Leading commentators such as Martin Wolf in the Financial Times and Paul Krugman in the New York Times argue the problem facing the global economy is lack of sufficient demand; the remedy is some combination of fiscal and monetary expansion. But sharply rising commodity prices suggest global growth is already hitting supply-side limits. The problem is not aggregate demand but its distribution.This is the implication of the syndrome I christened misflation the other day (and since I haven't see any other term in general circulation yet, I'm going to stick with mine for now).
Until firms significantly raise productivity, especially resource efficiency, the painful remedy is likely to involve increased competitiveness and reduced living standards across North America and Western Europe (through a combination of commodity price inflation, weaker exchange rates, higher import prices and falling real wages and incomes).
There is not much Keynesian demand management can do in the face of this sort of structural shift. Central bank policies are simply shuffling costs around (from borrowers and banks to savers and pension funds) while stoking further increases in food and energy prices.
Anyway, Krugman responds:
