Tiểu luận Stagflation in the United States

wth is measured by Gross Domestic Product (GDP) in current dollars (i.e. Nominal GDP) and in year 2005 dollars (i.e. Real GDP). As can be seen from the table and graph, in the 1970s and 1980s, US economy experienced several periods of contraction: 1974 GDP contracted 0.55%, 1975: 0.21%, 1980: 0.28% and 1982: 1.94%. For the other years, real growth rate remained relatively small (less than 6%), with an exception of 1984 with a rate of 7.19%, indicating a period of slow growth and economic contraction. Annual Current-Dollar and "Real" Gross Domestic Product 1960-2000 Year GDP Year GDP GDP in billions of current dollars GDP in billions of chained 2005 dollars Real Growth rate % GDP in billions of current dollars GDP in billions of chained 2005 dollars Real Growth rate % 1960 526.4 2,828.5 1975 1,637.7 4,875.4 -0.21% 1961 544.8 2,894.4 2.33% 1976 1,824.6 5,136.9 5.36% 1962 585.7 3,069.8 6.06% 1977 2,030.1 5,373.1 4.60% 1963 617.8 3,204.0 4.37% 1978 2,293.8 5,672.8 5.58% 1964 663.6 3,389.4 5.79% 1979 2,562.2 5,850.1 3.13% 1965 719.1 3,607.0 6.42% 1980 2,788.1 5,834.0 -0.28% 1966 787.7 3,842.1 6.52% 1981 3,126.8 5,982.1 2.54% 1967 832.4 3,939.2 2.53% 1982 3,253.2 5,865.9 -1.94% 1968 909.8 4,129.9 4.84% 1983 3,534.6 6,130.9 4.52% 1969 984.4 4,258.2 3.11% 1984 3,930.9 6,571.5 7.19% 1970 1,038.3 4,266.3 0.19% 1985 4,217.5 6,843.4 4.14% 1971 1,126.8 4,409.5 3.36% 1986 4,460.1 7,080.5 3.46% 1972 1,237.9 4,643.8 5.31% 1987 4,736.4 7,307.0 3.20% 1973 1,382.3 4,912.8 5.79% 1988 5,100.4 7,607.4 4.11% 1974 1,499.5 4,885.7 -0.55% 1989 5,482.1 7,879.2 3.57% 1990 5,800.5 8,027.1 1.88% Table 1: U.S. Annual Current-Dollar and "Real" Gross Domestic Product (1960-2000) Source: Figure 1: U.S. Annual Current-Dollar and "Real" Gross Domestic Product (1960-2000) Historical Inflation Rates Table 2 shows Inflation Rate data for the USA during the time 1959-2000, including monthly and annual rates. Year over Year compares the growth rate of the Consumer Price Index (CPI-U) from one period to the same period a year earlier. The oil shocks of 1973 and 1979 added to the existing ailments and conjured high inflation throughout much of the world for the rest of the decade. Before the year 1970, annual inflation rates mainly stayed below 3%. However, at the start of the new decade, the figure had more than doubled itself 10 years earlier, then slowing down at around 4% in the following 2 years. In 1974, there was a sharp rise in US inflation rate when it reached its highest of 11.04% in the last 15-year period. The buying power of money decreased remarkably and consumers were not willing to buy anymore. From 1975 to 1978, the rate went between relatively high levels of 7.6% and 9.1%, before reaching a double-digit figure again in 1979, breaking the 1974 record and soar to a new peak of 13.5% in 1980. In late 1980s, the situation became stable with the rate being kept under 5%. Year Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Annual 1965 0.9709% 0.9709% 1.2945% 1.6181% 1.6181% 1.9355% 1.6077% 1.9355% 1.6077% 1.9293% 1.6026% 1.9231% 1.6129% 1966 1.9231% 2.5641% 2.5559% 2.8662% 2.8662% 2.5316% 2.8481% 3.4810% 3.4810% 3.7855% 3.7855% 3.4591% 2.8571% 1967 3.4591% 2.8125% 2.8037% 2.4768% 2.7864% 2.7778% 2.7692% 2.4465% 2.7523% 2.4316% 2.7356% 3.0395% 3.0864% 1968 3.6474% 3.9514% 3.9394% 3.9275% 3.9157% 4.2042% 4.4910% 4.4776% 4.4643% 4.7478% 4.7337% 4.7198% 4.1916% 1969 4.3988% 4.6784% 5.2478% 5.5233% 5.5072% 5.4755% 5.4441% 5.7143% 5.6980% 5.6657% 5.9322% 6.1972% 5.4598% 1970 6.1798% 6.1453% 5.8172% 6.0606% 6.0440% 6.0109% 5.9783% 5.4054% 5.6604% 5.6300% 5.6000% 5.5703% 5.7221% 1971 5.2910% 5.0000% 4.7120% 4.1558% 4.4041% 4.6392% 4.3590% 4.6154% 4.0816% 3.8071% 3.2828% 3.2663% 4.3814% 1972 3.2663% 3.5088% 3.5000% 3.4913% 3.2258% 2.7094% 2.9484% 2.9412% 3.1863% 3.4230% 3.6675% 3.4063% 3.2099% 1973 3.6496% 3.8741% 4.5894% 5.0602% 5.5288% 5.9952% 5.7279% 7.3810% 7.3634% 7.8014% 8.2547% 8.7059% 6.2201% 1974 9.3897% 10.0233% 10.3926% 10.0917% 10.7062% 10.8597% 11.5124% 10.8647% 11.9469% 