Joseph Stiglitz: Stagflation Cometh

The title of John Berry's most recent article is "A Recession Shouldn't Be in Your 2008 Forecast." However, Joseph Stiglitz says, "For America today, the real question is only whether there will be a short, sharp downturn, or a more prolonged, but shallower, slowdown," and he urges monetary authorities not to raise interest rates even if there are signs of increasing inflation:

Stagflation cometh, by Joseph Stiglitz, Project Syndicate: The world economy has had several good years. Global growth has been strong, and the divide between the developing and developed world has narrowed... Even Africa has been doing well, with growth in excess of 5% in 2006 and 2007.

But the good times may be ending. There have been worries for years about the global imbalances caused by America's huge overseas borrowing. America, in turn, said that the world should be thankful: by living beyond its means, it helped keep the global economy going, especially given high savings rates in Asia... But it was always recognised that America's growth under President Bush was not sustainable. Now the day of reckoning looms.

America's ill-conceived war in Iraq helped fuel a quadrupling of oil prices since 2003. ... Until now, three critical factors helped the world weather soaring oil prices.

First, China, with its enormous productivity increases ... exported its deflation. Second, the US took advantage of this by lowering interest rates to unprecedented levels, inducing a housing bubble... Finally, workers all over the world took it on the chin, accepting lower real wages and a smaller share of GDP.

That game is up. China is now facing inflationary pressures. What's more, if the US convinces China to let its currency appreciate, the cost of living in the US and elsewhere will rise. And, with the rise of biofuels, the food and energy markets have become integrated. Combined with increasing demand from those with higher incomes and lower supplies due to weather-related problems associated with climate change, this means high food prices - a lethal threat to developing countries.

Prospects for America's consumption binge continuing are also bleak. Even if the US Federal Reserve continues to lower interest rates, lenders will not rush to make more bad mortgages. With house prices declining, fewer Americans will be willing and able to continue their profligacy.

The Bush administration is hoping, somehow, to forestall a wave of foreclosures - thereby passing the economy's problems on to the next president, just as it is doing with the Iraq quagmire. Its chances of succeeding are slim. For America today, the real question is only whether there will be a short, sharp downturn, or a more prolonged, but shallower, slowdown.

Moreover, America has been exporting its problems abroad, not just by selling toxic mortgages and bad financial practices, but through the ever-weakening dollar... Europe, for instance, will find it increasingly difficult to export. ...

At the same time, there has been a massive global redistribution of income from oil importers to oil exporters - a disproportionate number of which are undemocratic states - and from workers everywhere to the very rich. It is not clear whether workers will continue to accept declines in their living standards... In America, one can feel the backlash mounting.

For those who think that a well-managed globalisation has the potential to benefit both developed and developing countries, and who believe in global social justice and the importance of democracy (and the vibrant middle class that supports it), all of this is bad news. ...

Indeed, the ... world [is] facing depressed aggregate demand. For the past seven years, America's unbridled spending filled the gap. Now both US household and government spending is likely to be curbed, as both parties' presidential candidates promise a return to fiscal responsibility. After seven years in which America has seen its national debt rise from $5.6tn to $9tn, this should be welcome news - but the timing couldn't be worse.

There is one positive note in this dismal picture: the sources of global growth today are more diverse than they were a decade ago. The real engines of global growth in recent years have been developing countries.

Nevertheless, slower growth - or possibly a recession - in the world's largest economy inevitably has global consequences. There will be a global slowdown. If monetary authorities respond appropriately to growing inflationary pressure - recognising that much of it is imported, and not a result of excess domestic demand - we may be able to manage our way through it. But if they raise interest rates relentlessly to meet inflation targets, we should prepare for the worst: another episode of stagflation.

If central banks go down this path, they will no doubt eventually succeed in wringing inflation out of the system. But the cost - in lost jobs, lost wages, and lost homes - will be enormous.

Update: Above, Joseph Stiglitz says factors which have allowed us to weather higher oil prices are fading and we will soon feel stagflationary effects from the run-up in the price of energy. Oliver Blanchard, in an interview motivated by oil prices hitting the $100 mark for the first time, isn't so sure that we will see a return of 1970s:

MIT economist sees U.S. weathering $100 oil, by Sarah H. Wright, MIT News Office

Comments

[kthomas]

Would be nice to see wages rise...I know you laugh, but when you give working men and women even a small raise, it can have a huge impact on morale and, of course, puts spending money right in thier hands, and therefore, back into the economy.

