Waiting for stagflation

Krugman wrote about the "stagflation myth" as favoured by conservative economists in June 2009:

Ever since Reagan, conservatives have been using the evils of stagflation to denounce liberal economic policies. Yet mainstream economics — even at Chicago — has never made that connection.

Stagflation was a term coined by Paul Samuelson to describe the combination of high inflation and high unemployment. The era of stagflation in America began in 1974 and ended in the early 80s. Why did it happen?

Well, the textbooks basically invoke two factors. One was a series of “adverse supply shocks”, mainly the huge runup in the price of oil. The other was excessively expansionary monetary policy, especially in 1972-3, which allowed expectations of inflation to become entrenched. (Ken Rogoff — a Republican, by the way — attributes that expansion to the desire of Arthur Burns to see Richard Nixon reelected.)

The appearance of stagflation was a win for conservative economics, but it was conservative monetary economics that was partly vindicated: Milton Friedman’s assertion that there is no long-run tradeoff between inflation and unemployment turned out to be correct, and is now part of the standard canon.

But where is the Great Society in all this? Nowhere. The claim that stagflation proved the badness of liberal ideas is pure propaganda, which not even conservative economists believe.

Two years later, anti-Keynesian and all round hater of taxes and government spending Sinclair Davidson gave "stagflation" for Australia a run on The Bolt Report and The Drum:

It is the consequence of pursuing Keynesian economic policy. It should come as no surprise that the return of Keynesianism during and after the Global Financial Crisis could see the return of stagflation.

In 2007 Kevin Rudd argued, 'this reckless spending must stop'. He was quite right then, he would be even more correct today. The Australian economy is in trouble – according to the Australian Bureau of Statistics (ABS), the first quarter of 2011 experienced negative growth. Second quarter figures will be published in early September. This week the ABS reported that inflation is well above the Reserve Bank's two to three per cent inflation target.

Normally an inflation result like that would see an increase in official interest rates. After all the previous inflation figures were also on the high side. But the economy is very sluggish at the moment. A second consecutive quarter of negative growth would mean that the economy is officially in a recession.

 So what has happened to inflation since then?:

 Hmm.  Looks like inflation is under tight control.  

When asked today, about 20 months after his stagflation warning, we get this, in Catallaxy:

How is your stagflation call going anyway, Sinc?

Going well. The economy is stagnant, unemployment rising, cost of living amongst the highest in the world. Interest rates almost back at the depths of the GFC. The Americans are yet to unravel their QE. I don’t why you’re so happy – it brings me no joy.

So in the absence of actual inflation, you can just substitute "high cost of living"?  

 

What's also interesting is the anti-Keynesian spin put on it.    Yet when I Google on the topic of stagflation, I find that there has been a sudden recent burst of stagflation warnings from the UK:

Indeed, Britain has suffered persistently from higher inflation than any other advanced economy since the financial crisis struck. Unlike in the US and the eurozone, where inflation has remained broadly on track, inflation has been above the BoE’s 2 per cent target since the end of 2009, rising as high as 5.2 per cent in the autumn of 2011.     

So the country which gone much further down the anti-Keynesian "austerity" path than the US is the one facing potential "stagflation".

Looks like a theoretical "fail" too, then; not just a practical one.