12.0614% 12.2004% 12.3377% 11.0360% 1975 11.8026% 11.2288% 10.2510% 10.2083% 9.4650% 9.3878% 9.7166% 8.6000% 7.9051% 7.4364% 7.3786% 6.9364% 9.1278% 1976 6.7179% 6.2857% 6.0721% 6.0491% 6.2030% 5.9701% 5.3506% 5.7090% 5.4945% 5.4645% 4.8825% 4.8649% 5.7621% 1977 5.2158% 5.9140% 6.4401% 6.9519% 6.7257% 6.8662% 6.8301% 6.6202% 6.5972% 6.3903% 6.7241% 6.7010% 6.5026% 1978 6.8376% 6.4298% 6.5546% 6.5000% 6.9652% 7.4135% 7.7049% 7.8431% 8.3062% 8.9286% 8.8853% 9.0177% 7.5908% 1979 9.2800% 9.8569% 10.0946% 10.4851% 10.8527% 10.8896% 11.2633% 11.8182% 12.1805% 12.0715% 12.6113% 13.2939% 11.3497% 1980 13.9092% 14.1823% 14.7564% 14.7309% 14.4056% 14.3845% 13.1327% 12.8726% 12.6005% 12.7660% 12.6482% 12.5163% 13.4986% 1981 11.8252% 11.4068% 10.4869% 10.0000% 9.7800% 9.5526% 10.7618% 10.8043% 10.9524% 10.1415% 9.5906% 8.9224% 10.3155% 1982 8.3908% 7.6223% 6.7797% 6.5095% 6.6815% 7.0640% 6.4410% 5.8505% 5.0429% 5.1392% 4.5891% 3.8298% 6.1606% 1983 3.7116% 3.4884% 3.5979% 3.8988% 3.5491% 2.5773% 2.4615% 2.5589% 2.8601% 2.8513% 3.2653% 3.7910% 3.2124% 1984 4.1922% 4.5965% 4.8008% 4.5639% 4.2339% 4.2211% 4.2042% 4.2914% 4.2701% 4.2574% 4.0514% 3.9487% 4.3173% 1985 3.5329% 3.5156% 3.7037% 3.6857% 3.7718% 3.7608% 3.5543% 3.3493% 3.1429% 3.2289% 3.5138% 3.7987% 3.5611% Table 2: U.S. Annual and Monthly Inflation Rates (1965-1985) Source: Figure 2: U.S. Annual Inflation Rate (1959-2000 Year-over-Year) Unemployment Rate Here's a look at the U.S. unemployment rate for people aging 16 and over for selected years from 1960 to 2000. Throughout the 1970s and 1980s, unemployment rate was quite high in comparison with the percentage of 3.5% of 1969, which created a significant social burden for the economy. This might be the result of production contraction or reflected a level of minimum wage lower than expected. The rate fluctuated continuously during the period, creating ups and downs, however, was above 5% for most of the time. It kept hitting new records: 8.5% in 1975, 9.7% in 1982 and 9.6% in 1983. Unemployment Rate (%) 1960-2000 Year Rate Year Rate Year Rate 1960 5.5 1972 5.6 1984 7.5 1961 6.7 1973 4.9 1985 7.2 1962 5.6 1974 5.6 1986 7.0 1963 5.6 1975 8.5 1987 6.2 1964 5.2 1976 7.7 1988 5.5 1965 4.5 1977 7.1 1989 5.3 1966 3.8 1978 6.1 1990 5.6 1967 3.8 1979 5.9 1991 6.9 1968 3.6 1980 7.2 1992 7.5 1969 3.5 1981 7.6 1993 6.9 1970 5.0 1982 9.7 1994 6.1 1971 6.0 1983 9.6 1995 5.6 Table 3: U.S. Unemployment Rate (1960-1995) Source: Figure 3: U.S. Unemployment Rate (1960-2000) As previously analyzed, we can see that the period of late 1970s and early 1980s is a typical example of stagflation of the economy, which is the combination of low growth rate, in other words the “stag”, together with high inflation and unemployment rate, or the “flation” in the term. By the time of 1980, when U.S. President Jimmy Carter was running for re-election against Ronald Reagan, the misery index (the sum of the unemployment rate and the inflation rate) had reached an all-time high of 21.98%. The economic problems of the 1970s would result in a sluggish cynicism replacing the optimistic attitudes of the 1950s and 1960s. Faith in government was at an all-time low in the aftermath of Vietnam and Watergate, as exemplified by the low voter turnout in the 1976 United States presidential election. FEAR OF STAGFLATION RETURN In the 1970s, stagflation shocked traditional Keynesian economists, whose models said the economy could not suffer from both high unemployment and rapid inflation at the same time. Unfortunately, the Keynesians were wrong, because an economy obviously can experience both evils simultaneously. The typical view is that an economy in a deep recession is in no danger of price inflation. This belief is wrong both in theory and in practice. The worst bout of inflation during the postwar period occurred during the economic slump of the late 1970s and early 1980s. More seriously, there is a fear of stagflation return. According to the The Wall Street Journal from February 2008, “The U.S. is facing an unwelcome combination of looming recession