The Return of Stagflation

By Paul Greenberg Monday, March 28, 2011 Some of us have seen this movie before -- and didn't much like it the first time. The cast might have changed but the plot is the same: A president thinks he can keep spending-and-taxing, running up deficits and adding to the national debt, but escape the inescapable result: rising inflation. More dollars, less wealth. Why work, save, invest, put in overtime or start a business if the dollars you earn are worth less and less? Inflation is the most insidious of taxes, eroding people's savings, salaries, initiative. As the economy stagnates, national morale turns into national malaise. Consumer confidence drops, and so does American confidence in general. The series of interlocked, complex operations that is the American economy starts to sputter. Then comes the decisive blow: Unrest in the Middle East raises the price of oil to extortionate levels. It happened to Richard Nixon's presidency, then Jimmy Carter's. The oil shock ripples through the rest of the economy. Price controls -- and restrictions on domestic oil production -- only aggravate the crisis. The result: long lines at the pump, shortages in general, and ever higher prices. The country reaps the worst of both undesirable worlds: stagnation and inflation. A new word has to be coined to describe the new combination: Stagflation. Unemployment, inflation, interest rates, all hit double digits. The misery index, unemployment plus inflation, rises sharply. People feel trapped. As if they were on a treadmill headed down, down, down while prices keep going up, up, up. And there seems no way to get off. The intellectuals begin writing think pieces not about how to create the conditions for a robust recovery, but how to handle America's inevitable decline in the world. The country's leaders make empty excuses, put off the hard decisions necessary to reverse course, and temporize in general. Frustration grows. A sense of futility spreads. That's stagflation. Today's sequel -- call it Stagflation II -- has only started filming. There is still time to yell "Cut!" before the unhappy ending is upon us again. But will this president wake up in time? So far he's been sleeping through the opening scenes. Somebody needs to turn on the house lights and stop this production while there's still time. There's no shortage of decisive actions waiting to be taken. See the Bowles-Simpson report, with its list of ways to balance the budget. But there's little will to enact them. Somebody's favorite ox, or even calf, might be gored. And so the great ship that is the American economy stays on the same disastrous course, taking on water as it drifts toward ... the falls. Now, now, we're told, let's not be alarmist. There's nothing here that can't be explained away by the experts. Sure, inflation is growing ("February consumer prices up 0.5 percent" -- news item, March 18, 2011.) And the details behind the headline are scarcely assuring: "Consumer prices in the U.S. climbed more than forecast in February, led by the highest food prices since 2008 and rising fuel costs. The Consumer Price Index increased 0.5 percent, the most since June 2009, figures from the Labor Department showed Thursday in Washington...." But strip out the cost of fuel and food, we're assured, and "inflation is relatively subdued." That kind of unassuring assurance makes one wonder: Does whoever compiles these numbers pump his own gas or buy his own groceries? If so, hasn't he noticed what's happening? And it's happening to the core of the economy. For who can get by without food and fuel? What, Washington worry? The administration's budgeteers are still having fun with numbers. And still getting caught at it. To quote one, all too typical headline the other day: "Obama's budget is seen/ underestimating deficits." No kidding? Alas, at least for the administration, there's always some spoilsport around who insists on blowing the whistle: "WASHINGTON (Bloomberg News) -- President Barack Obama's 2012 budget would produce $2.3 trillion more in deficits over the next decade than the administration projects, according to the Congressional Budget Office." Is anybody surprised? What'll we find out next, that the projections for how much ObamaCare will cost are skewed, too? That won't surprise anybody who's been paying attention, either. As the economy hurtles on, following this too familiar script, what's most conspicuous -- by its absence -- is any constancy of purpose on the part of all the president's men. One day they're pushing an economic stimulus package -- Full speed ahead, inflation be damned! -- and the next issuing pro forma warnings about the danger of federal deficits out of control. There seems to be no single guiding principle at work, just a series of fits and starts in response to the crisis of the moment. In that respect, the president's economic policy matches his foreign policy: React to today's events rather than shape tomorrow's. It's hard to avoid the impression that once again the country is in the slippery grip of an ad-hocracy with no fixed purpose. But that's not quite right. This president does share one overriding concern with every other officeholder: his re-election. That seems to be his pole star; his every action is guided by it. If he has an ideology, that's it. The conspiracy theorists are wrong: Barack Obama isn't engaged in some insidious plot to turn the United States of America into just another European-style social democracy. That could be the result of all his twists and turns, but it's scarcely a conscious goal. It's just where we're drifting. And will continue to drift till the American people themselves wake up and decide to reverse course.