Yesterday former Federal Reserve Chairman Paul Volker pulled out the specter of the 1970’s to rail against those suggesting room for a higher inflation target, holding special contempt for the obviously insidious President of the Chicago Federal Reserve Charles Evans:
So now we are beginning to hear murmurings about the possible invigorating effects of “just a little inflation.” Perhaps 4 or 5 percent a year would be just the thing to deal with the overhang of debt and encourage the “animal spirits” of business, or so the argument goes.
It’s not yet a full-throated chorus. But remarkably, at least one member of the Fed’s policy making committee recently departed from the price-stability script.
Having the central bank embrace inflation would shock economists and Fed watchers who view price stability as the foremost goal of monetary policy. But there are worse things than inflation. And guess what? We have them today. A little more inflation might be preferable to rising unemployment or a series of fiscal measures that pile on debt bequeathed to future generations.
Of course, Volker’s amazement that someone might suggest a higher inflation target is a consequence of his conviction that the 1970’s was the worst economic decade ever:
…Economic circumstances and the limitations on orthodox policies are indeed frustrating. After all, if 1 or 2 percent inflation is O.K. and has not raised inflationary expectations — as the Fed and most central banks believe — why not 3 or 4 or even more? Let’s try to get business to jump the gun and invest now in the expectation of higher prices later, and raise housing prices (presumably commodities and gold, too) and maybe wages will follow. If the dollar is weakened, that’s a good thing; it might even help close the trade deficit. And of course, as soon as the economy expands sufficiently, we will promptly return to price stability…
…Some mathematical models spawned in academic seminars might support this scenario. But all of our economic history says it won’t work that way. I thought we learned that lesson in the 1970s. That’s when the word stagflation was invented to describe a truly ugly combination of rising inflation and stunted growth…
…It is precisely the common experience with this inflation dynamic that has led central banks around the world to place prime importance on price stability. They do so not at the expense of a strong productive economy. They do it because experience confirms that price stability — and the expectation of that stability — is a key element in keeping interest rates low and sustaining a strong, expanding, fully employed economy.
Note the conviction that high inflation is not compatible with strong growth. Now take a quick look at some of the economic outcomes of periods beginning with 1970 and 2000:
I don’t want to romanticize the 1970s. I think we all recognize that the 2.5% unemployment rate at the end of the 1960’s was below the natural rate and thus incompatible with low inflation. The subsequent decade of economic mismanagement did permit both inflation and unemployment to rise, although certainly some of the latter can be attributed to the unusually low unemployment at the beginning of the decade. That said, the above numbers stack up pretty impressively compared to the 2000s. Arguably in recent years productivity did accelerate, at least temporarily, but didn’t appear to translate into better job or wage growth. But overall, I am thinking the inflationary 1970s look pretty good right now relative to the price stability of the last decade.
Of course, in the background, the unexpected inflation of the 1970s drove a redistribution of wealth, and it is this that is probably Volker’s real complaint. My first undergraduate economics professor told a story of how all the student loans he took out in the late 60s and early 70s evaporated in real terms a decade later. Perhaps Volker would have preferred that he had been weighed down by those debts instead – a situation not unlike today, were the debt overhang is a weight on household spending.
What is even more sad is that Volker fails to recognize why some argue for higher inflation:
My point is not that we are on the edge today of serious inflation, which is unlikely if the Fed remains vigilant. Rather, the danger is that if, in desperation, we turn to deliberately seeking inflation to solve real problems — our economic imbalances, sluggish productivity, and excessive leverage — we would soon find that a little inflation doesn’t work. Then the instinct will be to do a little more — a seemingly temporary and “reasonable” 4 percent becomes 5, and then 6 and so on.
I don’t think I have heard anyone who believes that inflation is a cure to sluggish productivity. Indeed, see above – during the recession productivity was anything but sluggish. No one thinks that higher inflation will spark higher productivity, only that higher inflation can be a tool to lift the economy from the lower bound allowing output to rise to the productivity-enhance level of potential output. Excessive leverage is a real problem, and in fact one that can be addressed via inflation. A commenter on an earlier piece notes that even what I perceive as lower levels of inflation could quickly erode the debt overhang, albeit not as quickly as I might like. How a central banker cannot recognize that unanticipated inflation erodes real debt loads is simply unfathomable.
