Decades of Stagflation and Cartoon Economics

Abstract

It is shown empirically that for decades, the US economy has been in a state of stagflation which is defined by rising prices and simultaneously falling economic growth. It is a phenomenon involving not just “secular stagnation” (Summers, 2015) of low growth, but high inflation as well. A new cartoon economics is introduced here to explain a new macroeconomic model containing an aggregate supply “boomerang” which differs importantly from existing neoclassical or Keynesian models. Decades of policy blunder based on the Keynesian fallacy has caused the stagflation observed in the data. The evidence suggests that sound economic policy requires price stability, not inflation. Without a Glass-Steagall-type separation of traditional banking from speculative investment banking, the impact of monetary policy on inflation is much harder to monitor and for central banks to control.

Keywords: Stagflation, Macroeconomics, Keynesian, Policy, Aggregate Supply, Glass-Steagall

JEL Classification: A20, E10, E31, E32, E44, E52, E58, G28