In the comment thread of Britmouse´s excellent post, James in London and W Peden have an exchange in which I´m mentioned. W Peden´s comment is very long so I just reproduce a few paragraphs.
(James in London): Looking forward to a revisionist critique by a Market Monetarist of the “Barber Boom”. Was it so bad? Are you listening Marcus?
(W Peden): James in London,
Interesting question. I’m sure Marcus Nunes could do a better job, but a few revisionary observations-
Now for NGDP. To set the scene for the Barber Boom: the quarterly data I have (from the “Money Creation in a Modern Economy”) suggest that UK economic policy was very good from Q2 1965 to Q4 1967, when there was a halving of NGDP growth from over 10% to about 5%. NGDP growth then picked up following devaluation, and by the end of the (perhaps overrated) Roy Jenkins chancellorship was running at about 10% again.
Looking at NGDP, the “recession” during the early stages of the Heath government was clearly a supply shock. NGDP growth was above trend and stable from Q3 1970 to Q1 1972, but during this period unemployment rose dramatically and RGDP slowed right down (and IIRC fell in some quarters) presumably due to the collapse of incomes policies and the reversion of unemployment to its underlying natural rate, which had risen as a result of the major expansion of the welfare state during the Wilson government.
In terms of NGDP, the Barber Boom was very short. From Q2 1972 to Q1 1973, NGDP growth accelerated drastically from about 11% to over 20% as the government desperately tried to get unemployment down and RGDP growth up to 5%. Looking at the quarterly RGDP data from Trading Economics, NON-ANNUALIZED RGDP growth reached 5.3% in Q1 1973. In other words, even by the standards of their own incorrect estimates of the output gap, the UK macroeconomic authorities expanded RGDP by more than their ANNUAL target in a single quarter.
Probably the main revisionist note I shall sound is this: by the end of Anthony Barber’s chancellorship in March 1973, there was absolutely no reason why the UK needed to have >20% inflation. The monetary overhang could have been handled by a good market monetarist chancellor. Even taking Q1 1974 as a bit of an outlier, NGDP growth was coming back under control (relatively speaking) by the end of 1973, nearing 10%. Even with very pessimistic estimates of potential output in 1974-1975, inflation need not have risen very far beyond 10% in that period. And this means that the REAL inflationary boom was under Denis Healey from Q2 1974 to Q4 1975, during which NGDP and inflation accelerated far above 20%.
However, the boom was ended. NGDP growth was brought down even more rapidly than it was raised, falling to under 5% by Q1 1974. I have mixed feelings about this disinflation. On the one hand, a mid-term government practicing a statutory incomes policy probably has the best excuse and tools for a “shock therapy” approach, and unemployment continued to fall, presumably due to a temporary shift in the natural rate of unemployment resulting from the incomes policy. Nevertheless, a recession began in Q1 1974, partly supply-driven (the oil crisis and the miners’ strike) and partly driven by the sharp fall in NGDP growth.
It´s not a question of “doing a better job”, but of illustrating the period. I´m a firm believer in the “power of images” and that´s what I do below.
My takeaways: The so called Barber Boom was “BS”. NGDP growth had been stable as was RGDP growth, while inflation was trending down. What appears to have happened in 1972-73 was a politically-driven and desperate move with eyes on a possible election in 1974-75. According to “Backbencher”: In 1972, with an election looming, Heath U-turned in a spectacular turn of events that became known as the ‘Barber Boom’.
The oil shock (which erupted on October 1973) just made a bad situation worse. By constraining AD, the fall in real output was worse than otherwise (much like the Fed and the BoE, plus the ECB and others did in 2008).
The next charts indicate that if in the US the 1970s were known as the “Great Inflation”, in the UK the period should be called one of “Mammoth Inflation”. And the link of inflation with the behavior of NGDP couldn´t be more evident.
Update: In the comments James wrote:
Very clear. Very spiky times, but growth bulldozed on, almost regardless. Some sharp periods, but sharp recoveries. At least “stop-go” had plenty of go, and not just stagnation like today.
James, not quite. Today is a different world altogether, reflecting “peoples wish” for living a Great Stagnation (see next post).
In the 70s it was “spiky times” but growth (at least in the UK) did not “bulldozed on”. The charts below illustrate. In the 70s UK average gowth was 2.6 and pretty spiky, with standard deviation also of 2.6. In the US average growth was 3.2, and just as spiky (SD also 2.6).
During the GM, average real growth in the US continued at 3.3. but “spikiness” fell by more than 50% (SD 1.2). Average UK growth was the same (3.3%) and SD 1.1.
Certainly life was more pleasant in 1992-07!