The American Economist Paul Krugmannwinner of Nobel Prize in Economicsanalyzed the global rise in prices and drew a parallel with the wave of inflation which took place in the 70s.
“In my experience, economic experts all too often suffer from saddo not give seasonal affective disordera form of depression that affects many people during the dark winter months, but rather 1970s analogy disordera propensity to react to any hint of inflation with the assertion that the stagflation of the 1970s has returned (1)”.
“There was a lot sad during the first years of Obama, with dire statements about the inflationary effects of budget deficits and the growth of the money supply. As I wrote at the time, such concerns were foolish in a depressed economy.”
“TO from 2021 we really had an inflationary spike, and it was not entirely foolish to worry that bringing inflation back to an acceptable level would require high unemployment, as it did after the 1970s. The most famous thing was Larry Summerswhich had gained a lot of credibility by correctly predicting the inflationary spike, predicted that disinflation would once again be extremely costly,” Krugman said in an opinion piece published in The New York Times.
“That second prediction hasn’t aged well; inflation has come down a lot without rising unemployment. But summers He hasn’t thrown in the towel. The inflation of the 1970s occurred in two waves, and summers recently released a chart purporting to show that the recent disinflation is following the same path as the disinflation of the mid-1970s, which we know was followed by a major double-dip. summers he soon found himself the target of fierce criticism, with some accusing him of “graphic crime”. But the important issue was not how the graph was constructed, but the lack of context. As you have pointed out mike konczalof the Roosevelt Institute, the disinflation mechanics of the mid-1970s were nothing like what we have seen recently. In the 1970s, disinflation was associated with rising unemployment, whereas this time it has been associated with falling unemployment,” he added.
In this framework, it suggests that the mechanism behind the disinflation of Biden”has been fundamentally different from the mechanism behind the disinflation of Ford”. “The story that most easily fits the facts is the ‘long transition’: the gradual resolution of the economic disruption caused by the covid and its aftermath,” he says.
For the economist, something that had enormous influence during the 1970s was the real price of energywhich, having risen during the 1973 Arab oil embargo, rose even higher after the Iranian revolution.
“You might think that since core inflation specifically excludes the direct cost of energy, it should not have been greatly affected by the price of oil. But energy prices have a significant indirect effect on other prices, because they affect the cost of energy. In addition, in the 1970s, many wage contracts included cost-of-living bonuses, so energy prices influenced wages. More subduedly, rising oil prices may have boosted inflation expectations, which in turn pushed up real prices.”argument.
“Having said that, inflation rose even before the second oil shock. Because? It is true that unemployment fell substantially after the 1974-75 recession, but it was still higher than it was in the 1960s. However, the US economy behaved as if it were somewhat overheated. Because? The conventional answer is that the natural rate of unemployment had risen, so the economy needed higher unemployment to keep inflation low. In fact, the Congressional Budget Office estimates that the natural rate increased substantially from the 1960s to the mid-1970s, before beginning a long decline,” adds Krugman.
“Therefore, at this time the data do not seem to support the view that we are on our way to anything like the experience of the late 1970sin which inflation crept up despite relatively high unemployment, let alone the kind of inflation explosion that followed the second oil shock Does this mean that we are out of the woods when it comes to inflation? Not necessarily. The economy continues to perform at a good pace, so there is a possibility that inflation could pick up again. And anyone who fully trusts current data or current analysis is a fool: if there is one thing that economists in recent years should have learned, it is the need to show some humility. It is quite possible that the data, the models, or both are missing key aspects of what is occurring,” he posted.
“But the idea that the 1970s provide a useful template for where we are now seems pretty flawed. We should study the 1970s and learn what we can from them. But making direct analogies between now and then is just SAD (SAD)”, ends the text.
* This article originally appeared in The New York Times.