Once again, massive fiscal spending in the United States has invited warnings of inflation and triggered dark memories of the 1970s. But these fears are based on a model that has since been obliterated by economic realities – not least the rise of China, which has fundamentally reshaped the US and global economies.
Reality, on the other hand, actually obliterated the Phillips curve. From the early 1980s – and unmistakably from the mid-1990s onward – no inflation could be found, and lower unemployment did not tend to bring it on. The relationship is not vertical or downward-sloping, but flat, which is to say it doesn’t exist – if it ever did.
What happened? The answer can almost, if not quite, be summed up in a single word: China. From the early 1980s, the US dollar began to rise, crushing America’s Midwest industrial base and trade unions.
But won’t China now take advantage of high US demand to push up prices? No, because Chinese firms fear losing market share to other countries, and because China’s economic ethos prizes not profit maximization but social stability, steady production growth, and cost reductions through learning and new technologies.
US households are not suffering from a shortage of smartphones, dishwashers, and running shoes. What they lack is confidence and security. Hence, much of the Biden money will not go to China at all. It will go toward saving, in order to cover future rent, mortgages, utilities, and debt repayments.
James K. Galbraith Project Syndicate 31 March 2021
Yes, There Is a Trade-Off Between Inflation and Unemployment