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The alternative story I’ve heard is that “stagflation” happened to coincide with a massive surge in oil prices due to OPEC — which are an input to just about ev

The alternative story I’ve heard is that “stagflation” happened to coincide with a massive surge in oil prices due to OPEC — which are an input to just about every product we use, hence increasing prices — and Volcker’s deflationary recession just happened to coincide with OPEC falling apart. But this alternative explanation seems so obviously different from the lesson in your post that it can’t be the full story, so I assume there’s some nuance.

mattrp 7y ago
The nuance is that fed chairs don’t criticize each other and with rare exception all come from the same elite club - much like Supreme Court justices. I think your assessment is more likely the actual reasons for the cause / end of simultaneous stagflation/inflation.
m0zg 7y ago
Same reason why the USSR collapsed, BTW. Oil prices collapsed by mid 80s, and the USSR couldn't survive for very long without those export revenues. Gorbachev took over just as oil prices have hit the bottom. And if you look at the same graphs, you will see that Putin's economic recovery was largely sustained by the upward trend in hydrocarbon prices. To this day Russia has not even begun to diversify its economy.
- rm_-rf_slash 7y ago
  A cynical counterargument would be to point to the taxpaying cybercriminals to show evidence towards Russia’s burgeoning tech sector. https://slate.com/technology/2018/02/why-the-russian-government-turns-a-blind-eye-to-cybercriminals.html https://slate.com/technology/2018/02/why-the-russian-governm...
  - m0zg 7y ago
    I'm pretty sure criminals pay no taxes on their ill gotten gains in Russia. Heck, most "legal" businessmen there are forced by the extreme oil-oriented taxation regime to maintain "gray" books and only pay taxes on revenues that aren't under the table. Normal businesses can't really survive the kinds of taxes levied on oil/gas monopolies. It is far easier to pay off your local friendly government tax agent who would then miraculously buy a Maybach and a villa in Switzerland on $20K/yr government salary.
- mattrp 7y ago
  Technically the ussr collapsed because externally it had to settle accounts in the US dollar and low oil prices - it’s only export - couldn’t provide sufficient hard currency to do this but your point is still correct. Reagan knew this and leveraged it to the maximum even to the point of ruining our own oil economy and increasing our reliance on and strengthening our “allies” in the Middle East some of whom we later had to topple and some of whom we still struggle with today. It’s notable that this lesson wasn’t lost on China who long resolved that it would never run out of hard currency the way the USSR did. Russia on the other hand... as you point out they can’t seem to realize a diversified economy is one that collaborates and is open.
  - m0zg 7y ago
    It's even worse than that. The ruling elite knows that on the one hand it's non-removable, but on the other its days are numbered (Putin is quite old and he won't live forever; what happens after he dies is anybody's guess), so they pillage and burn whatever they can while they can, with impunity. Diversifying the economy would require a long term view. The folks currently in power don't even realize anything is wrong per se - oil and gas money works pretty well for them.
nickbauman 7y ago
The economist Ha Joon Chang has written extensivly how a somewhat higher target interest rate, like 5-7%, is actually better overall than the super-low targets the fed has. Lower interest rates tend to favor financial incumbents because they make money anyway because they have more and can sit on it, which implies that the money isn't actually helping develop new value in the market.
- dragonwriter 7y ago
  > The economist Ha Joon Chang has written extensivly how a somewhat higher target interest rate, like 5-7%, is actually better overall than the super-low targets the fed has. Better for what circumstances? The Fed doesn't start with interest rate targets, they start with a dual mandate on employment and inflation control and set interest rates based on expected results based on that mandate, which can at times be high and are now low (which is mostly, currently, a sign of monetary policy compensating for an extended period of defective fiscal policy.)
  - mattrp 7y ago
    Inflation is the only mandate. There’s been a lot of discussion about whether employment should play into their role. When it does creep in it’s around now outdated discussions about whether going beyond so called full employment causes inflation to rise. Clinton was the first to get a fed chair to admit there was no such thing as full employment and later it was Yellen who really pushed fed policy to ignore employment levels. There are some out there who say we are playing with fire by not targeting an employment number and that sometimes includes me but then I think about the woman in the street I saw about a year ago. At first I was worried she’d been robbed or attacked, she was yelling really loudly but as I got closer I realized she was yelling that she’d finally gotten a job. That would probably never had happened under a fed that targets an arbitrary 5% unemployment Figure and that is one of the many criticisms I’ve had for past fed actions that have ignored the little man by playing god up in their star chamber.
    - dragonwriter 7y ago
pdonis 7y ago
The nuance, if you want to call it that, is that you can't do controlled experiments with the actual world economy, so we don't know what caused stagflation or what caused it to end. We can't go back and re-run the experiment and do something different (don't raise interest rates, or keep OPEC from collapsing) to see if it changes the outcome. It's notable that you use the word "story": that is exactly the right word. These are stories we tell ourselves to try to make sense of what happened. But we should not mistake them for actual knowledge that would allow us to predict what will happen in the future. It isn't.
roenxi 7y ago
This goes to a basic framing issue that crops up all the time in economics. [Situation] => [Authorities Do Something] => [New Situation] then everyone assumes that the authorities were primarily responsible for the change. It seems like pretty intuitive logic but it doesn't make any sense on inspection; people adjust to changing economic circumstances much faster than the authorities can change things. The situation will change quickly even if the authorities do nothing. Lessons that get 'learned' about crises and responding to them are probably a build-up of rain dances rather than actual knowledge. It is a situation primed to promote economic witchcraft. Nobody agrees with which parts of are the most cargo-culty because political groups generally support the stupid ideas which happen to favour them.
kennethh 7y ago
The increased oil prices were due to increase in the money supply after the Vietnam War. Money printing usually leads to increased prices of products. Nixon removed the fixed conversion of Dollar to Gold with the Nixon shock (https://en.wikipedia.org/wiki/Nixon_shock https://en.wikipedia.org/wiki/Nixon_shock) which made it possible to print even more money. The gold price increased from less than 200 in 1977 to over 800 in 1981 as a response to a lack of faith in the dollar.

