AHC/WI: No Stagflation

The 70s Stagflation was perhaps one of the greatest economic crises that occurred to the US and the world. In normal recessions, money could be spent to combat it, and in normal inflations, the interest rate could be increased to combat it. Indeed, it was once thought that inflation and employment were inversely related, and this was what many of the techniques used to combat recessions and inflations were based upon. However, with stagflation, as the unemployment rate was increasing while inflation grew worse, no usual solutions could possibly work to rectify the state of the economy. It destroyed the logic behind every other economic recovery. As a result, the US was plunged into a decade of economic chaos, and ultimately, it ended when the large 1982 recession caused inflation to go down - a very untraditional solution to a very untraditional problem.

Now, Stagflation began with the Yom Kippur War. The sanctions placed by OAPEC caused a massive economic shock, which resulted in the disastrous economic episode. It is also said to have begun with the Nixon Shock, when the Bretton Woods system was finally phased out, or with the imposition of wage and price controls by Nixon. However, these were not the real causes of Stagflation. They were merely the sparks that lit it. There was much rot in the energy industry even before the 1970s. The trust known as the Seven Sisters, founded in the wake of the 1953 Iranian coup, ruled over much of the oil industry, stopping competition from emerging and stopping the development of economic reserves. And as new nations began to industrialize, the steel industries from the Western nations fell in decline in favour of the ones in developing countries. As such, merely stopping the Yom Kippur War or the Nixon Shock is not enough to stop Stagflation, for the tinderbox was ready to blow at any moment.

Now, how do you stop Stagflation? I guess one way is to stop the coup against Mossadeq and thus stop the formation of the Seven Sisters, but I think such a cartel would form anyways. In order to stop the decline of industry in the West, you could have the West adopt protectionism, but with the free trade consensus that existed at this time, that's hard. A POD to stop Stagflation would need to be a very specialized one, and I have no idea what it would be.

Thoughts?
 

Deleted member 1487

The oil shock has to be prevented it was the only way to stop it from happening. Do that and you have no 'Reagan Revolution'.
 
The oil shock has to be prevented it was the only way to stop it from happening. Do that and you have no 'Reagan Revolution'.

Such a thing would only delay Stagflation, not stop it. There were very real structural reasons why it happened, and the oil shocks were not one of those structural ones.
 
My estimation is neoliberalism will somewhat be less prevalent in western countries. However, considering how badly Keynesianians failed to recognize that limited free market policies (with the likes of what Ted Heath wanted to do and was prevented from doing so). I.e. removal of state subsidies and general liberalization of trade, flexible monetary exchanges, changes in status quo taxation would eventually need to occur to a minor extent, not the shock therapy of Thatcher and Douglas here. There are three key areas which may provide a POD.
  • Preventing the mass nationalization of industry, therefore making liberalization less painful in the long term.
  • Less knee-jerk reactions by international governments.
  • Implementing centrist sound economic policies, like those pursued in Australia (limited corporatism).
  • Promotion of a "land-owning democracy".

Now remember most "neoliberals" came to power with deception and then would turn around and reply "It needed to happen", Roger Douglas had made it clear that he would make a sweeping devaluation of the dollar. During the run up to the 1984 election investors anticipated the change and liquidated their assets, this created an environment of crisis and Labour was elected.
 

Deleted member 1487

Such a thing would only delay Stagflation, not stop it. There were very real structural reasons why it happened, and the oil shocks were not one of those structural ones.
Got something to support your claim, because when oil prices stabilized Stagflation went away.
 
Got something to support your claim, because when oil prices stabilized Stagflation went away.

Even before the oil shocks, there was Stagflation, in around 1971, at which point there was also a recession. Just wanted to point that out. For instance, here's a graph of inflation in that time.

stag-fig2.gif


Of course, the other ones are much larger, but in 1971, inflation rose, and so did unemployment - the very definition of stagflation.

You can argue the Nixon Shock, or his wage and price controls, are to blame, but that does not explain how that and the oil shocks can both cause Stagflation. Clearly, it's indicative of an issue that cannot be simply solved by merely stopping the oil shocks.
 

