What were the factors that led to stagflation in the United States during the 1970s?
score:6
I don't disagree with @T.E.D's answer, but I think there is an alternative explanation that is a bit more succinct.
The short answer that my econ profs gave is that although in theory wages can be treated as a good (the price rises when in short supply, and falls when in surplus), wages are "sticky downward" - there are legal and practical reasons why the price of labor does not fall. Stagflation occurs when the economy wants to shrink, but the price of labor cannot fall. In the 70's there was a continuous upward pressure on the price of labor, driven by cost of living agreements and unions. This continuous upward pressure created inflation. A variety of forces that are too complex and contentious to analyze succinctly imposed a downward pressure on productivity and economic growth. Stagflation was the economy's attempt to balance these two.
I also wanted to touch on the conclusion that we can ever run out of commodities; we can't. Take, as an example, energy. At the moment the premiere energy commodity is oil. As the world stock of oil depletes, the price will rise. When the price rises high enough (and when governments stop subsidizing cheap oil), the economy will substitute another energy commodity. Prior to 1800, the dominant energy commodity was either wood or human labor; then we switched to whale oil. As the price of whale oil rose, we switched to coal. Then when we discovered how to use oil, we switched to oil. I can't predict what we'll switch to next. While we may run out of a specific commodity, we'll never run out of "commodities" - at least as long as the government doesn't interfere.
Aside: Professor M. Salemi in his course "Money and Banking: What everyone should know" is rather adamant that no change in the price of a commodity can affect inflation. The course is available through the Great Courses series and from audible. I'm only partway through, but the portion I've consumed is clear and simple.
Upvote:2
It neither contradicts commons sense, nor basic economics.
In classic (micro) economics, every good can be represented by two curves: A supply curve and a demand curve, plotted against price for the good and amount sold. The point where the two curves intersect defines the natural market price for that good.
Now if some external event comes along to make that product more desirable (say there's a snowstorm coming, and you are selling snowshovels), what will happen is the whole demand curve shifts to the right. We say "demand has increased". This causes a shift of the intersection, such that more of the product gets sold at a higher price. There's a positive relation between prices and sales in this case.
Now, all else being equal, this will generally happen slowly across an entire economy if its population is growing. Thus (in the USA at least) we typically expect to see a positive relation between inflation (prices) and economic growth and employment (amount of goods being made and sold). If there's some kind of hiccup (eg: a recession), they will hiccup together.
However, if something instead comes along to make a product harder to supply, what will instead happen is that the supply line shifts back to the left. This causes a new intersection to occur at a higher price and a lower supply. When the supply side is impacted, the relation between prices and supply is inverse.
What happened during the 70's was that the supply of oil dropped drasticly. Since oil (in the form of transportation costs) is an input into practically every good sold, the supply curve of nearly every product was impacted. This caused both higher prices (inflation) and a lower production of goods (slow or no growth, unemployment, etc).
The effects weren't pleasant to live through (unless you were an oil producer), but nothing particularly mysterious was going on.
Upvote:2
There are at least five potential sources of inflation: 1) commodities inflation (oil prices) 2) wage inflation (unions) 3) monetary inflation (an "easy" Fed, until Volcker), 4) fiscal inflation (government spending) and 5) foreign exchange inflation (a falling dollar).
ALL of those factors contributed to U.S. inflation in the 1970s to varying degrees, a "legacy" of the Vietnam war. Seldom has that been the case at other times.
More post
- 📝 Evolution of destroyers
- 📝 Did monasteries hold land and collect rent in medieval Europe?
- 📝 Were any California presidios conquered?
- 📝 Is there a Chinese Intelligence Agency? Why is it not well known?
- 📝 When were soldiers compensated with land grants?
- 📝 Late 17th century colonial Anglican pastor
- 📝 Did Mithraism and other Roman cults surpass the original Greco-Roman religion in popularity before the rise of Christianity?
- 📝 Why does the US have many top-level web domains?
- 📝 Can you help me identify the rank and patch on this Royal Italian Army uniform?
- 📝 Why did Stalin push for the Great Purge against the Red Army in 1936?
