Two days ago I wrote:
Growth was slowing the 1970s, Sumner says.
Sure, because the Fed kept creating recessions to slow things down. Because of the inflation.
But the problem was not that growth was slow. Slow growth was a policy goal in the 1970s. If growth was slowing in the 1970s, it was a policy success. It is utterly wrong to turn that around now and pretend that slow growth was the problem.
Sumner is analyzing the wrong problem. They all are.
Yesterday I wrote:
The problem in those years was not that we couldn't get good growth. And the problem was not that we couldn't keep inflation at bay. The problem was that we could not do both at the same time.
In 1977 I wrote:
The problem that was so magnificently solved during the 1960s was the either/or cycle, of inflation and unemployment. The problem of the '70s, as we well know, is not either/or, but both. Stagflation, it has been called; a new name, describing a new problem.
For nearly a decade, we have been trying to solve a "both" problem with "either/or" solutions. Little wonder we have met with little success in the '70s!
In order to solve the economic problem, we must know what the problem really is.
3 comments:
They were trying to solve supply induced inflation with demand induced solutions, thinking that "Inflation is always and everywhere a monetary phenomenon." After all, this was the era when Friedman's QTM came to the fore and held sway until it was abandoned as ineffective.
Exactly my point, Tom. I offer an alternative explanation.
Robert L. Hetzel (PDF) quoting Arthur Burns, Federal Reserve Chairman from 1970 to 1978:
"We are dealing... with a new problem—namely, persistent inflation in the face of substantial unemployment—and...the classical remedies may not work well enough or fast enough in this case. Monetary and fiscal policies can readily cope with inflation alone or with recession alone; but, within the limits of our national patience, they cannot by themselves now be counted on to restore full employment, without at the same time releasing a new wave of inflation."
I made the same observation in 1977:
"The problem that was so magnificently solved during the 1960s was the either/or cycle, of inflation and unemployment. The problem of the '70s, as we well know, is not either/or, but both. Stagflation, it has been called; a new name, describing a new problem.
For nearly a decade, we have been trying to solve a "both" problem with "either/or" solutions. Little wonder we have met with little success in the '70s!"
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