For those of you who are nostalgic for the Carter years, Lawrence Summers warns about the prospective return of one of the signal features of those years—stagflation:
My concern rests on several considerations. First, even though financial repair had largely taken place four years ago, recovery has kept up only with population growth and normal productivity growth in the United States and has been worse elsewhere in the industrial world.
Second, manifestly unsustainable bubbles and loosening of credit standards during the middle of the past decade along with very easy money were sufficient to drive only moderate economic growth.
Third, short-term interest rates are severely constrained by the zero lower bound: real rates may not be able to fall far enough to spur enough investment to lead to full employment.
Fourth, in such situations falling or lower-than-expected wages and prices are likely to worsen performance by encouraging consumers and investors to delay spending, and to redistribute income and wealth from high-spending debtors to low-spending creditors.
Although slow growth is obvious to anyone who cares to look around, I don’t see many signs of inflation at this point. In terms of price increases which is what most people think of if they do think about inflation, the greatest price increases remain in those areas in which supply is constrained and government plays the strongest role—healthcare and education. How willingness to pay can increase in the presence of a constrained supply without prices increasing is a puzzle to me.