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| 2008 Nobel prize in Economics |
May 20, 2022
When I talk to business groups these days, the most commonly asked question is, “Are we headed for stagflation?” I’m pretty sure they find my response unsatisfying, because I tell them it depends on their definition of the term. 最近最常被問到的問題 " 我們現在正處於停滯性通膨嗎 ?? " 我很確信自己回答無法令人滿意, 我告訴他們 - 這取決於你對停滯性通膨的定義 是如何 !
If they understand it to mean a period of rising unemployment combined with inflation that’s still too high, the answer is that there’s a very good chance that we’ll suffer from that malady for at least a few months.
假如你的定義是高通膨伴隨著失業率逐步上升, 那麼Yes !! 我們有很大機會面對接下來長達幾個月停滯性通膨
But if they’re referring to something like the extreme pain we suffered to close out the 1970s, it looks unlikely.
但假如要像1970s那般通膨得令人難忘, 我想..... 目前狀況仍然還不是那樣
To explain the difference, consider two historical episodes.
First, look at 1979 to ’80, which illustrates what I suspect most people have in mind when they talk about stagflation. At the beginning of 1979 the United States already had 9 percent annual inflation; the surge in oil prices after the Iranian revolution sent inflation well into double digits. The Federal Reserve, under Paul Volcker, responded with drastically tighter monetary policy, leading to a recession and a sharp rise in unemployment: The recession brought inflation down but not enough, so the Fed tightened the screws further, sending the economy into a double dip (not shown on the chart). This finally did bring inflation down to around 4 percent, considered acceptable at the time, but at immense cost: Unemployment peaked at 10.8 percent in 1982 and didn’t get back down to 1979 levels until 1987.
Now look at the period from 2007 to the fall of 2008, just before the demise of Lehman Brothers. On the surface it looks somewhat similar, with uncomfortably high inflation, brought on by rising oil and other commodity prices, and surging unemployment:
And a fair number of influential people worried about runaway prices more than the recession. According to the transcript of the August 2008 meeting of the Federal Open Market Committee, which sets monetary policy, there were 322 mentions of inflation and only 28 of unemployment.
Yet inflation subsided quickly. And while there was a severe recession — still generally known as the Great Recession — it had nothing to do with squeezing inflation out of the economy and everything to do with the fallout from a severe financial crisis. 2006~ 2007台股有在做的人, 都對大宗農產品和油價飆到140塊印象深刻, 當時也吹起一陣通膨熱潮, 但到了2008風暴造成的經濟蕭條, 華爾街AIG, Bear Stearns倒閉, 各國失業率飆漲情境下, 通膨議題彷彿被遺忘 ......
What was the difference between these episodes? At the beginning of the 1980s, inflation was deeply entrenched in the economy, in the sense that everyone expected high inflation not just in the near term but also for the foreseeable future; companies were setting prices and negotiating wage deals on the assumption of continued high inflation, creating a self-fulfilling inflationary spiral. It took a huge, sustained uptick in unemployment to break that spiral.
Where are we now? As that last chart shows, consumer inflation expectations now look a lot like those of 2008 and nothing at all like those of 1979 to ’80: The public now expects high inflation for the near term but a return to normal inflation after that. Financial markets, where you can extract implied inflation expectations from the spread between yields on bonds that are and aren’t indexed to consumer prices, are telling the same story: inflation today but not so much tomorrow. 簡而言之, Krugman認為長期通膨預期才是70s停滯性通膨的主因, 而這項指標目前2022來看仍屬於中性水準, 比較像2008狀況, 並非1970年
In short, inflation doesn’t seem to be entrenched; 2022 isn’t 1980.
Nonetheless, I do expect to see some rise in unemployment. While we don’t seem to be in an inflationary spiral, many indicators suggest that the economy is currently running too hot to be consistent with price stability. Higher wages are good, but they seem to be rising at an unsustainable pace; unlike in 2008, inflation isn’t confined to a few areas, so that even measures that exclude the extremes are running high.
So the Fed has to do what it’s doing, raising interest rates to cool things down, and it’s hard to see how that cooling happens without at least some increase in the unemployment rate. Will the slowdown be sharp enough to be considered a recession? I don’t know, and the truth is nobody does. But it doesn’t really matter. We’re probably headed for a period of weakening labor markets while inflation is still elevated, and many commentators will surely proclaim that we’re experiencing stagflation.
But such proclamations, while technically true, will be misleading. When people hear “stagflation,” most think of the late 1970s and early ’80s — but there’s no evidence that we’re facing anything comparable now.
March 24, 2022
workers and consumers were making decisions based on the belief that high inflation would continue for many years to come.One way to see this entrenchment is to look at the wage contracts — typically for three years — that unions were negotiating with employers. Even then, most workers weren’t unionized, but these deals are a useful indicator of what was probably happening to wage- and price-setting more generally.
In 1979, union settlements with large companies that didn’t include a cost-of-living adjustment specified an average wage increase of 10.2 percent in the first year and an annual average of 8.2 percent over the life of the contract. As late as 1981, the United Mine Workers negotiated a contract that would raise wages 11 percent annually over the next several years.
With everyone expecting inflation to continue, workers wanted raises that would keep up with rising prices, and employers were willing to grant those raises because they expected their competitors’ costs to be rising as fast as their own. What this did, in turn, was make inflation self-perpetuating: Everyone was raising prices in anticipation of everyone else raising prices.
Ending this cycle required a huge shock — an economy so depressed both that inflation fell and that workers were compelled to accept major concessions.
Things are very different now. Back then almost everyone expected persistent high inflation; now few people do. Bond markets expect inflation eventually to return to prepandemic levels. While consumers expect high inflation over the next year, their longer-term expectations remain “anchored” at fairly moderate levels. Professional forecasters expect inflation to moderate next year.
This means that we almost surely aren’t experiencing the kind of self-perpetuating inflation that was so hard to end in the 1980s. A lot of recent inflation will subside when oil and food prices stop rising, when the prices of used cars, which rose 41 percent (!) over the past year during the shortage of new cars, come down, and so on. The big surge in rents also appears to be largely behind us, although the slowdown won’t show up in official numbers for a while. So it probably won’t be necessary to put the economy through an ’80s-style wringer to get inflation down.
That said, the Fed is probably too optimistic in believing that we can get inflation under control without any rise in unemployment. Statistical measures like the unprecedented number of unfilled job openings, anecdotal evidence of labor shortages and, yes, wage increases suggest that the job market is running unsustainably hot. Cooling that market off will probably require accepting an uptick in the unemployment rate, although not a full-on recession.
And for what it’s worth, the Fed’s plan for gradual rate hikes, which has already led to a major rise in mortgage rates, is likely to cause that unfortunately necessary cooling-off, especially combined with the fact that fiscal policy has turned contractionary as the big spending of early 2021 recedes in the rearview mirror.
So my message for those intoning dire warnings about the return of ’70s-type stagflation — which some of them have been itching to do for years — is that they should look at their history more carefully. The inflation of 2021-22 looks very different, and much easier to solve, from the inflation of 1979-80.
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