And Volker uses the general term “economic imbalances,” but offers no explanation to what he is referring. Arguably, the major economic imbalance is the foreign central bank-induced trade deficit, which has contributed to a global imbalance in patterns of production and consumption. Recall that he appears to recognize the role of the Dollar in any rebalancing:
If the dollar is weakened, that’s a good thing; it might even help close the trade deficit.
But seems to lose sight of this later:
At a time when foreign countries own trillions of our dollars, when we are dependent on borrowing still more abroad, and when the whole world counts on the dollar’s maintaining its purchasing power, taking on the risks of deliberately promoting inflation would be simply irresponsible.
I thought the purpose of the Federal Reserve was to promote the economic interest of the United States – that is its primary responsibility. And how can any economic imbalances be resolved if we remain dependent on borrowing from abroad? Wouldn’t we be better off discouraging those capital flows and allowing for export and import-competing industries to expand? And wouldn’t the rest of the world be better off if the US helped ease their inflationary pressures by providing additional goods and services to the global economy rather than attempting to absorb the excessive production of other nations? (And if you believe that those capital inflows represent confidence in the US economy, I have a bridge to sell you. Take out the purchases by foreign central banks and see what happens.)
Bottom Line: The constant comparisons to the 1970s are increasingly tiresome. At the end of the day, in the 1970s we were not in a liquidity trap. Today we are. The world is simply different. And we need policymakers that recognize that difference, not dinosaurs who refuse to do anything but live in a narrow view of their youth.
This post originally appeared at Tim Duy’s Fed Watch and is reproduced with permission.
57 Responses to “Not the 1970s”
I think too much credit is given to Volker for fighting inflation. In my view inflation is driven mostly by the business cycle and secular winds, which policy can influence but not negate. Central Bankers for the most part follow inflation and set rates so that real interest rates stay aligned with unemployment, growth & financial stability. When demand side forces rise you will have inflation, interest rate policy can moderate, but not eliminate rising demand. When capacity (labor or industrial) is tight and demand is not, you will have inflation; here only investments can help to allow capacity creation and productivity gains.
The 1970's had an oil spike, just as we have now; we were moving up the marginal cost curve shifting to more expensive shallow and mid water sources (not so much because we had to, but because the embargo amplified the need to reduce dependence on Arab oil) .Once production was in line with demand, real prices of oil fell as oil producers started lowering the marginal cost of oil through new technology,productivity,efficiency gains.
GDP growth between 1973 and 1982 was average – 2% real annualized,so I guess there were no major demand side issues. And supply side is why inflation persisted; monetary policy had no impact but served to keep real interest rates between -4% and +7% for an average of 0.6% over 1973 to 1982.The key point is inflation was what it was, Central Bankers simply did what they are supposed to do – kept real interest rates at levels which accomodated economic activity during a slow period in the business cycle and restrictive during expansionary phases of the economic cycle-they influenced but did not overwhelm the secular force. I think Volker did a good job, but the Godlike respect and emulation by EM central bankers is not necessary.
In some ways Volker is a danger at the present time.
Let me give you the perspective of an argentine that lived most of his life under the specter of inflation. Politicians, businessmen and economists in Argentina during most of the 2H of the 20th century said exactly what you propose: A little inflation is needed. Argentina ended up in hyperinflation in 1989. I agree with Volker: growth has to be on a real, sustainable basis. If 4-5% inflation induces investment and/or revenue growth in business, you will not be able to return to price stability, sooner or later there will be a run on the currency and lower income people will be hit the hardest. I think the economic imbalances and structural problems have to be solved by federal government policies and not masked by higher inflation.
Last but not least, your final comment on "dinosaurs" sounds rude and insulting. If such comment is the most that your intelligence can utter as an intellectual argument against Paul Volker, it sadly speaks poorly of you.
Hello, I really like your weblog. Is there something I can do to receive updates like a subscription or some thing? I’m sorry I am not familiar with RSS?
That was type of inspiring! Completely unanticipated. Now I am aware what I am going to perform tomorrow :)
Many thanks for taking the time to write this article. It is been extremely useful. It couldn’t have come at a greater time for me!
After a jiffy, regular commenters begin to form a community. It starts to feel intrusive to insert yourself.
One of the most thorough and very well thought out document I’ve found on this matter on the net. It is extremely thoughtful of you to post this kind of information. Thanks a lot!
Hello, I love your blog. Is there some thing I can do to receive updates like a subscription or something? I am sorry I’m not familiar with RSS?
Hi, I love your blog. Is there some thing I can do to receive updates like a subscription or something? I am sorry I’m not acquainted with RSS?
