Stagflation Nation?

It's flashback time over at the Wall Street Journal this morning, where Greg Ip observes that the United States "faces an unwelcome combination of looming recession and persistent inflation that is reviving angst about stagflation, a condition not seen since the 1970s." Inflation is up over the past year (4.3 percent headline, 2.5 percent core), while growth has slowed sharply. Of course, there's stagflation, and then there's stagflation. As Ip notes, inflation rose as high as 15 percent in the '70s, and unemployment 9 percent as the economy suffered through three recessions. So today's problems are less serious by many magnitudes.

Look, I think the slow-growth part of this scenario will be kaput by midyear as the Fed rate cuts kick in and housing investment, because of its diminished importance to the economy, becomes less of a drag. But let me tell you, gang, emergency rate cuts and "fiscal stimulus" do zippo to increase productivity or the economy's long-term growth potential or our international competitiveness. Increasing incentives and decreasing penalties to working, saving, and investing are what's needed.