By Goodwin Ginger

The problem with those analyses which predict stagflation in our future is that they leave out a couple of key dynamics. By far the largest cost of production in advanced economies is wages. In the 1970s you had the confluence of two factors not just high energy costs. Along with high-energy prices we had what economists like to call wage rigidities. That is, we had strong unions along side initially low unemployment. So when energy prices did spike, profits could not be salvaged by simply passing along price increases onto workers.

In the post Regan / Thatcher era wage rigidities have been moderated to a great extent. In the US for example there has been almost zero real wage growth since the late 1970s. The case is nearly the same in Canada with wages increasing well below lacklustre productivity growth rates. It should also be pointed out that, in inflation adjusted terms, oil prices are nowhere near where they were during the 1970s price spikes.

So I do not think we are likely to see the return of stagflation. What we will see as the Fed, BOJ and ECB ratchet up interest rates with their “conquer inflation at all cost” policy stance is a mopping up of global liquidity which will produce a mild to medium global slowdown and perhaps even a mild recession. Such should be sufficient to reign in demand for commodities in general and energy in particular and cool inflation. It will also have the bonus affect, from the POV of owners of capital, of increasing unemployment and thereby further increasing flexibility in domestic labour markets.

To be clear, in order to get stagflation you need both inflation and rigid labour markets in the context of high unemployment and an accommodative monetary and fiscal regime. None of the advanced capitalist countries fit this profile. One would like to point to Germany and perhaps France, but here the Euro convergence criteria has meant that accommodative fiscal policy is quite constrained and the monetary policy of the ECB is anything but accommodative. In the case of the US there is an overly accommodative fiscal policy (indeed spending has been on a tear under the republicans) but that money is being channelled into relatively benign projects. It is benign in the sense that increases in spending have not been in areas considered to affect the social wage and thereby labour market flexibility. True, such spending has helped drive unemployment levels to post WWII lows, but in the post Regan / Thatcher age such low unemployment does not seem to have strengthened the hand of workers in terms of wage bargains. Indeed quite the opposite seems to be the case.

The other big factor here is that with the expansion and integration of global production, there is for all intents and purposes and infinite supply of unskilled labour. This in turn has the consequence of checking labour market rigidities in the advanced capitalist zone.

When we take all these factors into consideration it seems clear to me that stagflation is not in our Future. What is in our future, however, is a potentially severe contraction.

Analysis continued in part two.

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