Stagflation is rare in the US economy


The current government is seeking the largest peacetime increase in military spending in history, while various domestic and social programs are being radically cut at the same time. How does this affect young people?

MICHAEL HEISE: In the short term, an increase in military spending could actually stimulate the economy. In the long term, however, it is not an advantage, especially for the younger generation, since military equipment and military installations do not bring any financial return and the debts have to be paid back by the following generations.

MOHAMED A. EL-ERIAN: The current political projects lead to an economic race between debt and growth. This is important. If growth comes out victorious in the end, people will be better off financially and have better prospects for prosperity now and in the future. But if the debt prevails, the people, especially the younger generation, will be in a worse financial position. They would have to bear a greater burden of debt without a corresponding increase in income or higher earnings potential.

The new administration under President Trump has just presented several plans to promote growth: more fiscal activism, with military spending being only one element, changes to a tax system that has not undergone any major reform since the mid-1980s, and infrastructure spending and efforts, support productive activities in the private sector and initiate deregulation measures. If these strategies are well designed and implemented sustainably, growth would have a good chance of winning the race.

If there were not a second, anti-growth package of measures with clearly stagflationary tendencies, that is, these measures would result in stagnating growth and higher inflation. Stagflation is a worst possible scenario. And that is exactly where protectionism would lead us. If these proposals prevail, debt would win the race.