Dear Friends,
It seems to me that Stagflation in the late 1970’s and the early 1980’s was mostly due to the large scale entrance of women into the workplace. Without passing judgment on the other social or filial implications, The affect of such a large population added to the workforce had inevitable implications for the macro economy.
As the supply of job seekers went up faster than the supply of jobs the equilibrium point of pay was lowered, and the cyclical rate of unemployment was raised. Until the workplace could effectively absorb those workers.
On the inflation front the large influx of women into the workforce put disposable income into hands of people, that until that time, had not had access to disposable income before. This increase in demand created a situation in which aggregate demand was higher than aggregate supply. The textbook definition of inflationary pressure.
With the confluence of these two factors, worker supply outstripping demand, and at the same time more money circulating in the economy as a whole, inevitably led to stagflation.
The fed aggressively fought inflation by keeping the money supply tight. This was thought to drive down demand putting the brakes on inflation. Today it is seen as the correct measure even in hindsight in most economic circles. By the early 1980‘s inflation was tamed but unemployment was at an all time high. Wages were low and taxes were high. I would argue that keeping a tight fiscal policy by the fed was the wrong course of action then.
If we keep in mind that stagflation was driven by the addition of new workers into the workforce, as we have established, then we can short circuit the event by solving the underlying cause. The three policies open to the Fed that I see are; Keep a tight fiscal policy (as was done historically), take a middle course to try to address inflation and unemployment, or finally, a loose fiscal policy to stimulate growth in the economy inflation be dammed.
Remember that the underlying problem was the rapid influx of workers (women) into the workforce that was driving stagflation, were growth encouraged instead of discouraged, growth in GDP would have driven up demand for workers. Especially with the extra demand generated by the newly disposable income, the growth would have been redoubled, making the economy absorb the additional workers much faster than historically, leading to a shorter negative growth cycle and the resulting unemployment / under utilization of the native workforce. Add to this the compounded effect on the modern GDP of the additional growth to GDP then. Think of the increase of, per capita GDP / economic standard of living, were this the case.
Of course this explanation is simplified. Other underlying factors were, the new caveat Dollar (disengagement from the gold standard), ending of the Vietnam war, early globalization of work, and European and Asian economic factors. The single biggest factor in the stagflation in the late 1970’s was however the large scale influx of women into the US workforce.
