The 60s X the 90s, “Golden Age” X “Great Moderation” – Who wins the “Economic Gold” (I could also call the “dispute” Obsession with Unemployment X Obsession with Inflation”.)

With the crisis, all “Schools of Thought”, even the ones that were “dormant”, came alive. So let´s also be nostalgic and compare two decades that mostly got “rave revues” from just about everyone concerned with these things.

There are many similarities between the 1960s and the 1990s. They both started with a recession – the 1960/61 recession and the 1990/91 recession. Both were relatively mild and both recorded a drop of 1% in Real GDP at the trough.

President Kennedy was elected on November 1960 and immediately surrounded himself with a veritable “who´s who” of the intellectuals of the time as advisors and counselors. That was also true for the “economic team”, in particular the group that came to staff the Council of Economic Advisors (CEA).

This was a sea change from the Eisenhower presidency, where economists, with the exception of Arthur Burns, didn´t have much sway.  Walter Heller, Chairman of the first Kennedy Council (1961-64) even dubbed the period “The Age of the Economist”. In his 1966 book, New Dimensions of Political Economy, he recounts the following:

President Johnson underscored his esteem of economists at the swearing-in of James Duesenberry as new CEA member in early 1966. He predicted that the new Council member would “write a record here, as his colleagues… have written, that will excite the admiration of not only all their fellow Americans, but will excite the admiration of leaders in other governments throughout the world who frequently comment to me about the wisdom, the foresight, the stability of the United States of America and its policies”.

In the 1960s it was all “about Fiscal Policy”.  But Monetary Policy was not completely “forgotten”. From James Tobin, Counsel Member during 1961-62 we know that:

1. The “new economics” (read “Keynesian economics) sought to liberate federal fiscal policy from restrictive guidelines unrelated to the performance of the economy.
2. The Council sought to liberate monetary policy to focus it squarely on the same macroeconomic objectives that should guide fiscal policy.

In the 1960s the goal of policy was “full employment” in order to satisfy the requirement of the Employment Act of 1946, that put the responsibility for employment and inflation on the shoulders of the Federal Government. The CEA took that responsibility very seriously as can be gleaned from a reading of the yearly Economic Reports of the President published during the decade.

From the first ERP in 1962:

THE U.S. ECONOMY made substantial advances in 1961 toward the goals of the Employment Act: “maximum employment, production, and purchasing power.”

In spite of the significant gains of 1961, the economy at the turn of the year still fell short of the standards set forth in the Employment Act. Too many persons “able, willing, and seeking to work” were unable to find “useful employment opportunities.” Even at record levels, national production had not yet reached its potential at full employment; and the purchasing power of the American people—the command over goods and services represented by their incomes—was still too low.

From the 1969 ERP:

The large recent gains in output reflect the fact that over-all demand has caught up and kept up with the economy’s rising productive capacity. In the late 1950’s and early 1960’s, the Nation was sacrificing the opportunity to consume and invest a substantial amount of the output it was capable of producing. Potentially productive men and machines were idle because of inadequate demand for their services. At the recession trough in the first quarter of 1961, actual GNP was $50 billion (1958 prices) below the estimated potential output of the economy at a 4-percent unemployment rate. This “gap” was gradually reduced and finally closed in the last half of 1965. Since then, actual GNP has fluctuated in a relatively narrow range around its growing potential—exceeding it somewhat in the boom of 1966 and falling a little short during 1967.

The paragraphs above were written just to put the “employment/unemployment obsession in perspective. After all it´s been half a century and most of us were not (consciously) around. And that obsession has its roots in the events of the “Great Depression”.

We all now about the “inflation obsession” that has become the “rule” since the “Great Inflation” of the 1970s came to an end in the early 1980s, so I´ll not spend time on it, going straight to the comparative charts about which I´ll have some comments.

First up unemployment.

Followed by inflation (measured by the Core PCE).

And RGDP growth

The unemployment resemblance is “eerie” despite the fact that it was an “obsession” only in the 1960s. Maybe low/falling unemployment is consistent with low/falling inflation, contrary to the original Phillips Curve (remember that soon after 1969, unemployment AND inflation trended up).

In the 1960s inflation was low and stable in the first half of the decade and quickly climbed during the second half. In the 1990s it trended down continuously. Observe in the RGDP growth charts that growth was much more stable in the 1990s and ended the decade higher and even more stable while it came down in the second half of the 1960s, when inflation began to show it´s “ugly” face.

To these facts I´ll give a “Market Monetarist – NGDP Level Targeting” interpretation.

The charts below show the behavior of Nominal Spending (NGDP) and a linear trend (estimated from, respectively, 1957 to 1965 and 1987 to 1995). It “fits the facts like a tailor-made glove”.

When did inflation “rear its ugly head” in the 1960s? Soon after spending “took off”. In the 1990s spending evolved along a constant growth trend. Unemployment AND inflation came down.

So, in a sense, the “obsession in the 1990s was with a constant level growth trend for spending. The “obsession” with inflation came “on board” with Bernanke and just as the unemployment “obsession” gave rise to the “Great Inflation”, the inflation “obsession” opened the door to (the final name ruling is still pending):

1. The Great Recession
2. The Lesser Depression
3. The Second Great Contraction

Oh, almost forgot, I think the 1990s wins the “gold” hands down!