Spurred on by some correspondence with MA, I have been forced to consider this question. My answer is that they could be pretty comparable if the U.S. Fed makes bad decisions.
The current situation involves a substantial aggregate supply shock, as did the early 1980s. Then it was mostly due to oil shocks (in '73 and '79); now it is due to oil shocks plus the really dumb ethanol programme, which also shifts the aggregate supply curve to the left by requiring US firms to use inefficient products produced at higher-than-necessary cost.
Also, throughout the 1970s, the US economy was slowly inflating; and in the lead-up to this year, the US Fed created/permitted a liquidity expansion that had a similar effect.
So both eras have involved simmering inflationary pressures on the aggregate demand side which, by themselves, could probably have been dealt with fairly easily. And both eras have involved aggregate supply shifts to the left (reductions in aggregate supply to the US economy). I.e., the stage is set for the US to go through another inflation-recession bout similar to that of the early 1980s.
But I think there's perhaps only about a 25% chance they/we will. Here is why:
- In the 1980s, the Fed (and the politicians) tried to fight the aggregate supply shock by pumping up aggregate demand. They did this relentlessly, feeding extreme inflationary expectations and shifting the short-run Phillips curves upward and outward. And the rising inflationary expectations contributed to the problem by shifting the aggregate supply curve to the left, adding to the seriousness of the supply shock.
- In the present era, the Fed has already renewed its lip-service commitment to price stability. This means it will have more of a tendency to let the economy tough its way through the aggregate supply shock, knowing that increasing aggregate demand will only make things worse in a year or two.
The Fed went into expansionary mode last year, and that was to offset the liquidity crunch it was correctly expecting. But then as politicians tried to pump up aggregate demand more with the stimulus package, the Fed began to curtail its wild expansionary policies and has made some reasonably loud noises about price stability, warning that it might have to increase interest rates in the near future.
IF (a big "if") the Fed keeps its eye on price stability, the US economy will indeed suffer from some stagflation over the next year or so: inflation rates, interest rates, and unemployment rates will all rise. But those increases will be much less than they would be if the Fed gives in to political pressure to "do something" and tries to head off the rising unemployment rates and rising interest rates via expansionary monetary policy, which would only multiply the inflationary pressures in the economy.
I give the Fed about 3/4 chance of being successful in fighting off these political pressures. Why as high as 3/4? They have already indicated that (a) they have learned from the experiences of the past 30 years, and (b) they have also indicated they are tending in this direction.
If I am right, look for slower growth over the next year or so, with maybe even a(nother?) negative growth quarter. Also look for unemployment rates to move upward by as much as half a percentage point (possibly more during the transition). Inflation rates will appear to have gotten out of hand, but will mostly be in the 4-5% range at their peak (and if they stay there long, they will cause yet another supply shock by increasing inflationary expectations!). And interest rates will rise by at least a full percentage point.
But just remember: if these things do not happen in the near future, they will be even worse after a year or two.
For a much more pessimistic view, see this, courtesy of MA.
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