and persistent inflation that is reviving angst about stagflation, a condition not seen since the 1970s” At the beginning of 2008, inflation was rising. The Labor Department said consumer prices in the U.S. jumped 0.4% in January and was up 4.3% over the past 12 months, near a 16-year high. Even stripping out sharply rising food and energy costs, prices rose 0.3% in January, driven by education, medical care, clothing and hotels. They was up by 2.5% from the previous year, a 10-month high. Some readers may remember the “misery index,” the sum of the unemployment and inflation rates. The official unemployment rate in 2009 averaged 9.3 percent, for a total misery-index rating of 12.0. This is the highest misery rating in 26 years, going all the way back to 1983 when it was 13.4. Prices rose 2.7 percent during 2009, according to the Bureau of Labor Statistics’ recent update of the Consumer Price Index (CPI), signalling a return of “stagflation”, a merger of stagnation and inflation. More recently, in 2011, yet with prices on the rise and unemployment still high, the U.S. economy again seems to be entering stagflation. April's producer price index for finished goods, which excludes services and falling home prices, rose 6.8%. The Bureau of Labor Statistics reports that intermediate goods prices for April were rising at a 9.4% annual clip. Meanwhile the official nationwide unemployment rate is mired close to 9%, without counting a large backlog of discouraged workers who are no longer officially in the labor force. So stagflation it is. The fact has shown that inflation for January showed an uptick that could signal the return of stagflation (cost-push inflation during periods of weak economic growth and slack demand). See the FRB of Cleveland web site for a good discussion of measuring core inflation with an explanation of the measures used in the graph below. As can be seen from the graph, the misery index is simply the unemployment rate added to the inflation rate. When either is high, there is some level of distress in major sectors of the economy. Often, however, when (demand-pull) inflation is up, unemployment is down. Figure 4: U.S. Inflation, year-over-year change, three measures (1990 – 2011) Figure 5: U.S. Unemployment Rate and Inflation (1960 – 2011) Although core measures of inflation (excluding food and energy) are low, cost-push inflation is returning in the form of high commodity prices, particularly energy. Transportation and food prices are the most sensitive to energy prices. Energy prices are rising for two reasons. In the short-run, energy demand is up following the world-wide recovery from the recession. In the long-run, the rapid economic growth of China and India along with the arrival of peak oil production, spell nothing but higher energy costs. In other words, it is the return of stagflation. Figure 6: Gasoline Price In 2011 Dollars Figure 7: Food-Price Index (1980 – 2010) Since both Gasoline price and Food price are indexed to inflation, it is necessary to compare the 1980 to 2010 period. While food prices are not yet back to the all-time high of 1980 as energy prices almost are (with the exception of the 2008 speculative bubble), just remember that it may take a while for high energy prices to push up other prices.If peak oil really has arrived, energy costs will act as a dead-weight drag on the economy each time it recovers and demand returns. CAUSES  GENERAL CAUSES Economists offer two principal explanations for why stagflation occurs. First, stagflation can result when the productive capacity of an economy is reduced by an unfavorable supply shock, such as an increase in the price of oil for an oil importing country. Such an unfavorable supply shock tends to raise prices at the same time that it slows the economy by making production more costly and less profitable. Second, both stagnation and inflation can result from inappropriate macroeconomic policies. For example, central banks can cause inflation by permitting excessive growth of the money supply, and the