economies suffered both stagnant growth and high inflation – quickly termed stagflation. The reason was simple. Keynesian stimulus worked well when the problem was insufficient demand – cutting interest rates would make people spend more thus restoring growth. In the early 1970s, though, the problem was supply – the lack of competition was beginning to tell. In the immediate postwar decades, the reallocation of labour to more productive sectors, coupled with greater capital investment and more effective production techniques, had allowed supply to keep pace with strong demand. Now, inefficient
economies suffered both stagnant growth and high inflation – quickly termed stagflation. The reason was simple. Keynesian stimulus worked well when the problem was insufficient demand – cutting interest rates would make people spend more thus restoring growth. In the early 1970s, though, the problem was supply – the lack of competition was beginning to tell. In the immediate postwar decades, the reallocation of labour to more productive sectors, coupled with greater capital investment and more effective production techniques, had allowed supply to keep pace with strong demand. Now, inefficient management practices and overstaffing began to limit what could be supplied at a price people would pay. More demand stimulus under such conditions would just result in more inflation, not more growth. The misery index, the sum of the annual inflation rate and the unemployment rate, climbed across the developed world. It reached its highest level in the postwar United States under President Jimmy Carter. Taming inflation was now a political imperative. Carter appointed Paul Volcker as chairman of the Federal Reserve, and Volcker embarked on a no-holds- barred fight against inflation, raising the federal funds interest rate to 19.1 per cent in 1981, a level that had not been seen postwar (or since). That did the job, though the United States suffered a double-dip recession. As the United States brought inflation under control, central banks across the world made low and stable inflati...
...more
This highlight has been truncated due to consecutive passage length restrictions.
Stagflation & misery index