Thomas1195

Banned
My estimation is neoliberalism will somewhat be less prevalent in western countries. However, considering how badly Keynesianians failed to recognize that limited free market policies (with the likes of what Ted Heath wanted to do and was prevented from doing so). I.e. removal of state subsidies and general liberalization of trade, flexible monetary exchanges, changes in status quo taxation would eventually need to occur to a minor extent, not the shock therapy of Thatcher and Douglas here. There are three key areas which may provide a POD.
  • Preventing the mass nationalization of industry, therefore making liberalization less painful in the long term.
  • Less knee-jerk reactions by international governments.
  • Implementing centrist sound economic policies, like those pursued in Australia (limited corporatism).
  • Promotion of a "land-owning democracy".

Now remember most "neoliberals" came to power with deception and then would turn around and reply "It needed to happen", Roger Douglas had made it clear that he would make a sweeping devaluation of the dollar. During the run up to the 1984 election investors anticipated the change and liquidated their assets, this created an environment of crisis and Labour was elected.

Regarding mass nationalisation, actually Labour had misunderstood Keynes from the beginning. Of course the manufacturing firms, and all other firms which were never public utilities must be privatized. But, exchange rate and trade must be liberalized of course. But, privatization must be accompanied with measures to prevent monopolies and crony capitalism, which neo-liberalism had failed.

Oh, as I remember, Australian leaders like Menzie still pursued laissez-faire with limited intervention for infrastructures and progressive tax policies.

Develop energy efficient technology and gear the economy towards sectors that are not energy intensive were Japanese policies.

So why is it that oil prices goes up by like the same amount btwn 1999-2010 as the 1970s and we have 0-2% inflation?
1990-2008: well, supply-side shocks such as IT revolution, or energy efficient tech. Also, flexible inflation target since late 1980s in many countries helped stabilized inflation. Finally, Fed and some other CBs kept interest rate artificially low, which finally led to subprime mortgage bubbles.
 

Deleted member 1487

Even before the oil shocks, there was Stagflation, in around 1971, at which point there was also a recession. Just wanted to point that out. For instance, here's a graph of inflation in that time.

stag-fig2.gif


Of course, the other ones are much larger, but in 1971, inflation rose, and so did unemployment - the very definition of stagflation.

You can argue the Nixon Shock, or his wage and price controls, are to blame, but that does not explain how that and the oil shocks can both cause Stagflation. Clearly, it's indicative of an issue that cannot be simply solved by merely stopping the oil shocks.
The problem in 1971 was the issue of having a gold based currency setting it's value and the printing of money, which increased inflation because the money supply expanded while the gold backing it did not. The Nixon shock of 1971 actually killed the inflation by you chart! It was the 1st oil shock that caused the massive rise in inflation in your chart too!!!! The oil shock happened in 1973, which caused that inflationary spike, while the late 1960s-1971 rise was caused by the problem of economic expansion while having a gold backed currency and a finite supply of gold in the work to back it. The move to a fiat currency was inevitable once the supply of gold for central banks topped out and the economy continued to expand, Bretton Woods was not sustainable.
https://en.wikipedia.org/wiki/Nixon_shock
https://en.wikipedia.org/wiki/1973_oil_crisis
All the Nixon Shock did was decrease the earnings of oil producers because once currency was free floated it devalued the dollar and since the petro-dollar defined what the price of oil was profits went down. A big part of the increase in oil prices was correcting for the depreciation of the dollar, which had lagged and then the embargo threw everything off a cliff. Really looking that the chart the spikes were caused by the first and second oil shocks, little else, plus then the interim elevated inflation due to the rise in oil prices to correct for the abandoning of the gold standard and pricing adapting to the free floating currency reality.
 

RousseauX

Donor
The problem is that something like stagflation was inevitable given the post-war macroeconomic order, because the government commits itself to full employment and is willing to use monetary and fiscal policies to sustain that. The issue is that people eventually learned to game the system: imagine if the government literally will make sure 0 people are unemployed, then the 1 person who is unemployed can simply keep asking for higher wages or go on strike or something. Then corporations have to rise prices to pay its workers more, and the central bank legitimize the whole by increasing the monetary base.

So inflation is structurally built into the system.
 

