Modest inflation and slower-than-normal economic growth. That's what we're looking at right now.
People are grousing about a 2.9% second-quarter GDP growth rate? That's a good long-term growth rate, but not what we've expected in the Dubya years. When you here professional economics talk, they'll look at 3% as a solid long-term growth rate for mature economies; much more than that tends to be inflationary.
Inflation's starting to rear its head, but only a 2.8% clip on core inflation, given the oil problems, isn't that bad. It's not what we've come to expect in the Greenspan Era, but we're far from the stagflation of the late 70s and early 80s.
Could it be that our retooled economy, with its emphasis on productivity and efficiency and an inflation-fighting Fed, has made normal economic growth be closer to 5 or 6% and normal inflation close to zero? Thus, when we hit a bad supply shock, that 6% growth rate slows to 3% and 0% inflation perks up to 3%.
What would have been stagflation in a more sluggish economy becomes mild inflation and mild growth. We have Reagan, Dubya and Bill Clinton (yes, Slick Willie, hang with me for a moment) to thank.
Reagan overhauled the tax code and regulation, allowing the innovative US economy to flourish. He also ushered in supply-side econ to the stage; the focus shifted from the Keynesian meme of getting government spending to goose aggregate demand to a neoclassical economic focus on allowing low taxes to goose both AD and aggregate supply and allowing innovation, reduced regulation to goose AS.
Dubya followed in the Laffer-Mundell school, pushing through tax cuts that helped get the US past the busting of the tech bubble and high gas prices.
I also should give Clinton credit for accepting the Greenspan school of monetary policy. While he took a more Keynesian view of fiscal policy, he institutionalized the Greenspan inflation-hawk approach by reupping the Maestro to another term as Fed chair. His tax increases merely slowed economic growth rather than causing a recession; the Wintel and Fed-Ex driven innovation economy was too strong for Clinton to screw up, and he had congressional Republicans as economic chaperones (don't go there, you on the right side of the Peanut Gallery; that smirk is unbecoming) for his last six years.
Those changes to fiscal and monetary policy have created a robust economy, so robust that a big spike in oil prices merely slows economic growth rather than causing a recession. 3% economic growth and 3% inflation is what passes for stagflation in this new era.
No wonder the issues Democrats want to stress are Iraq and Jack Abramoff.