Economist Paul Krugman explains why the US is a long way from the painful 'stagflation' of 1979

The word “stagflation” has a worst-of-both-worlds connotation — as in painful inflation combined with painful economic stagnation. It’s a word that conjures up thoughts of prices going through the roof while wages, promotions and job opportunities are in decline.

In 2022, prices are going through the roof, and the United States is seeing its worst inflation since the early 1980s. But liberal economist and New York Times opinion writer Paul Krugman, in his May 20 column, explains why the U.S. economy of 2022 is a long way from the stagflation of 1979 and 1980.

“When I talk to business groups these days,” Krugman explains, “the most commonly asked question is, ‘Are we headed for stagflation?’ I’m pretty sure they find my response unsatisfying, because I tell them it depends on their definition of the term. If they understand it to mean a period of rising unemployment combined with inflation that’s still too high, the answer is that there’s a very good chance that we’ll suffer from that malady for at least a few months. But if they’re referring to something like the extreme pain we suffered to close out the 1970s, it looks unlikely.”

Back in 1979, when Democrat and former Georgia Gov. Jimmy Carter was president, disco was huge — and one of the year’s disco smashes was Chic’s “Good Times,” famously sampled on the Sugarhill Gang’s “Rappers Delight” (an early hip-hop favorite) that year. But economically, many Americans obviously didn’t view 1979 and 1980 as good times. Angst surged along with prices, and voters took out their frustration on Carter when Ronald Reagan enjoyed a landslide victory in 1980’s presidential election and picked up 489 electoral votes in the Electoral College compared to only 49 for Carter.

Then, in the 1982 midterms, voters punished Reagan with a blue wave — only to give him a massive reelection victory in 1984. The phrase “It’s the economy, stupid” is associated with the 1992 presidential election, but those words were certainly applicable in 1980 and 1982.

“Look at 1979 to ’80, which illustrates what I suspect most people have in mind when they talk about stagflation,” Krugman recalls. “At the beginning of 1979, the United States already had 9% annual inflation; the surge in oil prices after the Iranian Revolution sent inflation well into double digits. The Federal Reserve, under Paul Volcker, responded with drastically tighter monetary policy, leading to a recession and a sharp rise in unemployment.”

Krugman continues, “The recession brought inflation down, but not enough. So, the Fed tightened the screws further, sending the economy into a double dip…. This finally did bring inflation down to around 4%, considered acceptable at the time, but at immense cost: Unemployment peaked at 10.8 % in 1982 and didn’t get back down to 1979 levels until 1987.”

In his column, Krugman has been arguing that the U.S. economy — all things considered, and even with inflation — is performing well under President Joe Biden, especially considering all the upheaval that COVID-19 pandemic has caused. Unemployment in the U.S. is way down; in April, the United States’ unemployment rate, according to the Bureau of Labor Statistics (BLS), was 3.6%.

The “consumer inflation expectations” of 2022, according to Krugman, are “nothing at all” like the inflation of 1979 and 1980.

“The public now expects high inflation for the near term but a return to normal inflation after that,” Krugman observes. “Financial markets, where you can extract implied inflation expectations from the spread between yields on bonds that are and aren’t indexed to consumer prices, are telling the same story: inflation today but not so much tomorrow. In short, inflation doesn’t seem to be entrenched; 2022 isn’t 1980.”

Krugman, however, predicts there will be “some rise in unemployment.”

“While we don’t seem to be in an inflationary spiral, many indicators suggest that the economy is currently running too hot to be consistent with price stability,” Krugman writes. “Higher wages are good, but they seem to be rising at an unsustainable pace…. So, the Fed has to do what it’s doing, raising interest rates to cool things down — and it’s hard to see how that cooling happens without at least some increase in the unemployment rate.”

Krugman wraps up his column by stressing that while the U.S. may or may not enter a recession in the months ahead, the economic conditions of 2022 are far from the stagflation of 1979 and 1980.

“When people hear ‘stagflation,’ most think of the late 1970s and early ’80s,” Krugman writes. “But there’s no evidence that we’re facing anything comparable now.”