Closer To The Ideal

I was just reading Brad Delong’s article about inflation during the 1970s. I’d always assumed it was the Republicans who forced the country to worry more about inflation than economic growth. I was surprised to learn that the Democrats, too, did an about-face on this subject:

 The recession of 1974-1975 made it politically dangerous to be an advocate of restrictive monetary policy to reduce inflation. Near the trough of the recession, Hubert Humphrey and Augustus Hawkins sought to require that the government reduce unemployment to 3 percent within four years after passage, that it offer employment to all who wished at the same “prevailing wage” that Davis-Bacon mandated be paid on government construction projects, and (in its House version) that individuals have the right to sue in federal court for their Humphrey-Hawkins jobs if the federal government had not provided them. In early 1976 the National Journal assessed its chances of passage as quite good—though principally as veto bait to create an issue for Democrats to campaign against Gerald Ford, rather than as a desirable policy.

Arthur Burns tried to avoid getting sucked into what he saw as a no-win situation:

Humphrey-Hawkins… continues the old game of setting a target for the unemployment rate. You set one figure. I set another figure. If your figure is low, you are a friend of mankind; if mine is high, I am a servant of Wall Street…. I think that is not a profitable game… (Wells
(1994))

And Humphrey-Hawkins eventually generated significant opposition from within the Democratic coalition. Labor would not support the bill unless Humphrey-Hawkins jobs paid the prevailing wage (fearing the consequences for unionized public employment if the “prevailing wage” clause was dropped); legislators who feared criticism from economists’—even Democratic economists’— judgment that Humphrey-Hawkins was likely to be very inflationary would not support the bill unless the “prevailing wage” clause was removed (see Weir (1992)).

The bill that finally passed and was signed in 1977:

• Set a target of reducing unemployment to 4 percent by 1983.
• Elevated price stability to a goal equal in importance to full employment.
• Set a goal of zero inflation by 1988.
• Called for the reduction of federal spending to the lowest level consistent with national needs.
• Required the Federal Reserve Chairman to testify twice a year.

In other words, the bill that was signed did nothing at all—save commit the Federal Reserve Chairman to a twice-a-year round of Congressional testimony.

So, by the end of the 1970s, nearly everyone was worried about the long-term effects that inflation was having on the country. I suppose, looking ahead to the 1980s, people might have reasonably worried about Latin American style hyper-inflation.

I also learned from this article that Germany got inflation under control in 1971 and Japan in 1975. They both did pretty well for a while after that. Germany offers a more interesting model than Japan, since Japan only did well for 15 years, and then it slid into the Lost Decade of the 1990s. Germany had a longer run of domestic prosperity, with things going well till the end of the 1990s.

This entry was posted on Thursday, January 22nd, 2009 at 5:59 am and is filed under economics. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.