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.