government can cause stagnation by excessive regulation of goods markets and labor markets, either of these factors can cause stagflation. Excessive growth of the money supply taken to such an extreme that it must be reversed abruptly can clearly be a cause. Both types of explanations are offered in analyses of the global stagflation of the 1970s: it began with a huge rise in oil prices, but then continued as central banks used excessively stimulative monetary policy to counteract the resulting recession, causing a runaway wage-price spiral. CAUSES OF STAGFLATION IN THE 1970s  Relationship between inflation and unemployment Until the 1970s, many economists believed that there was a stable inverse relationship between inflation and unemployment. They believed that inflation was tolerable because it meant the economy was growing and unemployment would be low. Their general belief was that an increase in the demand for goods would drive up prices, which in turn would encourage firms to expand and hire additional employees. This would then create additional demand throughout the economy. According to this theory, if the economy slowed, unemployment would rise, but inflation would fall. Therefore, to promote economic growth, a country's central bank could increase the money supply to drive up demand and prices without being terribly concerned about inflation. According to this theory, the growth in money supply would increase employment and promote economic growth. These beliefs were based on the Keynesian school of economic thought, named after twentieth-century British economist John Maynard Keynes. Nevertheless, in the 1970s, Keynesian economists had to reconsider their beliefs as the U.S. and other industrialized countries entered a period of stagflation. High oil price in the 1970s The 1973 oil crisis started in October 1973, when the members of the OAPEC (consisting of the Arab members of OPEC, plus Egypt, Syria and Tunisia) proclaimed an oil embargo. Figure 8 shows a history of oil prices, including Nominal monthly average oil price and Inflation-adjusted monthly average oil price as measured in 2007 dollars. Figure 8: Nominal monthly Ave, Oil price and Inflation adjusted monthly average oil price (1946-2008) Source: InflationData.com as of 1/16/2008 As illustrated, the period from 1946 to 1972 saw a stable trend in the price of oil at around $20. Unexpectedly, oil price during the period between 1972 and 1978 witnessed a 2.5 time increase, followed by a soar in the following year to hit a new record of $100. However, the oil price was off its peak of the year 1979, falling back by 80% to just $20 in 1986. The next years experienced a time of wild fluctuation and instability. Figure 9 shows year-over-year percentage changes in the core Consumer Price Index (CPI) from 1958 to 2003, with a closer look on the late 1970s and early 1980s. Figure 9: Inflation soared in the late 1970s and early 1980s Source: Bureau of Labor Statistics This oil crisis in 1973 resulted in actual or relative scarcity of raw materials. The price controls resulted in shortages at the point of purchase, causing, for example, queues of consumers at fueling stations and increased production costs for industry Government’s policies In July 1969, the Federal Reserve Board raised interest rates. Because the United States had spent enormous amounts of money on the Cold War, on the Vietnam War, on aid to less developed countries and, above all, on President Johnson‘s welfare society, the resources of even the mighty United States economy were stretched and prices were rising so the Fed acted to slow the economy down However, things turn out to be unexpected. Towards the end of 1969, that is, less than six months after the Fed had acted, policies instituted by the Nixon Administration began to push unemployment up. The intention of these policies was to stop inflation by reducing demand. Demand was to be reduced by reducing personal income, which was assumed to be a function of increasing unemployment. But President Nixon had already