Thomas1195

Banned
The problem in 1971 was the issue of having a gold based currency setting it's value and the printing of money, which increased inflation because the money supply expanded while the gold backing it did not. The Nixon shock of 1971 actually killed the inflation by you chart! It was the 1st oil shock that caused the massive rise in inflation in your chart too!!!! The oil shock happened in 1973, which caused that inflationary spike, while the late 1960s-1971 rise was caused by the problem of economic expansion while having a gold backed currency and a finite supply of gold in the work to back it. The move to a fiat currency was inevitable once the supply of gold for central banks topped out and the economy continued to expand, Bretton Woods was not sustainable.
https://en.wikipedia.org/wiki/Nixon_shock
https://en.wikipedia.org/wiki/1973_oil_crisis
All the Nixon Shock did was decrease the earnings of oil producers because once currency was free floated it devalued the dollar and since the petro-dollar defined what the price of oil was profits went down. A big part of the increase in oil prices was correcting for the depreciation of the dollar, which had lagged and then the embargo threw everything off a cliff. Really looking that the chart the spikes were caused by the first and second oil shocks, little else, plus then the interim elevated inflation due to the rise in oil prices to correct for the abandoning of the gold standard and pricing adapting to the free floating currency reality.
Agree, the gold-based standard could no longer serve when economies expand large enough, as gold is limited. Another cause of the breakdown of Bretton Wood was the substantial trade deficit of the US, whose currency was an anchor.
 

Thomas1195

Banned
The problem is that something like stagflation was inevitable given the post-war macroeconomic order, because the government commits itself to full employment and is willing to use monetary and fiscal policies to sustain that. The issue is that people eventually learned to game the system: imagine if the government literally will make sure 0 people are unemployed, then the 1 person who is unemployed can simply keep asking for higher wages or go on strike or something. Then corporations have to rise prices to pay its workers more, and the central bank legitimize the whole by increasing the monetary base.

So inflation is structurally built into the system.
Especially in the UK, where unions were very powerful. Worse, in the UK, unions also resisted new technology that can create supply shocks
 

Deleted member 1487

Agree, the gold-based standard could no longer serve when economies expand large enough, as gold is limited. Another cause of the breakdown of Bretton Wood was the substantial trade deficit of the US, whose currency was an anchor.
I have no idea why they went back to it post-WW2 when the Great Depression demonstrated that it was unworkable.
 

Thomas1195

Banned
I don't know how to explain but according to an article, Denmark in late 1950s implemented land value tax and inflation dropped to near zero while economy expanded substantially.
 

Deleted member 1487

I don't know how to explain but according to an article, Denmark in late 1950s implemented land value tax and inflation dropped to near zero while economy expanded substantially.
http://course.earthrights.net/?q=node/94
Effectively it used a LVT to end real estate speculation and force investment cash into other sectors of the economy, which resulted in massive growth because leaving money locked up in owning land because too costly (actually major problem in the US right now is that due to a dearth in productive investment, investors are going back to buying up land and literally seeking rents). The thing was it happened right during the go-go '60s, so that investment money had a place to go as the world economy was rapidly expanding after the destruction of WW2 was being recovered and all the new technologies developed during the war created massive new profitable industries to pump money into (think consumer electronics for one).
 
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RousseauX

Donor
I have no idea why they went back to it post-WW2 when the Great Depression demonstrated that it was unworkable.
Bretton Woods was very different from the classical gold standard because it allowed for domestic monetary policy whereas the weakness of the classic gold standard was that government can't adjust their monetary policy in response to recessions.
 

Deleted member 1487

Bretton Woods was very different from the classical gold standard because it allowed for domestic monetary policy whereas the weakness of the classic gold standard was that government can't adjust their monetary policy in response to recessions.
The problem is that it didn't solve the core issue with the gold standard: a limited supply of the metal upon which to base your currency, which when the economy expands naturally enough leads to inflation that cannot be dealt with. Because of that Nixon had to leave the gold standard when he hit that wall.
 

RousseauX

Donor
The problem is that it didn't solve the core issue with the gold standard: a limited supply of the metal upon which to base your currency, which when the economy expands naturally enough leads to inflation that cannot be dealt with. Because of that Nixon had to leave the gold standard when he hit that wall.
Right but fixing it at $35/ounce actually did work out for 15 years or so, and even before Nixon went off the gold standard the supply of dollars already broke the fixed ratio by the early-mid 1960s
 

Deleted member 1487

Right but fixing it at $35/ounce actually did work out for 15 years or so, and even before Nixon went off the gold standard the supply of dollars already broke the fixed ratio by the early-mid 1960s
Again temporarily sure, but it was not sustainable once the damage from WW2 was repaired and the world economy was returning to normal and expanding beyond the 1930s level. Right, Nixon's decision was based on the results of the rapid economic expansion of the 1960s that broke the Bretton Woods order; he put it off as long as possible, but it was clear that by 1971 it was finished.
 
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