A stagflation far from the crisis of the 1970s

History of a concept. Although it also works very well in French, the term “stagflation” is an anglicism. Its first known occurrence dates from November 17, 1965 when, before the British House of Commons, Iain Macleod, responsible for economic affairs in the “shadow cabinet” of the Conservative opposition, denounced the crisis which was then affecting the British economy: “We now have the worst of both worlds – not just inflation on one side and stagnation on the other, but both together. We have a kind of situation that we could call “stagflation”. »

The term is taken up by economists to designate the unprecedented situation experienced by the world economy from the beginning of the 1970s, recalls the World Bank in its latest Global Economic Outlook (Global Economic Prospects, June 2022). From 1962 to 1972, the average annual inflation rate was 3.6%; it soared to 10.3% in 1973 with the first oil shock, and averaged 11.3% from 1973 to 1983. 5.5% from 1960 to 1970 – drop to 4.1% from 1970 to 1980. It even went into recession (decline in activity for at least two consecutive semesters) in 1975 and 1982.

The problem is that the economic theory then dominant, inherited from Keynesian analysis, considers that it is impossible to experience inflation and economic stagnation simultaneously. The latter occurs in fact, according to the theory, at the end of a production cycle, when companies, unable to renew their supply or because of an external shock (war or financial crash, for example) no longer find takers. on the market, give up investing and lay off workers: for lack of demand, prices fall until demand picks up again.

This is why Keynesian policies consist in inflating demand by substituting public expenditure (public investment, subsidies to companies, allocations to households) for failing private expenditure. Conversely, the rise in prices occurs when growth picks up again, when companies offer innovative products to a demanding market and generate significant margins allowing them to invest, explains the economist Cristina Peicuti, author with Jean-Marc Daniel of Understanding economic crises (PUF, 256 pages, 14 euros).

Restoring the “natural balance”

Economists then “discovered” an explanation for the paradox of stagflation. It is precisely the public expenditure to support demand, and the voluntary maintenance of low interest rates to facilitate credit, which creates an excess of liquidity in relation to the “real” value of production: this difference he natural balance between price and production distorts the expectations of economic agents, generates inflation and hinders growth.

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