arranged in his message to Congress that ‚if unemployment were to rise the programme of unemployment insurance ‚automatically would act to sustain personal income. He had therefore undermined in advance his capacity to attack inflation through increasing unemployment and reducing personal incomes. For his policies, if they did not reduce incomes as much as the increase in unemployment would have done in an earlier period, they did reduce production. The number of unemployed shot up by more than one million in less than a year. The rate of increase in the gross national product dropped sharply. If it is socially unacceptable to move demand down far enough to balance supply, then the only way of achieving balance in an inflationary situation is to move supply up or, at least, keep it up to meet demand. However, when insufficiency of supply started to cause inflation, the United States have applied monetary and fiscal policies that curtail certain areas of demand, including investment demand, and that curtail production. This reduction of supply while demand necessarily stays up under the pressure of government as well as of private outlays, achieved those twin evils of more unemployment and higher prices. EXPLANATION FOR RISKS OF STAGFLATION RETURN Although many forces buffet the U.S. economy, the near-zero interest rate policy of the Federal Reserve is the prime contributor to the current bout with stagflation. Since 1945, most of the world has been on a dollar standard. Today, for emerging markets outside of Europe, the dollar is used for invoicing both exports and imports; it is the intermediary currency used by banks for clearing international payments, and the intervention currency used by governments. To avoid conflict in targeting exchange rates, the rule of the game is that the U.S. remains passive without an exchange-rate objective of its own. Not having an exchange-rate constraint, the Fed can conduct a more independent monetary policy than other central banks can. How it chooses to exercise this independence is crucial to the stability of the international monetary system as a whole. For more than two years, the Fed has chosen to keep short-term interest rates on dollar assets close to zero and—over the past year—applied downward pressure on long rates through the so-called quantitative easing measures to increase purchases of Treasury bonds. The result has been a flood of hot money (i.e., volatile financial flows that are subject to reversals) from the New York financial markets into emerging markets on the dollar's periphery—particularly in Asia and Latin America, where natural rates of interest are much higher. Wanting to avoid sharp appreciations of their currencies and losses in international competitiveness, many Asian and Latin American central banks intervened to buy dollars with domestic base monies and lost monetary control. This caused a surge in consumer price index (CPI) inflation of more than 5% in major emerging markets such as China, Brazil and Indonesia, with the dollar prices of primary commodities rising more than 40% world-wide over the past year. So the proximate cause of the rise in U.S. prices is inflation in emerging markets, but its true origin is in Washington. There is a second, purely domestic avenue by which near-zero interest rates in U.S. interbank markets are constricting the economy. Since July 2008, the stock of so-called base money in the U.S. banking system has virtually tripled. As part of its rescue mission in the crisis and to drive interest rates down, the Fed has bought many nontraditional assets (e.g., mortgage-backed securities) as well as Treasurys. Yet these drastic actions have not stimulated new bank lending. The huge increase in base money is now lodged as excess reserves in large commercial banks. In mid-2011, the supply of ordinary bank credit to firms and households continues to fall from what it had been in mid-2008. Although large corporate enterprises again have access to bond and equity financing, bank credit is the principal source of