[Farrar Richardson]

Summary of this post :
Disaster in store if we don't increase our consumption.
Summary of previous (Diamond) post :
Disaster in store if we don't decrease our consumption.

Conclusion : Schizophrenia in store for all sincere progressives.

[apj]

you mean....like real wages returning to 1999 levels? The heresy!! That would possibly mean....oh no, an ever so slight reduction in the CEO/average wage ratio! Oh the humanity...

[robertdfeinman]

The difference between Stiglitz and Diamond is that they are looking at different time scales. Stiglitz is worried about the next couple of years and, probably, how it will affect the upcoming election.

Diamond is worried about what the world will look like in 2050. It might make sense to adopt a short-term policy that promotes growth in the US even though this is not what is needed over the long term.

If the world falls into a depression than attention will be diverted from changes that require additional sacrifice (or adjustment, if you prefer). If we can minimize the impact of a downturn this may provide some breathing room for a new administration to come up with some new policies.

The problem that I see with those who are making short-term suggestions is that there is no consensus. Pick one from column A and one from Column B:
Taxes - raise lower
Interest rates - raise lower

Somewhere there is a pundit who can prove that their combination is the right choice. This is not encouraging.

[Farrar Richardson]

Short term - long term, there is still a contradiction. I amend my conclusion to read -
Schizophrenia in store without a fundamental change in economic thinking

[dissent]

Summary of this post :
Disaster in store if we don't increase our consumption expenditures.
Summary of previous (Diamond) post :
Disaster in store if we don't decrease our resource consumption.

These are not the same, and the difference is important.

[Lafayette]

Article: Europe, for instance, will find it increasingly difficult to export

What is curious about Europe is that, with the large rise of the euro versus the dollar, Europe is able to export at all. And yet, it is exports that are pulling the German economy out of the doldrums.

In fact, France's Airbus is closing about as many aircraft sales as Boeing. Not to mention the export of hi-speed trains and nuclear reactors that go unabated.

So, this indicates that with even large devaluations of the dollar, there is is still some room for European exporters. Which is goes against the grain of conventional economic thinking.

Admittedly, had the euro maintained its valuation against the dollar the same as when the euro was implemented, EU exports would be in even better condition. And unemployment probably as much as 1 to 1.5% lower.

[Mario Silva]

Political stability ( or should I say instability )in the Middle East , a determinant factor in oil prices , is difficult to predict . For example , what will happen once
U.S. military presence in Iraq is significantly reduced.
How about Pakistan , Lebanon and other trouble spots.
Consequently , the future of oil prices is within the realm
of soothsaying. Not to say the least of the qualms about climate change and the impact of this on the demand for oil.
All this leads to serious and urgent consideration of using alternative fuels or sources of energy . However , retrofitting industry and means of transportation to function with altertnative fuels will place a heavy
burden of cost to societies in the next decade.
Surprisingly , few economists make mention of this inevitable adjustment in the possibly very near future in their intermediate and long term predictions of the economy.
I personally feel that energy will be a determinant factor
of worldwide economic behavior in the next decade , more so
than Wall Street or interest rates .

[paine]

scatter shot comments here gang

question
do you really think there is no
known or knowable way
to
grow the global economy
right now
both greener and faster at the same time ???

or do u figure
as i do
there are prolly several avenues
that would offer both outcomes at once
and
that stig types
could pull one or other off
design the policy
and advise effectively
on the implementation
..........given the chance........

but "the system "
won't offer that option will it

[James Killus]

I'm intrigued by the idea that 2 years is short term and 40 years is long term.

What is 500 years, I wonder? That's just the time since the beginning of the end for the native American civilizations. Agriculture has been around for about 20 times that, give or take, depending, so that's about 10,000 years. How about 24,000 years? That's just the half-life of plutonium-239.

Keynes said, "In the long run, we are all dead." He didn't specify the exact meaning of "all," did he?

[John V]

The parallels to the late 60s heading into the early 70s are uncanny.

Heavy spending on "butter and guns" and economic growth in the 60s and stagflation in the 70s.

The last 10 years or look so similar.

