Moreover, rising income and wealth inequalities mean that the threat of a populist backlash will remain in play. On one hand, this could take the form of fiscal and regulatory policies to support workers and unions—a further source of pressure on labor costs. On the other hand, the concentration of oligopolistic power in the corporate sector also could prove inflationary, because it boosts producers’ pricing power. And, of course, the backlash against Big Tech and capital-intensive, labor-saving technology could reduce innovation more broadly.
There is a counternarrative to this stagflationary thesis. Despite the public backlash, technological innovation in artificial intelligence, machine learning, and robotics could continue to weaken labor, and demographic effects could be offset by higher retirement ages (implying a larger labor supply).
Similarly, today’s reversal of globalization may itself be reversed as regional integration deepens in many parts of the world, and as the outsourcing of services provides workarounds for obstacles to labor migration (a programmer in India doesn’t have to move to Silicon Valley to design a U.S. app). Finally, any reductions in income inequality may simply militate against tepid demand and deflationary secular stagnation, rather than being severely inflationary.
In the short run, the slack in markets for goods, labor, and commodities, and in some real-estate markets, will prevent a sustained inflationary surge. But over the next few years, loose monetary and fiscal policies will start to trigger persistent inflationary—and eventually stagflationary—pressure, owing to the emergence of any number of persistent negative supply shocks.
Make no mistake: inflation’s return would have severe economic and financial consequences. We would have gone from the “Great Moderation” to a new period of macro instability. The secular bull market in bonds would finally end, and rising nominal and real bond yields would make today’s debts unsustainable, crashing global equity markets. In due time, we could even witness the return of 1970s-style malaise.
Nouriel Roubini, professor of economics at New York University’s Stern School of Business, is host of the NourielToday.com broadcast.
This commentary was published with permission of Project Syndicate—Is Stagflation Coming?
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