How to solve the problem of stagflation?

Question

When the economy falls in a stagflation, the expansionary policies can help to reduce the unemployment rate. However, it will push the inflation even higher. Conversely, the contractionary policies can help to reduce the inflation rate due to the aggregate demand decreases. It however will drive the unemployment rate even further. How???????

Answer 1

It is a frustrating problem. Before the doctor prescribes the medicine, it is most important to find out the root cause, otherwise we may just be curing only the symptoms. The problem will still persist.

Stagflation has two parts: first is the stagnation when the growth is slow and unemployment is rising; and second is the inflation. I believe we cannot use standard conventional economic policies (expand or contract) to stop stagflation because this time round, stagflation happens for a different reason.

Let's first address inflation part. The wars are becoming costly. They drain money, and fighting terrorism with terror ignites more terrors. The fear factor is shooting through the roof, and thus the oil price rises with it. It is a chain effect that when the oil price goes up, the delivery cost, groceries, etc. follow. Therefore, the cost of living simply goes up. Note that it is a globalization type of economy these days; for example, China makes clothing for the rest of the world, and if China has a power failure, the rest of the world will have low clothing supply, and with given demand and low supply, price adjust itself higher. This fearful effect happens to the world, and so the rest of the world feels this effect upward price adjustment. Therefore, inflation exists.

Stagnation is due to the rising cost of labor when the cost of living rises due to oil scare, and the lower end type of manufacturing become unsuitable to be produced in places where labor cost is high. Therefore, these jobs are outsourced to area of the world where labor is significantly cheaper. For example, China becomes the world factories, and India becomes the global call centers. This is actually making economic sense for the consumers because no one wants to pay higher price for the same product. So we can see outsource reduce the jobs, and when no new jobs are created to offset the scenario, unemployment grows. As people become unemployed, they have less to spend, thus less spending to stimulate the economy. The economical growth slows down because all these reasons. Remember the sitcom, Malcolm in the middle, the family buy clothes for the 3 sons in an economical efficient manner: the eldest son pass his clothes to the second son, and the second son passes his to the third son, and so only the eldest son need to buy clothes. Same here, if US lose its manufacturing to other countries down the chain, it needs to invent new technologies, and move up higher in the food chain. US has spent too much money in wars and defense research (rank #1 in the world in Defense spending where Russia and China only spend a fraction of what US did), US should channel more funding to the other areas for economic growth. US used to be known for its invention of cars, telephone, transistor, etc. These seem to be yesteryear glory...we need to put in more efforts to keep this tradition of invention.

So now, when we see a better picture of the root cause of the stagflation problem that we are in, we can deal with it with an intelligent mind. Most importantly, stop the war and make sure not to start another one (Iran war). Promote new technology so that US stay ahead of others and produce high tech product that every one needs. Japanese Lexus make top rate cars where many people in the world buy. Canada RIM makes very secure communication product Blackberry that many people in the world buy. US should do the same. Forget about the lost outsourced jobs because American is not crazy about working $2 per day sewing clothes, and also we do not want to insist these jobs staying in US, so that we pay 10 higher that what the rest of the world is paying for clothes, electronics, etc.

We see the problem and we know the solution, but executing it is the most difficult part. Stopping the war....the president said that Iraq war will be left to the future US president to decide when US will pull back the troops. So it means not sooner than 2008. Currently, Iran war seems inevitable. Worse…many support the wars. So the oil scare persists, and inflation continues. There is no strong government support to promote new technologies and innovations like the other countries, so US is sliding behind, and not able to produce more cheaper but better products, or new killer applications that everyone needs. Probably, we need someone that can make the difference to turn the tides. So, cast your vote intelligently in 2008. I hope you vote for someone who can do all these important remedies to curb stagflation.

Answer 2

great question! each and every thing you have suggested with reference to the economic advisers opinion is the comparable that i'm receiving 2010 extra beneficial than fifty two% of all mortgages would be under water. The effect would be tough ! What Obama would not get... The Housing industry has the main suitable effect on our financial equipment! each and all the jobs that flow from housing = a hundred and fifty guy or woman jobs in line with factors, alongside with manufacturers, government, Contractors, Roofers, Painters, Plumbers, [Carpenters, Landscapers, Inspectors, sorting out Labs, Banks, Appraisers, Appraisers, Realtors, the record is extensive!........All Jobs! Obama needs to concentration on the "Housing industry" the great organization that quite desires the Presidents actual and committed interest. understand the very standard expectancies that we've for the President to honor. Restoring the actual factors Housing industry so we are able to flourish with jobs and stabilize the financial equipment!

Answer 3

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Answer 4

Simple, with Reaganomics or rather supply-side economics.

1) Cut Government expenditures
2) Reduce Government regulations on business
3) Cut taxes, especially marginal tax rates

Also the belief that the Fed does more harm than good when it changes the Money Supply in regards to liquidity, though this is this still debatable. (Monetarist view)