[barry payne - economist]

paine, with regard to electric production and consumption, Amory Lovins has been arguing for twenty years that given a level playing field in the energy market, conservation alternatives on the demand-side coupled with micro-power and distributed generation would beat out coal and nuclear any day

he recently points out that even assuming capital costs of zero for coal and nuclear, 1/2 to 3/4 of it could be replaced below its short run variable running costs with cost-effective green alternatives; and that worldwide, those alternatives have recently added about 41 gigawatts of capacity compared to less than 4 for nuclear

the main problem cited by critics of Lovins is that the savings require long-run time horizons and reside primarily in up-front capital costs on the demand-side, which usually raise the purchase price and periodic payments of related dwellings and equipment

particularly for residential, builders don't adopt it, lenders don't reward it, landlords that rent don't care and renters and owners who move a lot ignore it - it's rare for houses to be purchased based on the present value of energy savings; further, with the housing downturn, that huge inventory will take years to shed off before serious retrofitting or new structural designs can be put in place

recently the nuclear and coal industry have moved to secure subsidies for new nuclear plants and "clean" coal production; when those costs are avoidable - now - before they become sunk, is exactly the time to put the alternatives into play with aggressive new tranformative energy policies - the ones available now, off the shelf;

but it's catch-22 for the Lovins' alternatives, we can't do it now because it's not worth it in the short run; we can't do it in the long run because we have to save the industry with subsidies that discourage conservation;

if the Lovins' alternatives were initiated, it would be an intelligent way to grow green at lower costs not just in producing electricity but across the board with everything that uses it; it would also stimulate the development of skilled labor in diverse areas while dealing with risks of uncertainty through flexibility

[donna]

My next house will be energy conserving or easily converted to low energy use or else I won't buy it.

Once consumers start demanding it, the market will provide it. WE have to be the change we want to see.

[gordon]

If Prof. Stiglitz is right the US appears to be entering a Weimar period, without savings, with decreasing living standards, with very great social inequalities, with severe budgetary and trade problems and without confidence in Govt. We see increasingly eccentric solutions being proposed by increasingly eccentric political candidates, as happened during Weimar. And we all know how Weimar ended, don't we?

[Lafayette]

donna: WE have to be the change we want to see.

Well said.

And, let's remember, this country began its long march to nationhood with a simple phrase, "WE the people,".

Let's also not forget that bitching on a blog will never have the impact necessary. It is nice to air opinions, towards formulating our own. But, we do not decided policy and to change policy one must change political mentalities.

Political action can only do that. Let's be a bit French. Get yourself into the street and make one helluva pain of yourselves. I guaranty that such action will make "prime time". And, the more the numbers, the more prime time it will get. This is the only factor that matters to politicians ... highly mediatized disgust with the political system, namely THEM.

That was once an American custom, before politics went into a closet and never came out again. It was the public square where people met to debate politics, most often with their politicians. Go to any "backward" country and you will see this still happening in what is called a "forum" (which is a place where people met physically to discourse, debate and transact).

We are so attached to the boob-tube that we forget that the media is one way -- THEM to US. What is needed is more US to THEM -- a two way dialog, whereby politicians listen directly to their constituencies.

That is not easy to accomplish, but let's not think either that complaining on a forum will capture their attention. Politicians, especially the elected variety, typically do not descend into such low-level exchange.

The divide between the political leadership in this country and voters has never been greater.

PS: We'll see how much absenteeism the next presidential vote will bring.

[Callahan]

Ask any wingnut, and it'll tell you there is not a g.d. thing wrong with dubya's economy.

[Callahan]

To Lafayette, very well said sir. "The divide between the political leadership in this country and voters has never been greater". OR, The establishment does not have a FREAKING clue.

Who will lead the charge? Someone needs to stand up and get us organized for a march unto Washington.

[Cynthia]

Seems to me that Berry is awash in wishful thinking!

[Lafayette]

Cal: Who will lead the charge?

Miracles do happen

Well, it's not me. I live in France ... and well, you know, anything from France smells like 3-day old cheese.

But, some smart-ass who is willing to explain that Income Inequality is the MAJOR challenge of the economy, who is willing to take on the plutocrats (of the Right AND the Left) with their egocentric bent on amassing billions (not because they deserve the wealth, but just because they can have it).

It shouldn't be a populist, just a straight talker who believes in capitalism but decries capitalism gone awry.

