What is Stagflation?
Stagflation is an economic scenario where an economy faces both high inflation and low growth (and high unemployment) at the same time.
The idea was first proposed by New Zealand economist William Phillips, after whom the ‘Phillips curve’ is named, based on statistical studies on inflation and unemployment.
Some economists prescribe greater spending by the government to resuscitate the economy. But stagflation ties the hands of the government and the central bank from taking such countercyclical policy steps.(i)
Which countries faced Stagflation in the past and present?
In 1970s US faced stagflation. In desperation, President Jimmy Carter (1977-1981) tried to combat economic weakness and unemployment by increasing government spending, and he established voluntary wage and price guidelines to control inflation. Both were largely unsuccessful. A perhaps more successful but less dramatic attack on inflation involved the "deregulation" of numerous industries, including airlines, trucking, and railroads.
These industries had been tightly regulated, with the government controlling routes and fares. Support for deregulation continued beyond the Carter administration. In the 1980s, the government relaxed controls on bank interest rates and long-distance telephone service, and in the 1990s it moved to ease regulation of local telephone service.(ii) Russia suffered from stagflation in 2014-15. Russia's economic growth slowed down to amid dwindling investment, hefty capital outflows, and weak demand and low prices for its commodities exports. (iii)
The Indian economy has now faced six consecutive quarters of slowing growth since 2018. For the whole year, growth rate is expected to be around 5%. Most economists have blamed the slowdown on the lack of enough consumer demand for goods and services.
What is the way out?
Some economists suggest the policymakers should stop worrying about inflation and instead focus exclusively on boosting aggregate demand in the economy.
To quote legendary economist, Robert A. Mundell, is as follows: “The correct policy mix is based on fiscal ease to get more production out of the economy, in combination with monetary restraint to stop inflation. The increased momentum provided by the tax cut will cause sufficient demand for [money] to permit real monetary expansion at higher rates.”
© Parth Kalke.
i. Prashanth Preumal J. The Hindu Sunday,9th January 2020
ii. Mike Mofatt thoughco.com 27th January 2020
iii. Alexander Kolyandr and Paul Hannon – The Wall Street Journal 15th Jan 2014
