Stagflation and our unlearned history lessons

You might not be interested in stagflation but stagflation is interested in you. It has been more than a generation since anyone used that scary word in earnest. I have vague untutored memories of being a child in the 1970s amid talk of stagflation — simultaneously rising prices and unemployment. But it is hard to disentangle those thoughts from other hideous features of that time, like cracked linoleum floors, Cadbury’s-coloured suits and possibly the worst hairstyles in history, which is more than any child can reasonably handle. Thus my early youth of runaway inflation has functioned as something of a repressed memory. The one dimension I can vividly recall, which was more of a British-specific feature of those times, is the so-called winter of discontent (1978-79), in which corpses went unburied, rubbish uncollected and trains languished in their sidings. With inflation comes unrest. With unrest comes radical politics.

In the United States and Britain, stagflation led directly to Margaret Thatcher and Ronald Reagan. Or more precisely, to Geoffrey Howe (Thatcher’s hairshirt chancellor of the exchequer) and Paul Volcker, the Jimmy Carter-appointed Fed chair. Howe and Volcker slayed inflation by engineering mass unemployment with interest rates of up to 20 per cent. Is that what we are facing now? It will almost certainly not be that bad but I wish I could give you a clearer answer. I do know that Joe Biden’s Democrats are going to be electorally punished for a problem that is only partly of their making; they are very much the junior co-conspirators. Last year’s $1.9tn stimulus was a foolishly unnecessary measure that added a couple of percentage points to inflation at great political expense (indeed, it made it considerably harder for Dems to pass the highly necessary Build Back Better bill, which now looks all but dead). But the lion’s share of the blame goes to the supply chain problems caused by the coronavirus pandemic, especially the China end of that, which looks set to persist for the rest of this year, and to a central bank culture that had institutionalized its own complacency.

This note is not a forecast about where the US and global economies are heading. I suspect they are going southwards for some time. But you can read about that elsewhere in the Financial Times. My point is that as a species we are over and over again remarkably prone to believing our own propaganda. As Friedrich Hegel said: “We learn from history that we do not learn from history.” Humanity is chronically prone to hubris, which dictates that our generation has solved problems that have plagued humanity from the start. Examples of this include plagues themselves (we stand corrected; thanks coronavirus), old-fashioned wars of conquest (thank you Vladimir Putin), rampant oligarchy (lifetime achievement award to Donald Trump) and inflation (thanks again Covid, and to so many others; you know who you are).

In the case of stagflation, our memory loss is especially poignant. For the first time since the 1990s, Americans are finally experiencing solid wage growth. For the first time since the 1970s, however, those gains are being more than swallowed by price increases. This is going to antagonise people, which will lead to political outcomes that will make everything worse for everyone except the cynical racial entrepreneurs who populate today’s Republican Party. It may even endanger US democracy itself. The return of inflation is thus not some technical issue that is best left to monetary economists to solve. It is a dagger at the throat of US democracy. Damn our hubris and short memories.

Do I have a cure? Not really. Humans are arrogant and forgetful and thus prone to gross errors. Examples include not planning for the next pandemic, not responding to Putin’s previous military incursions, not believing Trump can win at the ballot box, and not grasping that free money for all seasons will eventually come with a price tag. We can only promise to do better next time and hope that history will be gracious enough to grant us another time. My only other lesson, which applies especially to members of my profession, is to always be sceptical of consensus. If what people are telling you sounds too good to be true, then it is likely too good to be true. At another time I would convert this into a larger treatise on why liberal democracy is the only realistic system since it starts from the assumption of human error and frailty. Right now, though, liberal democracy deserves no pats on the back. We keep doing our best to prove it doesn’t work.

So I’ll simply pivot to Rana: if you could single out a cheerful consensus of which we should be suspicious, what would it be?

Rana Foroohar responds

Ed, I love all this recent nostalgia for your past. Don’t be too hard on the 1970s — in addition to bad suits and inflation, they had great music, terrific films and better working hours.

But to answer your question — what is the optimistic consensus that is wrong? One that I’ve been thinking of recently is the idea that place doesn’t matter. Nothing seems to matter more these days in politics and economics; we’ve learnt quite painfully in recent years that the world isn’t flat.

But mainstream economics, amazingly, doesn’t factor that into the models. For example, economists believe that people go where the jobs are; that’s why the only task of a policymaker, in their view, is to create more at a national or even international level. If there is a downturn in a particular city or region, people will simply pull up stakes and move where things are better. That’s the rosy assumption.

Clearly, things haven’t worked out that way. I once interviewed an economic aide to a senior Democratic senator from the South who told me with amazement about the sense of certainty within the party that rural areas and low-density locations simply weren’t worth considering politically. “I remember back in 2016, I was on the Hill, talking to a friend in the White House who was involved in economic policymaking,” the aide said. “He’d been travelling and seeing a lot of rural poverty in places like Iowa and Virginia. He told me, ‘Don’t worry. We’ve got this figured out. We’ve done the models, and it turns out that it’s cheaper to pay people to move to the top 50 cities than to try to create jobs where they are!’” Can you believe, the aide said to me, “the sense of contempt inherent in that statement?”

I can. I can also imagine that the “models” were only as good as the assumptions of the people crafting them. And as you say, we so often get it wrong.

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And now a word from our Swampians . . .

In response to ‘A whiny plea to acknowledge Generation X’:

“About overprotecting our kids: having moved from Washington, DC to Paris about three years ago, we naturally changed our overprotective approach with our children (aged 8 and 10 years). It is liberating for them and for us that they can scoot to school by themselves or we can ask them to walk down the street to buy milk or a baguette. The overprotection of our kids seems to be as much cultural as generational. But as I’m sure you know, the French are experts at getting kids to ‘suck it up’. Sadly, we are moving back to Washington, DC in one year and my biggest concern is whether a sniper is waiting for the kids at dismissal. The US is fundamentally unsafe. I don’t know how we will navigate this when we return.” — Laura, Paris, France

“Would recommend you check out Chuck Klosterman’s latest book The Nineties. The first couple of chapters are dedicated to answering this very question. For me though, Gen X is typified by both the grunge scene (as Rana noted) as well as the movie Reality Bites. Elliott Smith is my favourite Gen X artist though.” — Terry Toland, Springfield, Virginia

This article was originally published by Www.ft.com. Read the original article here.

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