We are 360 million people. Gotta be some one out there with the gumption, who is willing to take the risk of being gunned down for his/her beliefs. It takes a tremendous pair of cojones to go against a tsunami of moneyed-interests. But, miracles do happen.

If not, this blog is going to be discussing the same subjects for some time to come. Whilst Congress is gridlocked and the whoever PotUS goes on foreign trips to make it into the evening news.

Heaven help us, We the people ... who have to put with this sh*t. (It's insane. There should be enough to go around for all.)

[Callahan]

Layfayette, yup I've been trying to say it too, put a CAP on CAPitalism, but that seems to be a dirty word especially of course in the sector to the RIGHT.

We need a tough guy not unlike Jimmy Hoffa to organize some kind of effort.

[Callahan]

One more comment for Lafayette, last night I witnessed extreme bravery from an unlikely source, ... a slender female (though she is a tough lawyer, or guess I should say it correctly ATTORNEY AT, ... what else? LAW), ...

Greta Susternenenen, or however it is prouncicated, had the gonads, the cahooonas, the grit, the tenactiy, the gall to denounce FOCKS NEWS for not including Ron Paul in the upcoming Republican debate. Do you belive it? If she does not end up dead, I'm sure she will at least be badly beaten, and fired.

Having said all of that, there may be someone somewhere who can lead an effort.

[Callahan]

Statement ammend, that's Greta Van-Susternenenen. A brave, brave, brave brave, very brave woman.

Way to go Greta!

[Callahan]

I should be working, but can't leave this alone today, though I've been working my tail off for the last six weeks or so, so what the hell,

Greta had GREAT Odacity last night.

[Lafayette]

Callahan: We need a tough guy not unlike Jimmy Hoffa to organize some kind of effort.

Oscar nominees

OK, but look what happened to Jimmy ... (If you do know, btw, I'm sure his family would be pleased to hear from you. ;^)

I'm afraid it aint gonna happen. Every time Americans elect a kick-ass president, our boys end up coming home in body-bags.

No, I guess we need not a "straight-talker", but more a smoothie with 2.3 children and a blond wife (or black and attractive).

We're not electing a presidential candidate in the primaries, but Oscar award for Best Actor or Actress in the role of PotUS.

Bright smiles, brushed hair, botoxed baby-boomers.

[Callahan]

Lafayette, yes for a president we don't want a Jimmy Hoffa, but for an anti-establishment organizing sumbitch we do.

Someone with the Odacity of Greta, to take it to em. I'm talking about raising hell with K street, with Congress, with the administration, whoever it is.

[Denis Drew]

One way to sustain demand in the American economy is to do something that should be our first economic priority anyway: restructure the labor market to shift income from the over bloated top few percentile who have gotten increases all out of proportion to their contributions -- and for the point of this discussion: who have gotten more money than they can spend (a reason for low inflation?) -- to "bottom" ninety percentile incomes who will spend like sailors (the closer to the bottom of the bottom) because their -- long underpaid -- potential demand is now so pent up.

Theoretically, I guess we could keep demand more stable if we swung income distribution back and forth as one end got more pent up and the other more spent out -- but I don't think most of us would be willing to pay that high a price for stability (unless full blooded depressions were rampant -- we HAVE been in a thirty-plus year wage depression).

[Lafayette]

Cal: I'm talking about raising hell with K street, with Congress, with the administration, whoever it is.

Swing Voters

I quite agree. The targets you mention deserve being "taken on". They grossly interfere in the political dynamic.

But, remember, America's electioneering process is marked by huge sums of money, because "money works". The media can and does sway voters. Why is this a problem?

Because voter sentiment in America is very evenly divided, from Left to Right during elections. So, the tactical objective becomes one of swaying swing voters, even in minor proportions, in order to win in the Electoral College.

Consider this: One of the factors that was definitive in the lead-head's election was the Evangelical (read protestant) Latino vote that is especially prone to manipulation by means of religious messaging in political advertising. (Not that they are the only ones, mind you.)

This group represents, in fact, only about a third of Latino voters, but they nonetheless steadfastly supported lead-head because of his supposed religiosity.

K-street lobbyists pick up these signals very aptly, and exploit them. (In fact, one of the best in the art is not Karl Rove, but Hillary's primary electioneering guru.)