Noble Prize Laureate Paul Krugman recently wrote about the myth of Stagflation, citing bloggers who "admit" it's happened.

--quote--
this is a standard bit of conservative propaganda. Ever since Reagan, conservatives have been using the evils of stagflation to denounce liberal economic policies. Yet mainstream economics — even at Chicago — has never made that connection.

Stagflation was a term coined by Paul Samuelson to describe the combination of high inflation and high unemployment. The era of stagflation in America began in 1974 and ended in the early 80s. Why did it happen?

Well, the textbooks basically invoke two factors. One was a series of “adverse supply shocks”, mainly the huge runup in the price of oil. The other was excessively expansionary monetary policy, especially in 1972-3, which allowed expectations of inflation to become entrenched. (Ken Rogoff — a Republican, by the way — attributes that expansion to the desire of Arthur Burns to see Richard Nixon reelected.)

The appearance of stagflation was a win for conservative economics, but it was conservative monetary economics that was partly vindicated: Milton Friedman’s assertion that there is no long-run tradeoff between inflation and unemployment turned out to be correct, and is now part of the standard canon.
--/quote--
Source(s):
http://krugman.blogs.nytimes.com/2009/06/03/the-stagflation-myth/


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