mattrp 7y ago

The nuance is that fed chairs don’t criticize each other and with rare exception all come from the same elite club - much like Supreme Court justices. I think your assessment is more likely the actual reasons for the cause / end of simultaneous stagflation/inflation.

m0zg 7y ago

Same reason why the USSR collapsed, BTW. Oil prices collapsed by mid 80s, and the USSR couldn't survive for very long without those export revenues. Gorbachev took over just as oil prices have hit the bottom. And if you look at the same graphs, you will see that Putin's economic recovery was largely sustained by the upward trend in hydrocarbon prices. To this day Russia has not even begun to diversify its economy.

rm_-rf_slash 7y ago
A cynical counterargument would be to point to the taxpaying cybercriminals to show evidence towards Russia’s burgeoning tech sector. https://slate.com/technology/2018/02/why-the-russian-government-turns-a-blind-eye-to-cybercriminals.html https://slate.com/technology/2018/02/why-the-russian-governm...
- m0zg 7y ago
  I'm pretty sure criminals pay no taxes on their ill gotten gains in Russia. Heck, most "legal" businessmen there are forced by the extreme oil-oriented taxation regime to maintain "gray" books and only pay taxes on revenues that aren't under the table. Normal businesses can't really survive the kinds of taxes levied on oil/gas monopolies. It is far easier to pay off your local friendly government tax agent who would then miraculously buy a Maybach and a villa in Switzerland on $20K/yr government salary.
mattrp 7y ago
Technically the ussr collapsed because externally it had to settle accounts in the US dollar and low oil prices - it’s only export - couldn’t provide sufficient hard currency to do this but your point is still correct. Reagan knew this and leveraged it to the maximum even to the point of ruining our own oil economy and increasing our reliance on and strengthening our “allies” in the Middle East some of whom we later had to topple and some of whom we still struggle with today. It’s notable that this lesson wasn’t lost on China who long resolved that it would never run out of hard currency the way the USSR did. Russia on the other hand... as you point out they can’t seem to realize a diversified economy is one that collaborates and is open.
- m0zg 7y ago
  It's even worse than that. The ruling elite knows that on the one hand it's non-removable, but on the other its days are numbered (Putin is quite old and he won't live forever; what happens after he dies is anybody's guess), so they pillage and burn whatever they can while they can, with impunity. Diversifying the economy would require a long term view. The folks currently in power don't even realize anything is wrong per se - oil and gas money works pretty well for them.

nickbauman 7y ago

The economist Ha Joon Chang has written extensivly how a somewhat higher target interest rate, like 5-7%, is actually better overall than the super-low targets the fed has. Lower interest rates tend to favor financial incumbents because they make money anyway because they have more and can sit on it, which implies that the money isn't actually helping develop new value in the market.

dragonwriter 7y ago
> The economist Ha Joon Chang has written extensivly how a somewhat higher target interest rate, like 5-7%, is actually better overall than the super-low targets the fed has. Better for what circumstances? The Fed doesn't start with interest rate targets, they start with a dual mandate on employment and inflation control and set interest rates based on expected results based on that mandate, which can at times be high and are now low (which is mostly, currently, a sign of monetary policy compensating for an extended period of defective fiscal policy.)
- mattrp 7y ago
  Inflation is the only mandate. There’s been a lot of discussion about whether employment should play into their role. When it does creep in it’s around now outdated discussions about whether going beyond so called full employment causes inflation to rise. Clinton was the first to get a fed chair to admit there was no such thing as full employment and later it was Yellen who really pushed fed policy to ignore employment levels. There are some out there who say we are playing with fire by not targeting an employment number and that sometimes includes me but then I think about the woman in the street I saw about a year ago. At first I was worried she’d been robbed or attacked, she was yelling really loudly but as I got closer I realized she was yelling that she’d finally gotten a job. That would probably never had happened under a fed that targets an arbitrary 5% unemployment Figure and that is one of the many criticisms I’ve had for past fed actions that have ignored the little man by playing god up in their star chamber.
  - dragonwriter 7y ago

pdonis 7y ago

The nuance, if you want to call it that, is that you can't do controlled experiments with the actual world economy, so we don't know what caused stagflation or what caused it to end. We can't go back and re-run the experiment and do something different (don't raise interest rates, or keep OPEC from collapsing) to see if it changes the outcome. It's notable that you use the word "story": that is exactly the right word. These are stories we tell ourselves to try to make sense of what happened. But we should not mistake them for actual knowledge that would allow us to predict what will happen in the future. It isn't.

roenxi 7y ago

This goes to a basic framing issue that crops up all the time in economics. [Situation] => [Authorities Do Something] => [New Situation] then everyone assumes that the authorities were primarily responsible for the change. It seems like pretty intuitive logic but it doesn't make any sense on inspection; people adjust to changing economic circumstances much faster than the authorities can change things. The situation will change quickly even if the authorities do nothing. Lessons that get 'learned' about crises and responding to them are probably a build-up of rain dances rather than actual knowledge. It is a situation primed to promote economic witchcraft. Nobody agrees with which parts of are the most cargo-culty because political groups generally support the stupid ideas which happen to favour them.

kennethh 7y ago

The increased oil prices were due to increase in the money supply after the Vietnam War. Money printing usually leads to increased prices of products. Nixon removed the fixed conversion of Dollar to Gold with the Nixon shock (https://en.wikipedia.org/wiki/Nixon_shock https://en.wikipedia.org/wiki/Nixon_shock) which made it possible to print even more money. The gold price increased from less than 200 in 1977 to over 800 in 1981 as a response to a lack of faith in the dollar.