In my last post I tried to show that in the 1960s the prevailing “obsession” with employment paved the way to the “Great Inflation” of the 1970s. In the 1970s, the employment “obsession” remained a “fixture of the policy landscape” under the Burns Fed. According to Robert Hetzel in his excellent piece Arthur Burns and Inflation:
Burns believed that the labor unions, through their exercise of monopoly power to push up wages, were blocking his attempt to lower inﬂation and stimulate economic activity. He attacked the monopoly power of corporations and unions (U.S. Congress, 2/20/73, p. 414, and 8/21/74, p. 219, respectively):
“As for excessive power on the part of some of our corporations and our trade unions, I think it is high time we talked about that in a candid way. We will have to step on some toes in the process. But I think the problem is too serious to be handled quietly and politely.
. . . we live in a time when there are abuses of economic power by private groups, and abuses by some of our corporations, and abuses by some of our trade unions”.
More than anyone else, Burns had created widespread public support for the wage and price controls imposed on August 15, 1971. For Burns, controls were the prerequisite for the expansionary monetary policy desired by the political system—both Congress and the Nixon Administration. Given the imposition of the controls that he had promoted, Burns was effectively committed to an expansionary monetary policy. Moreover, with controls, he did not believe that expansionary monetary policy in 1972 would be inﬂationary.
The outcome was that inflation “doubled up”, being the result of real shocks (that increased inflation and unemployment) and an expansionary monetary policy to mitigate the effect of the shocks on unemployment.
In the second half of the 1980s, 1990s and first half of the 2000s, inflation AND unemployment remained contained. In my interpretation this favorable combination came about because the Fed in fact stabilized nominal spending along a trend path. Then Bernanke took over and brought with him the “obsession” with inflation. The outcome was the “Great Recession” (“Lesser Depression” or “Second Great Contraction”). Four years on we are still a long way from escaping this predicament because, just as in the 1970s, the “obsession” that “caused” the “GR” is alive and well, as can be gleaned from this piece in the WSJ:
But a new survey of local businesses conducted by the Federal Reserve Bank of Atlanta, released Wednesday, suggests South-Eastern region business leaders may not share the Fed’s confidence about future inflation.
The survey of 168 firms found an average expectation inflation would hang close to the Fed’s target at 1.9% over the next 12 months. That was up a touch from the average expected annual gain of 1.8% uncovered in a similar survey a month ago, but it was still below the Fed’s preferred level for price increases of 2%.
The short run was not where the potential problem lies. Survey respondents predict inflation over the next five to 10 years to rise by 2.9%, a level that would problematic to the Fed. Of those who answered the question, the bias of regional companies clearly points to expectations that long term inflation risks are rising. Respondents said there was a 38% chance prices will rise between 1.1% to 3%, and a 29% chance of a gain between 3.1% and 5%. Those surveyed put a one in five chance on inflation rising by 5% or higher over the next five to 10 years.
So, yes: It´s “Hello Blackbird”! At least until someone like Christy Romer becomes Fed Chairperson.