The Breakdown

Explaining Southern California's economy

Econ 474: Say hello to 'stuckflation'

Americans hold up 'I want to work' placards as they join a protest of several thousand people demanding jobs outside City Hall in Los Angeles on August 13, 2010. A Labor Department report showed 131,000 jobs were lost in July and the unemployment rate remained stuck at 9.5 percent.
Americans hold up 'I want to work' placards as they join a protest of several thousand people demanding jobs outside City Hall in Los Angeles on August 13, 2010. A Labor Department report showed 131,000 jobs were lost in July and the unemployment rate remained stuck at 9.5 percent. Mark Ralston/AFP/Getty Images

Here's what we know: unemployment nationally is stuck at 9.1 percent; job "creation" is stuck at less than 100,000 per month; applications for unemployment benefits are stuck above 400,000 per month; and GDP growth is stuck below 3 percent.

And that's just four "stucks." Add in numerous other datapoints and you get a Big Stuck — the story of the American economy.

It's far worse in California, where we're stuck on everything that the nation is stuck on, but because of our thousands of unemployed construction workers have an jobless rate of 12 percent.

There are exactly two sets of ideas about how we can get out of this quagmire. On the right, the argument is to cut taxes, reduce government spending, and eliminate regulations that encumber business activity. On the left, the argument is to raise taxes on the wealthy while cutting them for the poor and middle-class, spend more on economic stimulus, and more rigorously regulate high-risk financial and business activity. 

Unfortunately, as the failure of parts of President Obama's jobs bill in the Senate shows, neither side is going to get all or even most of what it wants until the government is revamped by the 2012 election.

If you're keeping track, that's another full year of stuck.

I've taken to calling this the "Lesser Depression" because unlike the Great Depression, we're not confronting mass unemployment. We're like a patient with severe lung damage. We can't get in enough oxygen to move with any kind of speed. So we shuffle along, if we shuffle at all. And we're being forced to run in mud. Sticky mud.

However, I now think that a new term is in order. Our current situation reminds many people of the late 1970s, — the "malaise era," when stagflation, a combination of high inflation and low economic growth, choked the country.

We don't have the high inflation this time around. But although prices have remained stable, demand for goods has flagged. This is because households and business took on too much debt when credit was loose and are now "deleveraging," repairing their balance sheets, and either not pursuing more credit or having it taken away from them by banks that are more risk-averse. Bascially, everyone feels far too poor to spend. And everyone has felt this way for years now.

I'm calling this "stuckflation" (Nate Beller, a cartoonist, was the first to use the word, as far as I know). It's as much as psychological state as anything else, although I think it describes the economic struggle we're up against. It explains why some pundits maintain we're in a recession in all but name, even though the data doesn't support their case (we haven't seen two consecutive quarters of falling growth, we're adding jobs, some sectors like autos are doing well).

It's stuckflation, defined as subpar post-recession growth, high unemployment, low inflation but a credit-binge hangover, and an omnipresent threat of deflation that never quite shows up but keeps the macroeconomists freaked out nonetheless. You often hear Japan and it's "lost decades" mentioned in this context. But that's true, scary deflation.

What makes stuckflation different is the "exorbitant privilege" of the U.S. dollar as the world's reserve currency. We'd probably be in another recession now or headed for it if the downgrade of the U.S. bond rating by Standard & Poor's had made investors flee U.S. debt, rather than flock to it. 

It's not really clear how we're going to get out of the Big Stuck. You hear the argument that we should go back on the gold standard — sacrificing the dollar's reserve status and returning to the old model of the world's currencies being pegged to an objective measure — but this tends to come from conservative anti-government types who lionize "rational" markets and despise central banks, like the Federal Reserve. They blame currency manipuation for all our troubles and insist that if we take that political power away, the markets will self-correct.

That sounds like a fantasy. More likely, what will vanquish stuckflation is sustained, innovative business activity, along with some industrial-strength re-employment of the jobless. Eventually, there will be enough economic growth to end the pain. But we may have to wait a while. 

Follow Matthew DeBord and the DeBord Report on Twitter.

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