Looking Back at the 70s

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Karl Smith says:

I like to focus on inflation because I think just about all of us have agreed that inflation is primarily controlled by actions at the Fed.

I’m ripping this completely out of context1 because it reminds me of a question I have for any economists who care to respond. Here it is: it’s now been 30 years since the stagflation of the 70s. Is it still the consensus view that the inflation of that era was caused by a union-triggered wage-price spiral? Or do we believe that Milton Friedman was right, and inflation is always and everywhere a monetary phenomenon, even in the 70s? Or something else?

Just to be clear, I should add that I’m not asking if the wage-price spiral was a factor — I’m sure it was — but whether it was the proximate cause. Or were loose fiscal and monetary policy the cause, and union demands simply a reaction? The reason I ask is simple: Paul Volcker jacked up interest rates from 1979-1981, and inflation fell. This suggests that union demands were mainly a response to perceived Fed seriousness about inflation, not a primary cause of 70s inflation. Likewise, although unions have declined in the U.S., they’ve remained pretty strong in much of Europe and there’s been no repeat of 70s-style inflation there. This also suggests that monetary policy is considerably more important than union wage demands.

But I don’t know. So I’m tossing it out. Any macro or labor economists care to venture an opinion?

1But you can, of course, click the link to see what he’s talking about. Hint: inflation is going down unless the Fed decides to do something about it.

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DEMOCRACY DOES NOT EXIST...

without free and fair elections, a vigorous free press, and engaged citizens to reclaim power from those who abuse it.

In this election year unlike any other—against a backdrop of a pandemic, an economic crisis, racial reckoning, and so much daily crazy—Mother Jones' journalism is driven by one simple question: Will America will move closer to, or further from, justice and equity in the years to come?

If you're able to, please join us in this mission with a donation today. Our reporting right now is focused on voting rights and election security, corruption, disinformation, racial and gender equity, and the climate crisis. We can’t do it without the support of readers like you, and we need to give it everything we've got between now and November. Thank you.

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