Stagflation: Causes and Solutions

Stagflation is a combination of increased inflation, reduced demand and increased unemployment. We might think that this would be impossible. When unemployment increases, decreasing demand for consumer goods should cause deflation of prices of consumer goods. Similarly when unemployment decreases, prices should increase in response to higher demand.

Trade with Foreign Countries

But stagflation occurred during the Carter administration and is occurring now. In both cases, stagflation is the result of our trade with foreign countries. We purchase more petroleum from abroad because our consumption in increasing while our domestic supply is decreasing. We purchase more manufactured goods from abroad because we have reduced tariffs which used to protect our domestic producers from foreign producers who pay lower wages and pay less environmental and other social costs. We are also outsourcing service jobs to foreign countries.

Causes of Inflation.

When petroleum prices increase as occurred in the 1970s and is occurring now, increased energy and transportation costs cause increased prices of other goods. As we attempt to substitute ethanol made from grain for gasoline, the prices of our food which include or depend on grain increase.

Our inadequate maintenance and improvement of our physical infrastructure causes increased transportation and communication inefficiencies and costs. The poor quality education that many of our students receive produces labor inefficiencies and costs. Too little competition among colleges and universities increases costs. Receiving little student assistance from our government, many high school graduates can’t afford to attend college. Less educated labor imposes costs on producers.

Our unique health care system which depends upon private insurance coverage is producing out-of-control cost increases, inefficiencies and inadequate care for many of us. Sick people increase both health care and labor costs.

Our producers also face job (FICA) taxes and health insurance costs not shared by their foreign competitors. This increases their prices, reduces their competitiveness and reduces the numbers of workers they employ.

The Deregulation which began during the Carter administration has introduced huge inefficiencies into our economy. In many industries, competition has declined, resulting in price increases. Savings and loan, dot.com and housing bubbles have occurred, producing much inefficient investment. Corruption has hugely increased, resulting in negative effects upon our environment, our quality of consumer goods, the treatment of our workers and our shareholders. One major form of deregulation has been the deterioration of labor rights to unionize and bargain. Another cost of inadequate regulation has been corporate rigging of the books to deceive investors, resulting in bankruptcies which impose enormous costs upon investors and employees.

The contracting out of government services without competitive bidders to campaign contributors by our Bush administration has produced huge inefficiencies, including over-billing, poor quality services and mistreatment of labor. Government payments for services we don’t receive is a form of inflation.

So is earmarked pork (by most members of both political parties) which forces our government to buy unneeded services from campaign contributors.

Our Occupation of Iraq, military spending not oriented to dangers we face, and many internal security measures are spending enormous sums, creating additional long term costs and diverting workers from productive domestic jobs to military service abroad. As our government borrows from aboard, interest payments are a further drain on our economy, increasing our costs and reducing our demand for domestic goods and service.

Causes of Unemployment

Our increased purchase of foreign goods and services is draining money from our economy, resulting in reduced domestic demand and employment.

As people consume oil and other goods dependent upon oil, they have less money to spend for other goods. Money is drained off to oil producing countries abroad Demand for domestic consumer goods and services declines. Unemployment increases.

We are also experiencing increased competition from foreign countries in East and South Asia, Mexico and other low wage countries. This dampens inflation. But money and jobs are drained off to foreign producers. Reduced demand for American goods causes increased unemployment. Unemployment is also increased as service jobs are outsourced to other countries.

Wages (in real terms) for most Americans have stagnated or declined during the last 30 years. Even with more family members seeking work and borrowing heavily through credit cards and home equity, family incomes have stagnated. A lesser proportion of us have middle incomes, as some are receiving higher incomes and many are receiving lower incomes. This has been aggravated by tax decreases for our wealthy and reduced support for our poor. The higher a person’s income and wealth, the less the proportion they spend upon domestic consumer goods and services. Our increasing financial inequality is reducing our demand and increasing our unemployment. For more. For more.

Contrary to Conservative claims, the Bush income and estate tax cuts oriented heavily toward our wealthy have harmed our economy, producing the slowest economic growth in decades. The proposed tax stimulus package will similarly provide inadequate stimulus. For more.

To Stop Stagflation

The above examination of factors producing stagflation suggests these remedies:

· Prioritize our internal security measures based upon likelihood and magnitude of threats.

· Restrict our national guard to internal security duties, except for congressionally declared foreign emergencies.

· Support creation of an international justice and peace capability, so we aren’t tempted to police the world.

· Downsize our military to orient only to probable military challenges.

· Bring our troops home from Iraq.

· Reduce consumption of foreign oil through conservation, recycling and alternative energies.

· Invest in producing alternative energies

· Invest in producing vehicles and other machines which conserve energy and use sustainable energy.

· Use grains to provide food instead of fuel.

· Protect our environment to deduce public costs.

· Invest to maintain and enhance our physical infrastructure.

· Invest to provide quality care and education to every child and person from birth throughout their life.

· Provide sufficient educational assistance to qualified students.

· Invest to provide quality cost controlled health care to all.

· Allow our government to bargain with health care providers.

· Substitute public health care insurance for private insurance.

· Substitute consumption taxes for job (FICA) taxes.

· Restore and enhance worker rights, including especially the rights to unionize and bargain.

· Create a fair progressive income tax which doesn’t contribute to unwarranted financial inequality.

· Create measures to provide adequate incomes to workers and disabled people.

· Regulate industries and businesses to restore appropriate competition; reduce corruption; prevent bubbles; and protect our employees, investors, suppliers, consumers and environment.

· Eliminate privatization of government work, with no-bid contracts to campaign contributors.

· Eliminate both Republican and Democratic earmarked pork contracts to campaign contributors.

· Regulate foreign trade to require competitors to improve their labor, consumer and environmental standards.

· Ease immigration of needed students and workers to our county.

The government can be a problem through doing too much or too little. It is a necessary solution to many of our challenges.