Political Science 2211E Lecture Notes - Lecture 3: Stagflation, Fairness Doctrine, Neoliberalism
19 Feb 2020
School
Department
Course
Professor
Today’s Topics
1. The Stagflation Crisis
2. The political implications of Stagflation
3. The collapse of bretton woods and the shift to neoliberalism
Defining Stagflation
- Stag-flation = stagflation + Inflation
- High inflation and unemployment at the same time
- Emerged in 1970s
Keynesian and Stagflation
- Was supposed to be impossible in Keynesian economics
- Inflation and unemployment supposed to move inversely
- When demand goes down unemployment goes up therefore inflation goes down
Milton Friedman
- Conservative professor at The University of Chicago
- Predicted stagflation in his 1968 presidential address to the american economics
association
- Friedman argued the trade-off between unemployment and inflation was NOT stable
- Higher inflation that lasted for a while would eventually begin to snowball
The Phillips Curve
- Keynesians believed unemployment and inflation moved in opposite directions in a
direct trade-off
- Lower unemployment could be achieved by accepting slightly higher inflation
Economic Causes of Stagflation
Keynesians
- Unemployment and inflation the same
Friedman
- Unemployment and inflation relationship is NOT stable-- and inflation will still
increase
Union Wage Demands
- Unions incorporate inflation rate into wage demands
Wage-Price Spiral
-
Increased Union Power
Welfare state increased power of unions
- New deal pro-labour laws
- Fordism
- Lower unemployment
- Keynesian monetary policy wanted unemployment to be low, therefore there
is more influence for the workers in unions
- Less free trade
- Businesses cannot just relocate into Mexico-- so trade unions had more power and
influence
Unions and Stagflation
Power of unions:
- Allowed inflation to be incorporated in wage demands
- Prevented governments from raising interest rates
- Because it would raise unemployment
- A lot of central banks were not independent in that governments controlled interest
rates-- unlike today where Trudeau can’t be like “i want interest rates lowered and
have it lowered”
Political Implication
Undermined Keynesianism
- Stagflation somewhat undermined Keynesian economics
- Boosted Friedman’s free market economics
- What depression was to free market, stagflation was to welfare state
More
stimulus
required to
lower
unemploy
Workers
demand
higher
wages to
compensat
Higher
wages
force firms
to raise
prices and
Document Summary
Today"s topics: the stagflation crisis, the political implications of stagflation, the collapse of bretton woods and the shift to neoliberalism. High inflation and unemployment at the same time. Was supposed to be impossible in keynesian economics. When demand goes down unemployment goes up therefore inflation goes down. Conservative professor at the university of chicago. Predicted stagflation in his 1968 presidential address to the american economics association. Friedman argued the trade-off between unemployment and inflation was not stable. Higher inflation that lasted for a while would eventually begin to snowball. Keynesians believed unemployment and inflation moved in opposite directions in a direct trade-off. Lower unemployment could be achieved by accepting slightly higher inflation. Unemployment and inflation relationship is not stable-- and inflation will still increase. Unions incorporate inflation rate into wage demands. Higher wages force firms to raise prices and. Keynesian monetary policy wanted unemployment to be low, therefore there is more influence for the workers in unions.
