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