Thank you for another important post. Where else could any person get that sort of details in this kind of a full way of writing? I’ve a presentation incoming week, and I am around the lookout for this kind of information.
After research just a few of the weblog posts in your website now, and I actually like your means of blogging. I bookmarked it to my bookmark website listing and will be checking back soon. Pls try my web site as properly and let me know what you think.
Aw, this was a really fantastic publish. In theory I’d like to compose like this also – taking time and actual work to generate a good write-up… but what can I say… I procrastinate alot and never seem to get one thing performed.
I thought it was going to be some boring old post, but it really compensated for my time. I will publish a link to this page on my weblog. I’m certain my visitors will locate that quite useful
We absolutely love your blog and find the majority of your post’s to be precisely what I’m looking for. Does one offer guest writers to write content for yourself? I wouldn’t mind producing a post or elaborating on many of the subjects you write regarding here. Again, awesome weblog!
You received a really useful weblog I’ve been here reading for about an hour. I’m a newbie and your achievement is very much an inspiration for me.
Resources like the 1 you mentioned here will be quite useful to me! I will post a link to this page on my weblog. I’m sure my visitors will find that really useful.
I admire the valuable details you supply within your articles. I will bookmark your blog and have my youngsters test up right here typically. I’m quite certain they are going to understand lots of new stuff here than anybody else!
Hey, just looking around some blogs, seems a pretty good platform you are using. I’m currently using WordPress for a few of my sites but looking to change one of them over to a platform similar to yours as a trial run. Anything in particular you would recommend about it?
Just wished to mention your blog is incredibly smart. I usually prefer to hear some issue new about this mainly because I actually have the similar blog in my Country on this subject so this help´s me plenty. I did a research on a topic matter and observed a really good variety of blogs but nothing like this.Thanks for sharing so much in your blog.
Hi webmaster, commenters and everyone else !!! The blog page was absolutely fantastic! Lots of fantastic details and inspiration, both of which we all need!b Preserve ‘em coming… you all do this kind of a wonderful task at such Concepts… can’t tell you how much I, for 1 appreciate all you do!
Keep ‘em coming… you all do these a excellent position at these Concepts… can not tell you how significantly I, for a single appreciate all you do!
This is my very first time i pay a visit to here. I identified numerous entertaining things within your blog, specially its discussion. From the tons of feedback on your articles, I guess I am not the just one getting all the enjoyment here! Maintain up the good work.
I admire the valuable details you provide in your articles. I will bookmark your blog site and have my children check up right here often. I am fairly confident they’re going to discover a lot of new stuff right here than anyone else!
Substantially, this post is really the sweetest on this notable topic. I harmonise with your conclusions and can thirstily look ahead for your incoming updates. Saying thanks will not just be enough, for your phenomenal clarity inside your writing. I will directly grab your rss feed to stay knowledgeable of any updates. Admirable work and a lot accomplishment in your company dealings! Please excuse my poor English as it’s not my first tongue.
There are definitely a number of details like that to take into consideration. That is a nice level to convey up. I offer the ideas above as basic inspiration however clearly there are questions like the one you convey up the place the most important factor shall be working in honest good faith. I don?t know if best practices have emerged round things like that, but I am positive that your job is clearly identified as a good game. Each boys and girls really feel the affect of only a moment’s pleasure, for the remainder of their lives.
I’m curious to find out what blog system you’re working with? I’m having some minor security problems with my latest website and I would like to find something more safe. Do you have any suggestions?
Couldn?t be written any better. Reading this post reminds me of my old room mate! He always kept talking about this. I will ahead this article to him. Pretty positive he will have a very good read. Thanks for sharing!
You may have not intended to do so, but I assume you have managed to express the state of mind that a lot of people are in. The sense of wanting to aid, but not knowing how or wherever, is a thing a lot of us are going through.
Hrmm that was weird, my comment obtained eaten. Anyway I wanted to say that it’s great to know that someone else also mentioned this as I had trouble finding the identical info elsewhere. This was the first place that told me the answer. Thanks.
I was quite encouraged to seek out this site. I desired to thank you for this particular go through. I certainly savored each little little bit of it and I’ve you bookmarked to check out new stuff you post.
Keep ‘em coming… you all do this kind of a fantastic task at this kind of Concepts… can’t tell you how a lot I, for 1 appreciate all you do!
