Guess What? It's Still the Economy, Stupid.

Stagflation seems to be on everybody's mind today with the release of some new and dismal economic figures. I don't usually toot my own horn but I'm going to have to beg a moment's indulgence (promise I'll return to my normal humble self shortly) while I remind readers that I said it first here.

Back on January 6, 2008, here's what I wrote.

The economic news for the 4th quarter of 2007 is in and it is not good. That’s an understatement of massive proportions, by the way. It's actually dire and in ways that we haven't seen since the intractable combination of recession and inflation, known as stagflation in the 1970s...

...Sorry to be repetitive, but the point needs to be made that across the board economists and business writers fear a resurgent threat of inflation. Which means that we could be headed for something not seen since the late 1970s. Stagflation could be rearing its ugly head again.

Since writing that more and more economists, pundits and now journalists are seeing similar parallels and wondering the same thing.

In today's Washington Post, the editorial writer makes the same connection when he says this.

REMEMBER the "misery index"? During the frustrating 1970s, economists used it as a shorthand measure of the pain imposed by simultaneously rising consumer prices and joblessness. Simply adding up the inflation and unemployment rates roughly quantified "stagflation," a phenomenon that defied the economic theory under which inflation and recession were supposed to be mutually exclusive. The misery index averaged 16.27 during President Jimmy Carter's term, peaking at a post-1948 high of 21.98 in the middle of his unsuccessful 1980 reelection campaign. The best index since then was 5.74 in April 1998, under President Bill Clinton. It's been creeping up since, hitting 9.2 in January. The word "stagflation" is once again on the lips of serious economists.

Yup, that ugly word which defines an intractable economic situation where there is a slowdown at the same time as inflation rears its evil head. It's a situation that classical economists once thought to be impossible. Indeed, the cure for recession was to pump money into the economy to stimulate spending and growth. Conversely, the cure for inflation was to tighten monetary policy and credit to slow down the economy.

And that's what makes stagflation so impossibly stubborn to treat. What do you do when you can use neither of these options?

Fortunately, the Washington Post goes on to say the following.

Comparisons with the 1970s should not be overdone. Among the differences between now and then is that labor unions are much weaker today and are thus less able to bargain for higher wages, which companies pass on to consumers. The slowing economy should reduce inflation, in part because falling demand for oil will help moderate its price. Still, the talk of stagflation illustrates what was obvious even before the Fed began using rate cuts to stave off recession: U.S. monetary authorities have relatively little room to maneuver. The worry is that the economy will be sluggish in 2008 -- even though the Fed has pumped in all the cheaper money it could provide consistent with its anti-inflation mission, and maybe a little bit more.

Of course, the Washington Post, being congenitally myopic about free trade and economic matters, always gets something wrong. Interpreting weakened unions and stagnant wages as positive signs for the economy misses the boat entirely. You wonder whom the Misery Index was for? Certainly not for workers who have suffered flat wages for years, which was fine with the Post's business writers.

But if, as the Post claims, the bigger worry is sluggishness, then higher real wages will do more to stimulate growth and get the economy moving than would all the cheap money and tampering that the Fed is trying to do. Ultimately, the way to fight sluggish growth is to put higher wages in the pockets of workers so they can afford to buy things. That's because ours is a consumer based economy. So with a slowdown of consuming, the economy is dead in the water.

Moving on, another columnist, this time Paul Krugman from the New York Times, also weighed in today with a column on stagflation. Here's what he said.

Will the next president be the second coming of Jimmy Carter? Given Thursday’s economic headlines, full of dire warnings about the return of 1970s-style stagflation, you might think so.

But like the Washington Post, he thinks the case for a return to 1970s style stagflation might be overstated. There certainly are some similarities, including the economic slowdown coupled with rising unemployment at the same time as the rise of the inflation rate to 4.3 percent, the highest it's been in 20 years, fueled in large part by rising oil prices, now just over $100 a barrel - also an all time high. But Krugman thinks a more apt comparison might be with the first Bush slowdown in the 1990s.

Realistically, though, the parallels between the problems facing the U.S. economy now and those of the late-1970s aren’t that strong. That’s the good news.

The bad news is that the economy probably will look similar to, but worse than, the economy that undid the first President Bush. And it’s all too easy to see how the next president could suffer a political fate resembling that of both the elder Mr. Bush and Mr. Carter.

According to Krugman, the same conditions that we are seeing today were in play back in the late 80s and early 90s and caused the first Bush economic recession. Those conditions include financial problems at banks, the collapse of the real estate bubble and sluggish consumer spending due to high household debt. Only Krugman thinks it's going to be even worse this time because this real estate bubble is bigger, we have higher debt and much higher oil prices. In fact Krugman predicts that this rough patch will extend into the year 2010, a far less optimistic picture than the Washington Post's prediction that it will go into late 2008.

I'm not sure if anybody has a crystal ball here. But, as Krugman points out, unlike stagflation, for which there are no good solutions, weak spending is definitely treatable. He recommends a serious fiscal stimulus package consisting of public investment and aid to Americans in distress.

I'd add that public investment in the aging infrastructure, exploration of renewable energy alternatives, education, and health care would create jobs, stimulate the economy and also solve several other serious problems we have, not the least of which is global warming.

I agree, though, with Krugman that it will take political courage to withstand the entrenched philosophy of the Republican hard right that shrinking the government, doing nothing and cutting taxes are the only solutions regardless of the problem.

Democrats, to effectively fix the economy, solve our energy problems, strengthen our schools, fix our health care system and stop global warming while stimulating the economy and creating new jobs (in fact, whole new industries) will have to challenge the notion that the government is the problem. There is a role for an effectively run government. If the Republicans can't see that, it's time to tell the public it's because they don't run government effectively to start with.

Then, it's time to challenge the notion that you can't use tax money to further the common good or that it's somehow socialist to do so. There is nothing socialist about public-private partnerships to solve the problems that impact us all.

Indeed, involving private industry in market based solutions to our public problems is something most business people would welcome as much as ordinary wage earners. When the economy is sound and the quality of life is good, everybody benefits.

By the way, it also sounds like a plan to end the class warfare Republicans are fond of deploring while they themselves wage it.