This article by James Tobin (Nobel winner) – “living-with-inflation” – from May 1971 is telling:
The cruel choice between two evils, unemployment and inflation, has become the major economic issue of the day. Democrats and Republicans agree that both evils must be avoided and differ only on the means—with Democrats largely favoring the more drastic remedies. Congress has thrust upon the President authority for direct controls on wages and prices. The Administration has relied on traditional fiscal and monetary measures, including changes in taxes and spending and Federal Reserve control over the supply of money. First it tried to hold down prices by using tight money to restrain demand; now it is trying to create jobs by using budget deficits and easier money to expand demand. But the results, so far, are not encouraging. The traditional measures produced a recession and rising unemployment, but inflation hardly slowed down. Now both the recession and the inflation seem very stubborn.
Nevertheless, inflation and recession are usually alternative afflictions. One of the most dismal and best verified observations of modern economics is that there is ordinarily a trade-off between the rate of inflation and the rate of unemployment. Less of one means more of the other. Hence, full employment (which means an unemployment rate between 3 1/2 and 4 1/2 percent) can, on the average, be sustained only with 4 to 5 percent inflation. Price stability (another Pick-wickian term, meaning annual inflation of no more than 1 to 2 percent) is possible only with more than 5 percent unemployment.
Further on he contests Milton Friedman:
Friedman’s argument rests on an appealing but unverified assumption: that you can’t fool all of the people all of the time. If labor and business are making inconsistent demands, then in Friedman’s view a mere renumbering of prices and wages through inflation will not resolve the conflict. But, in fact, the evidence suggests that even sophisticated people are far more sensitive to direct losses in money incomes than to declines in their purchasing power through higher prices. Wage and salary reductions are almost unknown in industrial countries, even though it is not uncommon for employees to suffer temporary losses in purchasing power. So long as wages and prices are set in dollars, and money retains its age-old power to deceive, inflation can be used to resolve economic conflict.
Statistical studies have yet to verify a one-for-one feedback of price rises on to subsequent wage demands; current estimates for the US are that from 35 percent to 70 percent of price increases are ultimately translated into subsequent wage increases. This does not mean that labor is losing out—prices do not for long move more than in proportion to wage costs—but simply that there is a damper on the inflationary process. Perhaps ultimately inflation can be no more deceptive than the change of the monetary unit from, for example, old francs to new francs with two fewer zeros, and have no greater effect on real behavior. Perhaps “money illusion” is a transient phenomenon. But the period of adjustment is measured in decades rather than years. If so, the Phillips trade-off is real enough for the practitioners of economic policy.
The whole piece is worth reading. Tobin was an important participant in the 1960s economic policymaking. As Joseph Pechman wrote in 1987 reminiscing on Walter Heller, Chairman of President Kennedy´s first Counsel of Economic Advisers (CEA) who had passed away:
As chairman of the Council of Economic Advisers, he assembled the best team of economists ever to serve the council. He chose as his colleagues on the council James Tobin and Kermit Gordon and later Gardner Ackley and persuaded such stars as Kenneth Arrow, Arthur Okun, George Perry, and Robert Solow to join the staff. This team, with Walter as its quarterback, vigorously advocated the neoclassical Keynesian synthesis of fiscal and monetary policies to achieve full employment and increase economic growth. They persuaded President Kennedy to propose a major tax cut to stimulate demand. They advocated the enactment of an investment tax credit and the liberalization of depreciation allowances to stimulate investment incentives. And they developed the first-and, I believe, successful-voluntary wage-price guideposts to help contain inflationary pressures as the economy moved to full employment. As a result of the policies pursued by the Kennedy and Johnson administrations, the nation enjoyed a long period of economic growth and prosperity without inflation. From the fourth quarter of 1960 to the fourth quarter of 1964, when Walter left his CEA post, U.S. real GNP grew at an average annual rate of 4.9 percent, consumer prices rose 1.2 percent a year, and long-term federal bond yields never exceeded 4.2 percent. I will leave it to the economic historians to decide whether these were the best years in our postwar history, but they were certainly close.
But what they really did was guide the economy to the “Great Inflation”.
Today we are faced with an “inflation obsession”, the flip side of the 1960s and 70s “unemployment obsession”. From the “Great Inflation” to the “Great Recession”.