Category: Economics

ECONOGAL > Economics

Is Stagflation on the Horizon?

Posted on by Econogal

An Unusual Economic Condition

Stagflation last appeared in the United States of America during the 1970s. The economic condition combines high inflation rates with high unemployment. As most students of economics know, these two functions of the economy usually are inverse to each other. When they act in unison there is strain on the economy, and we call the result stagflation.

Stagflation in the 1970s

Rapidly rising prices combined with wage freezes and layoffs created hardship for most of the 1970s. As a result, Arthur Okun devised a way to measure stagflation. The Misery Index at its’ simplest equation is easy to calculate:

Misery Index= Seasonally Adjusted Rate of Employment + Annual Inflation Rate

Much like the Inflation Rate Challenge of a few years ago, I plan to track the Misery Index throughout 2025. Currently the number reads normal. Thus, the January numbers do not indicate stagflation. However, they are just at the top end of the range. The Seasonally Adjusted Rate of Employment for January 2025 was 4% and the Annual Inflation Rate in January was reported at 3%. So, the numbers bear watching. We start with the Misery Index at 7%. Again, that number reads more like a normally functioning economy, not one experiencing stagflation. But these particular rates are lagging indicators.

Plain Old Inflation

We may just go through another rapid period of inflation similar to that of a few years ago. This time the supply shocks most likely will stem from a combination of tariffs and agricultural woes. Drought and disease are just two factors. Most farmers will agree there is climate change. The argument stems on the cause of the changing weather. But everyone can agree the unknowns of weather patterns have a great impact on farm production.

So, I plan to revisit the Inflation Check Challenge. I will keep some of the items from before. But I am now paying $8.00 for a dozen eggs so those will be watched as well. The first check will be after the February employment and inflation numbers are out so The Misery Index can be tracked, too.

Prediction on Stagflation vs. Inflation

There are a lot of ifs and maybes involved in predicting which way the economy will flow. Current variables include the impact of tariffs, the severity of governmental layoffs as well as private industry slowdowns. Personally, I don’t know of anyone laid off, just of hours cut. Furthermore, how other countries react to the tariffs is unknown.

Countries enjoying unfair competitive advantage can make more concessions than those who believe historical exchanges fall into the Fair-Trade category. Politics comes into play as well as does ongoing military conflict.

Governmental cuts, whether labor or goods, will tend toward a recessionary effect. These cuts are necessary as anyone looking at the Debt Clock can see. (For those who have not checked on the clock in a while, the powers-that-be have added a DOGE component.) The Federal Deficit is near a tipping point which, if reached, will make stagflation look pleasant.

So, while I am certain we will have inflation, I think we will also experience a recession. Thus, the country will undergo stagflation once again.

We can no longer kick the can down the road. In the short-term things will be ugly. But if we do not get the deficit under control, the dollar is in danger of default. And the strength of the U.S.A. will plummet. The country came together after 9/11. Can a unified response to the fiscal mess we are in occur? I hope so, but I do have doubts.

Help Wanted vs. 32-Hour Work Week

Posted on by Econogal

Help wanted signs are everywhere so I was surprised to hear of a suggested 32-hour work week yesterday on the radio. Senator Bernie Sanders from Vermont is calling for the mandatory reduction in hours along with an increase in the minimum wage to $17.00 an hour. On the surface the idea will sound great to many. But, as always there are costs to a regulated market. Even the labor market.

Free Markets

The concept of free markets is a major contributor to the economic success of the United States as well as most other developed nations. In a free market, prices adjust due to supply and demand. Economic theories are complex and include ideas such as price stickiness and stagflation. But overall, the concepts work. If there is a shortage buyers pay more. When there is a glut suppliers need to cut prices or products languish in warehouses.

Wages represent the price of labor. Help wanted signs are signals that the labor market is not in equilibrium. So, more workers are needed than are willing to work. In a free market situation, wages are increased to the point more individuals are enticed to work. To a certain extent, the process works.

Help Wanted

However, other factors are impacting the labor market. Covid-19, Baby Boomers retirement, child care costs and government policy are all limiting the availability of workers. The combination of factors is having an adverse effect. There are too many reasons to not work whether one is young or old. Perhaps AI (Artificial Intelligence) will take up the slack. But for the present, we have a labor shortage. Hence the Help Wanted signs.

So, businesses respond by cutting hours of operation or even services in general. This results in disgruntled consumers. A vicious cycle begins.

32-Hour Work Week

So as a retired economics instructor I was taken aback by Senator Sanders’ proposal of a 32-Hour work week. In my opinion this is a recipe for disaster. We already have a labor shortage. Fewer hours worked, no matter how productive those hours, means an additional drain on the labor supply.

Certain industries absolutely cannot work with a shortened work week. Just-in-time industries such as fast-food restaurants don’t benefit from a shorter work week. Hamburgers can’t be “saved” for future use. Other industries such as accounting do not benefit from a 32-Hour work week either. Taxes are due when they are due. The same holds true for the legal system. Farmers certainly can’t stop the tractors and combines once the 32-hour mark rolls by.  I could go on and on.

Unfortunately, many states have K-12 systems that are prepping society for a 32-Hour work week. My local school system went to just four days a week about a decade ago. I still think this is a bad idea. Perhaps schools in Vermont where Senator Sanders is from are all on a four-day schedule.

Before retiring to focus on writing I worked in excess of 40 hours a week on a regular basis. My spouse still goes into the office on Saturday mornings. This is in addition to the longer than eight hours during the week. Workaholics? Maybe, but the quality and quantity of work is a positive. Things get done. Service-good service- is provided.

Work Ethic Needed

I am sure Senator Sanders is well intentioned. But I still disagree with his proposal. Our society needs to value the work ethic of its’ labor force. Under a free market, wages will respond to this ideal. Even if it means a period of time dotted with Help Wanted signs. Perhaps it is my Protestant upbringing, but I feel strongly that each individual needs to contribute to society through work.

An umbrella of social services is needed for those who cannot help themselves. BUT, our umbrella is too large. My experience has witnessed severely physically handicapped individuals doing their utmost to contribute somehow and in some way.

Too many individuals not in this category are opting out of work and out of society. Could this unwillingness to provide labor be responsible for our increase in violence? Perhaps. I believe happiness comes from within. If one has not accomplished even a simple task, can one develop this inner emotion? Satisfaction with one’s work plays a key role. But my understanding of psychology is limited. I will stick to economic markets. Help Wanted signs do not equate to a 32-Hour work week.