I think this is among the most vital info for me. And i am glad reading your article. But wanna remark on few general things, The web site style is ideal, the articles is really nice : D. Good job, cheers
Merely, admirable what you have performed right here. It really is satisfying to search you express through the heart along with your clarity on this significant subject material can be quickly looked. Impressive post and can seem forward for your long run update.
Spot on with this write-up, I actually think this website wants rather more consideration. I’ll probably be once more to read rather more, thanks for that info.
The Zune concentrates on being a Portable Media Player. Not a web browser. Not a game machine. Maybe in the future it’ll do even better in those areas, but for now it’s a fantastic way to organize and listen to your music and videos, and is without peer in that regard. The iPod’s strengths are its web browsing and apps. If those sound more compelling, perhaps it is your best choice.
Thank you for taking time to write this write-up. It’s been incredibly helpful. It could not have arrive at a greater time for me! http://www.blurty.com/talkpost.bml?journal=grumpy318&itemid=809
I used to be more than happy to seek out this net-site.I needed to thanks on your time for this glorious learn!! I positively having fun with each little little bit of it and I’ve you bookmarked to take a look at new stuff you blog post.
Not long detected regarding your web site and are still already reading along. I assumed i will leave my 1st comment. i don’t determine what saying except that I’ve enjoyed reading. Nice blog. sick be bookmarking keep visiting this web site really typically.
Cheers. Great post :) I love commenting and taking part in discussions. I think it’s important, especially as a blogger myself, to keep in touch with the bloggers who inspire me, as well as those who are just starting out. Btw try to monetize it on theflyper.com ;)
I thought it was going to be some boring old publish, but it really compensated for my time. I will publish a link to this page on my weblog. I’m certain my visitors will discover that very useful
I thought it was going to be some boring old post, but it really compensated for my time. I will publish a link to this page on my blog page. I’m positive my visitors will come across that very useful
Considerably, this publish is really the sweetest on this notable subject. I harmonise along with your conclusions and will thirstily appear ahead for your incoming updates. Saying thanks is not going to just be ample, for your phenomenal clarity inside your writing. I will immediately grab your rss feed to stay knowledgeable of any updates. Admirable operate and significantly achievement inside your organization dealings! Please excuse my poor English as it really is not my 1st tongue.
Hi webmaster, commenters and everyone else !!! The blog was absolutely fantastic! A lot of fantastic info and inspiration, both of which we all need!b Preserve ‘em coming… you all do this kind of a fantastic task at these Concepts… cannot tell you how much I, for 1 appreciate all you do!
I was really encouraged to find this web site. I desired to thank you for this unique go through. I definitely savored each and every small little bit of it and I have you bookmarked to have a look at new things you post.
I found your blog on yahoo and can bookmark it currently. continue the good work.
Great post. I was checking constantly this blog and I am impressed! Extremely helpful info specially the last part I care for such information much. I was seeking this particular info for a long time. I will keep the attention of your blog. Thank you and best of luck.
You received a really useful blog I’ve been right here reading for about an hour. I’m a newbie along with your achievement is extremely a lot an inspiration for me.
I’ll gear this review to 2 types of people: current Zune owners who are considering an upgrade, and people trying to decide between a Zune and an iPod. (There are other players worth considering out there, like the Sony Walkman X, but I hope this gives you enough info to make an informed decision of the Zune vs players other than the iPod line as well.)
I’m a long time watcher and I just believed I’d drop by and say hi for that 1st time. I seriously delight in your posts. Many thanks http://www.blurty.com/talkpost.bml?journal=bluejelly548&itemid=1278
I was very encouraged to locate this web site. I wanted to thank you for this special examine. I undoubtedly savored every single tiny bit of it and I’ve you bookmarked to look at new things you post.
Hey, just looking around some blogs, seems a pretty great platform you are using. I’m currently using WordPress for a few of my sites but looking to change one of them over to a platform similar to yours as a trial run. Anything in particular you would recommend about it?
Resources like the one you mentioned here will be really useful to me! I will post a link to this page on my weblog. I’m sure my visitors will locate that very useful.
I have enjoyed looking around your site and poring over various articles. EconoMonitor : EconoMonitor » Not the 1970s is a well written piece about a very intriguing subject. I cannot wait for your planned updates.
Sorry for the huge review, but I’m really loving the new Zune, and hope this, as well as the excellent reviews some other people have written, will help you decide if it’s the right choice for you.
Eventually, a problem that I’m passionate about. I’ve looked for details of this caliber for that previous several hours. Your internet site is significantly appreciated.