The Stagflation: A Crisis Deepens

The "stagflation" of 1974 is rapidly becoming the crisis of the mid-1970s. The official unemployment rate has moved steadily upward from 5.4 per cent in August, to 5.8 per cent in September, to 6.0 per cent in October, to 6.5 per cent in November. The Ford administration claims unemployment will peak at 7 per cent, but that figure could be reached by the end of this month.

The mid-1970s' crisis is beginning to compete with the 1958 recession for the worst economic downturn since the Great Depression. In 1958 the unemployment rate exceeded 7 per cent for seven months, and once hit 7.6 per cent.

The November unemployment rate of 6.5 per cent only begins to tell the story of who and how many are out of work, since the official government statistic ignores about half the people who want work but cannot find it. Moreover, the 6.5 per cent figure fails to reveal the wide variation in unemployment among different groups. The November figures breaks down as follows:

Unsold Products

One of the problems that typically develops in a recession is illustrated by the acres of unsold cars in Detroit. Companies have accumulated stocks of goods they cannot sell at a price they like. At the same time there are growing numbers of people who need these goods but cannot afford to buy them. In effect, the companies are on strike, holding back in hopes of better prices.

The glut of inventories is severe in this recession because companies built up unusually large inventory stocks to get ahead of inflation. The rate of inventory build-up in the last three months of 1973 was un-precedented. Inventory growth in the first half of 1974 was faster than any year since 1966.

The scramble to build up inventories last year helped prevent the unemployment rate from rising above 4.8 per cent in the last part of 1973. Now, however, workers will pay for the companies' speculation against inflation by being laid off when they need money most. Until those unsold goods start to move, unemployment will stay high.

Government Action

What is the government going to do about the recession?

To stop a recession the government is "supposed" to increase its own spending--buying goods and employing people--and cut taxes so individuals and corporations can increase their spending. These fiscal policy measures would mean more production, more jobs, and more profits.

Also, the government is "supposed" to increase the supply of money and lower interest rates. These monetary policy actions would help businesses get funds to finance expansion.

But it isn't quite so simple. Actions to raise government and private spending would create more upward pressure on prices. The government is no more pleased at the idea of stoking the fires of inflation than it is at the prospect of worsening recession.

Both inflation and recession create social conflict. With recession people cannot afford to buy food because they are out of work. With inflation people cannot buy because prices are so high. Either way they are angry.

Furthermore, inflation makes it harder for U.S. business to compete with foreign business, and inflation creates uncertainties and instabilities which disrupt the economy.

Problems resulting from inflation are, after all, part of what got the U.S. into the present mess. Is the government likely to shove the economy out of recession by creating another round of inflation that will in turn set off another recession?

It may seem silly but that is just what did happen with the downturn of 1970-71. In 1971 Nixon decided he had to get the economy moving again before the 1972 election. He got it moving. And here we are.

Will Ford do the same? The 1976 election is already on the horizon.

But for now, Ford is still opting for recession. He talks of "holding the line" on government spending, refuses to release available funds for social welfare programs, and blames the Congress for the economy's woes.

Business's Stand

Some business interests support this kind of action (or inaction). A recession can be useful for them in slowing down inflation and in All workers  6.5 per cent Adult men  4.6 per cent Adult women  6.6 per cent Teenagers  17.3 per cent White  5.8 per cent Non-white  11.7 per cent Blue-collar  8.2 per cent White-collar  3.7 per cent