Economic trouble ahead? (Brattleboro Reformer)

You don't need the U.S. Labor Department to tell you that your paycheck isn't going as far as it used to, but its annual statistics confirm what we all suspect -- wages are not keeping up with the cost of living.

The Labor Department reported this week that consumer prices rose by 4.1 percent in 2007, but wages only rose 0.9 percent.

That only tells part of the story. Food prices soared in 2007. Eggs went up 29.2 percent, while milk rose 13.1 percent and citrus fruits rose 7.4 percent. Bread went up 7.4 percent, coffee 6.3 percent, cheese 5.9 percent and chicken 5.8 percent.

For the whole year, gasoline went up 8.2 percent and fuel oil rose 7.4 percent, but both those figures don't reflect the rapid rise in the last three months of 2007 -- 30 percent for gas and 27 percent for fuel oil.

Health insurance went up 10.1 percent and the cost of medical care rose by 5.8 percent. Even the cost of funerals went up, by 5 percent.

The inflation picture would be even worse if weren't for China. The consumer goods that are now mostly being imported from that country have fallen in price -- clothing was down 0.4 percent, and footwear and furniture was down 0.9 percent. The price of toys fell by 4.7 percent.

We throw out these numbers because they are a sign of a condition we first saw back in the 1970s -- something economists call "stagflation," when you have rising prices and stagnant economic growth.

Stagflation is not easy to cure. When prices rise, it's usually due to rapid economic growth. The normal reaction of the Federal Reserve is to tighten the money supply and raise interest rates in the hope of cooling things down.

If you tighten things too much, you get a recession. The Fed's usual cure for a recession is to pump more money into the economy and cut interest rates.

With stagflation, however, neither cure works. Pump up demand, and you pump up prices. Try to put a damper on inflation, and you make the recession worse.

Stagflation persisted from the start of the first Arab oil embargo in the fall of 1973 to the end of the 1981-82 recession. Sharp increases in the price of oil due to supply disruptions by OPEC caused much of the problem.

The huge runup in oil prices over the past year or so is reminiscent of that period. And when something on which the economy is totally dependent rises in price, everything else rises in price too. To the rising price of oil we can add the continued drain of our wars in Iraq and Afghanistan -- more than $600 billion and counting.

Through much of the 1970s, the annual rate of inflation hovered around 10 percent. It took a punishing round of interest rate hikes and contraction of the money supply by the Federal Reserve in the early 1980s to bring inflation down to the 2-4 percent norm that we've been used to for the past 20 years.

Interest rates rose to their highest levels since the Civil War. In June 1982, the prime rate -- the benchmark for mortgages and consumer loans was 21.5 percent.

The Feds decision to raise interest rate helped kill inflation, but at a cost of massive unemployment and bankruptcies -- on a scale that hadn't been seen since the Great Depression five decades earlier.

Anyone who lived through the 1981-82 recession remembers how painful that era was. They remember how many factories closed down and how many homes and business were foreclosed upon. They remember when 12 million Americans were unemployed. The country eventually rebounded from that recession, but there were sectors of the American economy -- particularly in manufacturing -- that never recovered.

Are we entering into another painful economic crunch? It looks more and more likely. Consumer spending is falling because people are paying so much more for the basics of life that they have little discretionary income. Every economic indicator is showing trouble ahead.

The economic stimulus plan proposed by the Bush administration will likely be too little and too late. It's hard to say if the interest rate cuts and additional increases to the money supply that the Federal Reserve is considering will make a difference either. And relying on foreign capital to shore up our financial institutions is not desirable.

Given the memories of recessions past and the lack of any sort of cushion for most Americans if we see times as bad as the early 1980s, it is no wonder that the economy has jumped to the top of the list of voters' concerns in this election year. What will happen next is anyone's guess.