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Monday, August 29, 2011

This Is Not The 70's

The typical relationship between unemployment and inflation is contrary (so to speak.)  High or growing unemployment is usually associated with low or falling inflation.  Such is the case now, to an extreme level.

A historical aberration occurred in the late 70's, when we had high unemployment and high inflation together. The name for this condition was the cleverly contracted portmanteau, STAGFLATION.  This is qualitatively defined as a period of high inflation and slow growth.  I haven't seen a quantitative definition, so I made one up.

StagflationAn economic realm characterized by unemployment that is above the long term average level, coupled with inflation that is more than 1.5* the long term average level.  For the period January, 1948 through April, 2011, these average values are 5.7% and 3.72%, respectively.  The CPI benchmark value is then 5.58%.    Coincidentally, these values are so close that they collapse to a single horizontal line on the graph below.   CPI inflation, 12 Mo RoC, is in green.  Unemployment is color coded in Blue and Red, by president's political party. 



My definition is arbitrary.  Feel free to pick one you like better.  But it is easy to see that the stagflationary period of October, '74 to August, '82, is unique in the post WW II era, though there was a near miss in December, 1970, when the two criteria crossed right at the defined border.

Inflationary peaks occurred in Feb. '70, Nov. 74, and Apr. '80.   Unemployment made a high, broad peak at 5.9 to 6.1% from Nov. '70 through Dec. '71.  Other sharp peaks followed in May, '75 and Dec. '82.  During this period, the typical contrary motion did not occur.  Instead, the two measures moved more or less together, with inflation peaks leading unemployment peaks by 6 to 30 months.
 
As a side note, you can see that every Rethug administration leads immediately to higher unemployment.  It's mixed with the Dems.  Kennedy-Johnson and Billy-Bob both brought unemployment consistently down during their administrations.  Carter gave us a down-up sequence, and B. Hoover Obama might give us a down to follow his initial up, if he is extremely lucky.

But, since Obama is an Eisenhower Republican, and the Fed is powerless to fight deflation, I'm not going to hold my breath.
.

8 comments:

Troy said...

It's my thesis that the 1970s inflation was caused by the baby boom entering their spending & borrowing years.

It took a while for the system to catch up with the new reality, but the decade still in fact added 30M jobs, same as it did in the 1980s and 1990s, but without the growth in real debt of the 1980s.

The Fed was fighting this inflation with high interest rates, and this caused the major recessions of the 1970s.

BadTux said...

I would state that there are three events in the 1970's which are most decidedly not today:

1) The winding down of the Vietnam War and the ending of the draft, which directly added over a million young men to the workforce.

2) The oil shock of 1973

3) The oil shock of 1978.

The first one, perhaps reflected starting in the late 1970 figures for unemployment, happens after every war. We see it in 1919 and in 1946 also. Add in the fact that the recently-demobilized have likely also banked significant sums of money while deployed overseas and want to spend it, and you get higher demand combined with higher unemployment. This, BTW, also explains why the Cold War demobilization in the early 1990's had similar effects.

The next two are resource constraints. Economies that are resource-constrained -- which cannot increase economic activity due to lack of critical resources -- behave in a completely different way (I might say non-Keynesian way though Keynes certainly was aware of resource constraints) from those that are demand-constrained (i.e., that have slack resources but no demand to utilize those resources).

So, let's look at the current situation:

1) We're not demobilizing -- while men are coming home from Iraq and Afghanistan, they're coming home to train and prepare for the next war, we're not seeing a reduction in military manpower.

2) We have plentiful unemployed people (slack resources), and we have sufficient oil and other resources to employ them if there were demand.

In other words, at present we are demand constrained, which is completely different from the situation of the late 1970's where we were resource constrained. And in my view that is the fundamental difference between then, and now, that makes Keynesian remedies appropriate now when they weren't then.

- Badtux the Fundamentals Penguin

Stagflationary Mark said...

Here's my take on it. I think it is safe to say that we agree here.

October 28, 2010
This Is Not the 1970s

Hahaha! :)

You might also get a kick out of this.

August 20, 2011
The Perfect Trade for the 1970s?

Long gold.
Short treasuries.

As seen in the chart, that trade has gone pretty much nowhere since investors were able to speculate on both GLD and TBT simultaneously. In other words, those who felt we were duplicating the 1970s are more than a bit confused right now.

Jazzbumpa said...

Troy -

That's a reasonable narrative, as far as it goes. I'm an early boomer - Dec. '46. The peak birth rate was in '57 - so those kids started hitting the work force around the late 70's.

Tux fills it in with the more generally recognized economic explanation.

Mark - Fortunately, there is no copyright on titles ;-)

Cheers!
JzB

Stagflationary Mark said...

Mark - Fortunately, there is no copyright on titles ;-)

Please tell me your next post doesn't involve real deflationary men. ;)

Real Deflationary Men Don't Work!

The Arthurian said...

Very good, Tux. You have plugged a hole with the winding-down of the VietNam war. So now your stagflation story accounts for all three of the big inflation peaks (1970, 1974, 1980).

But what accounts for the increasing minimums?

Jazz, looking at the long-term averages ("the period January, 1948 through April, 2011") defeats the point of the analysis. Look at your same data in a different graph: the Phillips curve. Noah has a good one (the second graph here).

I repeat the question.

It doesn't matter that the behavior is contrary. What matters is that *both* trend lines went up. What matters (today) is we can bring down one or the other, but not *both*. Our economic policies work like squeezing a balloon.

The Arthurian said...

Two petty clarifications:

Where I wrote "What matters is that *both* trend lines went up"
you should take this to mean that both short- or medium-term averages went up. Obviously the lines go up (and down).

Where I wrote "What matters (today) is..."
you should take this to mean "It was true until the crisis that..."

Jazzbumpa said...

Art -

The long term averages provide a benchmark to determine what is and is not stagflation. Rather than defeating the point of the analysis, they give it an anchor.

Mark -

My next post doesn't involve real deflationary men.

Cheers!
JzB