- 📝 Why did China begin persecuting Falun Gong after tolerating the movement for nearly a decade?
- 📝 Why did Hitler order counter-attacks as late as 21/04/1945?
- 📝 How would I establish a value for these watches?
- 📝 What is the earliest archaeological evidence of silk presence in Ancient Rome?
- 📝 Did Western "New Imperialism" actually free slaves in Muslim lands?
- 📝 Would a Roman emperor during Pax Romana be recognised by Roman Britons as a king of Roman Britain?
- 📝 What does the skull and crossbones on the Nazi uniform represent?
- 📝 How close did Germany come to interdicting Soviet oil shipments from the Caucasus in 1942?
- 📝 What is the large blue object on the right in this picture showing Greek fire?
- 📝 Where is the bloodiest area with most deaths within a single day?
- 📝 How would a WW1 pilot signal a request to surrender in-flight?
- 📝 Has there ever a period in history when people were not killing each other?
- 📝 Which company offered this aircraft interior in the 60s?
- 📝 What did the Soviets know about the Hunger Plan during WWII?
- 📝 Was there and if so what was a northern silk road route from Khazaria to China?
- 📝 Did Erwin König Exist?
- 📝 What is the difference between a Division Pioneer and a Regimental Pioneer?
- 📝 Why was silage only invented in the 19th century?
- 📝 Who started trams in Delhi?
- 📝 Published History of Harvard
Source: stackoverflow.com
Search Posts
Related post
- 📝 What were the factors that led to stagflation in the United States during the 1970s?
- 📝 What were factors that led to a decline in bond yields during World War II given that the opposite should have happened?
- 📝 What events led to the fall of the Zhou Dynasty during the Warring States period?
- 📝 What were the factors that caused the world to move away from the Gold Standard in the 20th century?
- 📝 What were the factors that aided Margaret Thatcher in her victory against the trade unions when her predecessors failed?
- 📝 To what extent did Gandhi affect the factors that led to the partition of India?
- 📝 What factors led to the rise of political parties in the United States?
- 📝 What were the factors that caused debtors' prison to disappear in most parts of the world in the 20th century?
- 📝 What were the factors behind the lowest AAA corporate interest rate in U.S bond history during 1946?
- 📝 What factors contributed to the United States having a larger proportion of Jews than other British colonies?
- 📝 What were the incentives for war during the Warring States Period?
- 📝 To what extent has the United States become (in 1870) the nation that it originally set out to be?
- 📝 What drugs were used in England during the High Middle Ages?
- 📝 Is there any evidence to support the claim that the United States was "suckered into WW1" by Zionists, made by Benjamin Freedman in his 1961 speech?
- 📝 Why didn’t Japan attack the West Coast of the United States during World War II?
- 📝 What are the factors that caused the new world civilizations to be less technologically advanced than the old world?
- 📝 What led some people to (correctly) believe that there was no land under the ice cap at the North Pole?
- 📝 What disruptions were brought about by Islam that the Arabians saw so many victories?
- 📝 What were the reasons that the British colonies in North America rebelled but not others?
- 📝 What Factors Have Led to the Duration of US Copyrights Continuously Increasing?
- 📝 What was the liquor that was based on petrol which was produced in the USSR during the Second World War?
- 📝 What were the key factors to the fall of domestic socialism in the USA?
- 📝 What were the “passports” that diplomats requested when declaring war?
- 📝 Why did the states that were born out of the Louisiana purchase adopt a common law system, and not a civil law system?
- 📝 What factors discouraged the Nazis from focusing all their forces on the Caucasus region during Operation Barbarossa?
- 📝 How could it be that 80% of townspeople were farmers during the Edo period in Japan?
- 📝 What were the individual soldiers motivated by during World War 1?
- 📝 In the United States government, has there been cases that electoral colleges don't vote for the candidate the majority of their state voted for?
- 📝 What factors led to much higher US war bond sales and participation rates in WWII over that of WWI?
- 📝 Communication lag during the Age of Sail: what if enemy claimed that peace agreement was signed?
