Stagflation is the combination of inflation and stagnation in an economy (2). Using traditional economic theory, treating either economic stagnation or inflation aggravates the other condition, resulting in a never-ending cycle that is difficult to break. Martin Weitzman takes on the issue of stagflation and suggests in The Share Economy that we do not have to be content with stagflation, and that there are creative approaches which can lead the American economy out of this vicious cycle.
Traditional methods for lowering unemployment and increasing growth (treating stagnation) is to stimulate the economy through expansionary monetary and fiscal policies. However, this can lead to inflationary momentum that is slowed by contractionary policies. This leads to increased unemployment and slow growth, which causes the cycle to begin anew. Contractionary processes can also have as by-products low productivity, budget deficits and debt crises.
Weitzman's view is that a new approach is needed since the traditional approaches have not been able to solve the problem of cyclical inflation and recession. Instead, countries have experienced cycles of growth and contraction that are determined more by the current political climate rather than economic principles.
What Weitzman recommends is a change in the employee compensation arrangements so that price stability is compatible with full employment. Instead of adopting a macroeconomic view of the economy to solve the problem of stagflation, Weitzman instead recommends a strongly microeconomic approach (3). At the heart of stagflation is the current practice of tying employee compensation to factors that are outside the firm's control (such as cost of living). The firm's own performance (and thus the employees' performances) are not reflected in the current compensation matrices in place at most American companies. Instead, tying an employee's salary to the performance of the compa...