finance for working capital for small and medium-sized enterprises (SMEs) enabling them to purchase labor and other supplies. In cyclical upswings, SMEs have traditionally been the main engines for increasing employment, but not in the very weak upswing of 2010-11, where employment gains have been meager or nonexistent. Why should zero interest rates be causing a credit constraint? After all, conventional thinking has it that the lower the interest rate the better credit can expand. But this is only true when interest rates—particularly interbank interest rates—are comfortably above zero. Banks with good retail lending opportunities typically lend by opening credit lines to nonbank customers. But these credit lines are open-ended in the sense that the commercial borrower can choose when—and by how much—he will actually draw on his credit line. This creates uncertainty for the bank in not knowing what its future cash positions will be. An illiquid bank could be in trouble if its customers simultaneously decided to draw down their credit lines. If the retail bank has easy access to the wholesale interbank market, its liquidity is much improved. To cover unexpected liquidity shortfalls, it can borrow from banks with excess reserves with little or no credit checks. But if the prevailing interbank lending rate is close to zero (as it is now), then large banks with surplus reserves become loath to part with them for a derisory yield. And smaller banks, which collectively are the biggest lenders to SMEs, cannot easily bid for funds at an interest rate significantly above the prevailing interbank rate without inadvertently signaling that they might be in trouble. Indeed, counterparty risk in smaller banks remains substantial as almost 50 have failed so far this year. That the American system of bank intermediation is essentially broken is reflected in the sharp fall in interbank lending: Interbank loans outstanding in March 2011 were only a third of their level in May 2008, just before the crisis hit. How to fix bank intermediation is a long story for another time. But it is clear that the Fed's zero interest-rate policy has worsened the situation. Without more lending to SMEs, domestic economic stagnation will continue even though inflation is taking off. The stagflation of the 1970s was brought on by unduly easy U.S. monetary policy in conjunction with attempts to "talk" the dollar down, leading to massive outflows of hot money that destabilized the monetary systems of America's trading partners. Although today's stagflation is not identical, the similarities are striking. RECOMMENDATIONS Stagflation undermined the dominant Keynesian consensus, and placed renewed emphasis on microeconomic behavior, particularly neo-classical economics with its attempt to root macroeconomics in microeconomic formalisms. The rise of conservative theories of economics, including monetarism, can be traced to the perceived failure of Keynesian policies to combat stagflation or even properly explain it. Stagflation in the USA was defeated by then Federal Reserve chairman, Paul Volcker, who sharply increased interest rates to reduce money supply from 1979-1983 in what was called a "disinflationary scenario." Starting in 1983, fiscal stimulus and money supply growth combined to create a sharp economic recovery, which is in line with standard macro-economic models; however, there was a five-to-six-year jump in unemployment during the Volcker disinflation. It appears that Volcker trusted unemployment to self-correct and return to its natural rate within a reasonable period, which it did. A recommendation that seems to have great effects on stagflation is to increase aggregate supply, which is shown clearly below: INCREASING AGGREGATE SUPPLY Increase aggregate supply is the best antidote for stagflation. We can’t choose changes in aggregate demand as a solution because if aggregate demand increases, then inflation rises but unemployment falls (because output rises). If aggregate demand falls, then inflation falls but unemploymen