Stagflation and Overshoot: Economic Impacts of Inaction and What We Can Do
By Mathis Wackernagel
What Is Stagflation and Why Is It Back?
Stagflation, a mix of economic stagnation and inflation, was once thought to be a rare economic glitch. It famously disrupted economies during the oil crises of the 1970s, when energy shortages led to soaring prices, straining economies around the world. Today, stagflation is making a troubling comeback, driven not just by geopolitics alone, but by something deeper and more persistent: ecological overshoot.
Overshoot: The Hidden Engine of Inflation
Overshoot happens when humanity uses more from nature than the Earth can regenerate. Also because of the laws of physics, overshoot will end: ether by design or disaster. Both outcomes lead to economies with smaller resource throughputs.
As these resources become harder to access, prices rise. If our economies are not prepared to operate with lower resource demands, then the price shock will be even more severe. Economists would argue that price elasticities depend on the availability of alternatives, something we increasingly lack.
This rising cost of restocking shelves, physically, the increased effort to “fill the stores,” is experienced as inflation. But this is not inflation caused by too much money; it’s inflation caused by too little nature.
At the same time, overshoot devalues assets that are no longer viable in a climate- and resource-constrained world. Think of coal plants, flood-prone real estate, or outdated transport infrastructure. These “stranded assets” drag down economic vitality, contributing to the stagnation side of stagflation.
Learning from the Past: The 1970s Oil Crisis
The oil shocks of the 1970s offer a useful comparison. Then, as now, economies were caught off guard by their dependence on a finite resource: oil. Inflation soared, productivity stalled, and unemployment rose. But the crisis also sparked innovation: fuel efficiency standards, renewable energy research, and a shift toward less energy-intensive industries.
Whether we fully learned the lesson is debatable. Our dependence on oil remains strong. One indicator is oil’s continued price inelasticity, which illustrates our persistent difficulty in finding substitutes.
Now, we realize our dependence extends beyond oil to the entire spectrum of biocapacity resources. Worse still, we rely on a flow of resources far above what the planet can sustainably provide. This market failure, combined with tight dependency, risks steering us into even more turbulent waters.
Why Today’s Stagflation Is Different
Unlike the oil crisis, today’s resource constraints are not temporary. Climate change, biodiversity loss, and ecosystem degradation are long-term, global challenges. They are not just economic headwinds. They are structural shifts that will shape our future unless we act decisively.
Traditional economic tools like interest rate hikes or stimulus packages miss the mark. To address the root cause, we must confront our overdependence on the planet’s biocapacity.
The Way Forward: Invest in Regeneration
The good news? Stagflation is not inevitable. We can avoid it by shifting our investment priorities. Instead of pouring money into extractive industries, we can invest in regenerative ones. The most powerful are the ones which, when we have more of them, global overshoot declines. Examples include:
- Clean energy that displaces fossil fuel dependency
- Sustainable transportation and higher-density urban living
- Soil and forest ecosystem restoration to rebuild natural capital
- Innovation that enables better lives with fewer resources
These investments not only ease inflationary pressures by improving resource security. They also build long-term economic stability.
Conclusion: It’s Choice, Not Fate
Ecological overshoot inevitably drives stagflation. This may be the most compelling reason for many decision-makers to treat overshoot as an economic priority. The oil crises of the past showed us that resource scarcity can trigger stagflation, but also that disruption can lead to transformation.
Today, we face a similar crossroads. If we invest wisely and act boldly, we can build an economy that works… because it works with nature, not against it.