Wednesday, February 16, 2011

Stagflation rears its head in the UK. What to do?

Inflation + unemployment = stagflation.

Stagflation looks as if it is going to rear its ugly head in the UK economy.

Inflation is above target at 4%, and set to rise to 5% in coming months.
Unemployment is rising, 44k increase over 3 months, now standing at 2.5m. A further 1.6 million could be added thanks to Osborne's cuts. 

Things are worse for youth, at 20% youth unemployment. People are talking also about a "jobless recovery", where UK economic growth picks up without affecting unemployment levels. Not good.

Stagflation isn't really meant to happen, because the Philips curve predicts that as unemployment rises, inflation falls, and vice versa. It is thought this holds in the short term, but in the long term, unions, expecting inflation, demand wage rises to counter it, and we get into a wage-price spiral.

Stagflation is thought to be due to external shocks such as a rise in the price of energy and raw materials. This would certainly explain the current problems.

Stagflation is said to be "difficult and costly" to remedy.

The accepted remedy is to address the item whose costs are increasing.

In our case therefore the remedy is to reduce our dependence on oil.

We have a solution on offer : the Green New Deal, where we create a carbon army of people insulating homes and offices, and invest massively in renewable technology and HVDC electricity distribution  networks.

The Green New Deal directly addresses unemployment, reduces fuel poverty, reduces fuel imports, and slows climate change.

In itself it is not enough. many other measures are needed, including a shift towards energy efficient public transport, and a Green Wage Subsidy, that transforms unemployment benefit from being an economic drag to an economic stimulus in the green sector of the economy.

So, stagflation is on its way, but we have a remedy to hand.

All we have to do is to get Dave Cameron to do a U-turn on his economic policies.

That shouldn't be difficult.


Anonymous said...

We were in Scotland in 1977 and we came across a deer eating some kind of nuts on the ground - needless to say he was farting like a trooper and my father told us that he had stagflation.

DocRichard said...

Thank you for taking the trouble to comment, but there are a couple of inconsistencies in your argument. First, a deer is not a stag, it is a deer, And second, I think if you went back you would find that those "nuts" were brussels sprouts.

Otherwise I am fully in agreement.

Anonymous said...

I was only 7 and had not yet grasped the species difference to confront my father.

Can I say how much I lurv your cardy.

DocRichard said...

It's not a cardy it's a waistcoat. My beloved hates that photo and wants me to ban it.