Not a monetary phenomenon
Nor was it a fiscal phenomenon, my (post-)Keynesian comrades. Let’s not be glib.
I’m talking about the inflation of the 1970s. Sorry, Milton, I know you got a lot of mileage out of the line, but the great inflation was not at root a monetary phenomenon. Let’s take a look at a graph:
The crucial economic fact of the 1970s is an incredible rush into the labor force. The baby boom came of age at the same time as shifting norms about women and work dramatically increased the proportion of the population that expected jobs.
The “malaise” of the 1970s was not a problem with GDP growth. NGDP growth was off the charts (more on that below). But real GDP growth was strong as well, clocking in at 38%, compared to only 35% in the 1980s, 39% in the 1990s, and an abysmal 16% in the 2000s.
What was stagnant in the 1970s was productivity, which puts hours worked beneath GDP in the denominator. Boomers’ headlong rush into the labor force created a strong arithmetic headwind for productivity stats. Here’s a graph of RGDP divided by the number of workers in the labor force. The malaise shows up pretty clearly:
The root cause of the high-misery-index 1970s was demographics, plain and simple. The deep capital stock of the economy — including fixed capital, organizational capital, and what Arnold Kling describes as “patterns of sustainable specialization and trade” — was simply unprepared for the firehose of new workers. The nation faced a simple choice: employ them, and accept a lower rate of production per worker, or insist on continued productivity growth and tolerate high unemployment. Wisely, I think, we prioritized employment. But there was a bottleneck on the supply-side of the economy. Employed people expect to enjoy increased consumption for their labors, and so put pressure on demand in real terms. The result was high inflation, and would have been under any scenario that absorbed the men, and the women, of the baby boom in so short a period of time. Ultimately, the 1970s were a success story, albeit an uncomfortable success story. Going Volcker in 1973 would not have worked, except with intolerable rates of unemployment and undesirable discouragement of labor force entry. By the early 1980s, the goat was mostly through the snake, so a quick reset of expectations was effective.
Fiscal policy could not have solved the problem, unless you posit that new workers would have been more productively employed by government than the private sector was capable of employing them. Contemporary market monetarism could not have solved the problem. Given the huge demographic shift, stabilizing NGDP growth at an arbitrary level would have been a prescription for depression. Market monetarists sometimes hint that NGDP per capita would be a more appropriate growth path target than simple NGDP. Consider: Both supply and demand tend to correlate with work. Workers make stuff, and they also expect to consume more than nonworkers. One might argue, then, that NGDP per member of the labor force would be a good level for a market monetarist to target. Let’s take a look at that:
It seems to me that the Fed did a pretty good job of matching NGDP to workers in the 1970s. If anything, they were a bit too tight, but permitted some catch-up growth in the 1980s to offset that.
Since the 1970s, macroeconomics as a profession has behaved like some Freud-obsessed neurotic, constantly spinning yarns about how the trauma of the 1970s means this and that, “Keynes was wrong”, “NAIRU”, independent (ha!) central banks. A New Keynesian synthesis made of output gaps and inflation and no people at all, just a representative household reveling in its microfoundations. Self-serving tall tales of the Great Moderation, all of them.
It was the people wut done it, by being born and wanting jobs. Even the ones without penises.
Oh, and give poor Arthur Burns a break. You couldn’t have done any better.