Stagflationrefers to a situation whereby there is stagnant economic growth inthe economy, as well as high rates of inflation and unemployment. Itis a rare occurrence in any nation and a country can stay for a longtime before experiencing stagflation. In situations of stagflation,there is a tendency for workers to get laid off since organizationsexperience negative growth. As a result, the employees’ purchasingpower decline significantly and they buy few products. This makesbusinesses to engage in competition in order to attract morecustomers. In the United States, stagflation was experienced duringthe recession that lasted from 1973-1975. In 1973, the rate ofinflation in the United States tripled (from 3.4% to 9.6%) while theGross Domestic Product declined considerably (Hunt, 2005).
Thecauses of the stagflation experienced in the United States can beattributed to a number of factors. One of the causes of thissituation was the shock experienced in the supply of oil in 1973.During this period, OPEC cut its quota, thus leading to an increasein the oil prices to almost four times. Consequently, the price ofoil caused inflation that ultimately led to the stagflation. Thestagflation was also a product of political forces. In 1971, UnitedStates President Richard Nixon introduced economic policies thatwould help him get re-elected. These policies triggered stagflationin the United States. The first policy introduced by the Nixonadministration was price and wage controls. With this policy, theability of businesses in the United States to increase prices fortheir products was affected. As such, even when the prices of importsrose, the businesses found it challenging to remain profitable sincethey were forced to reduce the costs. In addition, it was not easyfor the businesses to lower wages because of the wage controlsintroduced by the government this contributed to laying off ofemployees, thus leading to unemployment (Hunt, 2005).
Nixonadvocated for the removal of the United States from the goldstandard, and this contributed to an increase in the prices ofimports. With the withdrawal of the United States from the goldstandard, there was an ultimate rise in the price of gold, as well asa decline in the value of the United States dollar. This led to anincrease in the prices of imports. The political and economicimplications of the stagflation focused on the ability of the federalgovernment to fight inflation. The credibility of the federalgovernment to fight inflation was lost. Socially, the stagflation hada huge impact on the standards of living of most American workers.With most of them being laid off, their income declined considerablyand they had to look for alternative ways of earning a living. Thestagflation also led to an increase in the number of United Statescitizens under the government welfare program. With a high number ofunemployed Americans, the government had to increase its allocationsto cater for the unemployed citizens who had been laid off from theirprofessions (Barsky & Kilian, 2000).
Afterrecovering from the stagflation of the 1970s, it was thought that theUnited States was well-equipped to fight inflation and other economicdownturns. However, this was not the case as there was a recessionexperienced during the late 1980s. The causes of this recession canbe attributed to a number of factors. The major cause of thisrecession was the monetary policy of disinflation that the FederalReserve adopted. President Reagan aimed at ensuring that the UnitedStates cut down its domestic spending. However, the Republicansopposed this policy as a result of which the government had to loosenits monetary policy. With an increase in the defense spending and taxcuts, the United States faced a challenge of recovering from theeffects of the stagflation it had faced in the 1970s.
TheIranian revolution of 1979 significantly contributed to the recessionexperienced in the United States during the 1980s. The revolution ledto an increase in the prices of oil in the international market andthis affected the United States negatively. The causes of both the1970s stagflation and the economic recession of the 1980s can beregarded as similar. This is because the rate of unemployment in the1980s rose to 10%. In addition, political forces can be seen to havehad a huge impact on the economy of the United States (Richardson,2011).
Theeconomic troubles experienced in the 1970s and 1980s taught thefederal government a lesson with regard to the improvement of theeconomy. One of the lessons learnt is that recovery from the effectsof recession can take a longer time than expected. For example, theUnited States took a long time to recover from the stagflation of the1970s, which extended to the early 1980s. The recession experiencedin 1980s also took a long time to end since it lasted up to the earlyyears of 1990s. Another lesson learnt from the recession was thatpolitical interference can have a devastating effect on the economy.The government should not introduce policies that affect businessesnegatively.
Barsky,R. B., & Kilian, L. (2000). Amonetary explanation of the great stagflation of the 1970s.Michigan: Ann Arbor.
Hunt,B. (2005). OilPrice Shocks: Can They Account for the Stagflation in the 1970s?(EPub). NewYork: International Monetary Fund. Richardson,J. (2011). Fromrecession to renewal: The impact of the financial crisis on publicservices and local government.Bristol, UK: Policy Press.