Are we heading towards stagflation?

The first oil crisis, that of 1973-1974, ended up generating, especially in the developed Western world, a situation that was defined as "stagflation", that is, the simultaneity of economic stagnation and inflation. The world had come from a place where the two concepts were quite opposed, given that stagnation was fought with expansionary policies that were inflationary and inflation could be reduced with stabilization policies (i.e., stagnation or contraction). The repetition of expansionary policies simultaneous to the existence of strong supply inflation —the increase in the price of oil was due to unforeseen extra-economic causes—, ended up meaning that economic stimulus policies were useless. Only the same stagnation that was sought to be combated was achieved, but with the addition of inflation.

Stagflation was the ghost that haunted the developed world during the second half of the 1970s. It ended up questioning Keynesian demand-side stimulus policies and paved the way for supply-side policies, which were led by liberal right-wing governments.

Can it happen again? There are clear risks on the side of economic stagnation. The sudden rise in the price of widely used energy sources and raw materials causes a reduction in economic activity. The attempt to soften the impact through public subsidies has limited scope. As many are already remembering, trying to extinguish the fire of rising prices of oil, natural gas, and the main fertilizers with consumption subsidies is a serious mistake. It is politically easy, but we have so many precedents that show how negative these policies can be that it is frightening that they are still justified.

The rise in the price of oil and raw materials directly affected by the destruction from the Persian Gulf War is a real and not simply speculative fact. A lot of extraction capacity, a lot of industrial capacity (refining and processing) and a lot of transport capacity have been destroyed. In the best-case scenario, it will take years to rebuild them. The losses not only affect the owners —states, companies, or individuals—, but also burden all consumers, intermediate or final. Subsidizing a product that has become scarcer for a long period is a bad solution. It is better to do what one can to replace it with other products or reduce its consumption.

The confusion over the policies to be adopted leads, quite inevitably, to stagnation without being able to avoid inflation. The misfortunes caused by the Gulf War must be seized to encourage a change in the productive model as much as possible. If oil and natural gas become more expensive for a long period of time, let's try to consume less of them. Let the price tell us what we need to save. If we do this, we can become more competitive and regain growth capacity. If other products become more expensive, let's try to replace them. But please, do not subsidize them. Subsidies should be reserved for people who need them, not for things.

The abuse of subsidies for things (products that were scarce) was one of the great activators of the neoliberal turn of the late seventies and early eighties. The state's revenue-raising capacity and its borrowing capacity were so great that it seemed they could do anything. But this was not the case: in a few years, the accumulated debts became unmanageable in quantity and price, and the competitiveness of consumer countries collapsed. It was necessary to return to accounting and financial orthodoxy, which does not fail, but which can be politically very unpleasant.

We don't know what will happen. Trump is unpredictable, but it's clear he has stirred up a hornet's nest from which it will be difficult for him to escape. Wednesday's agreements may not last long. In other words, the war can be prolonged, always hoping that the last day is near. But each day of war, the destruction of productive capital increases, impoverishing its owners and making the goods they produced for all consumers more expensive.

We have alternative energy sources. Let's promote and optimize them. Let's pay attention to what would be better to stop producing given its cost and let's pay attention to the dependence on distant and warring suppliers. Let's take advantage of the wartime situation to change our offer, bringing it up to date. Let's be aware that when there are wars, our country is usually considered a safe haven. Let's take advantage of it. Meanwhile, we hope the situation does not deteriorate further.