Site Meter

Sunday, May 19, 2013

I've had it up to here with Matt Yglesias

He wrote

"But the remarkable thing about the inflation of the 1970s is how long a span we went with key Federal Reserve officials insisting that curbing inflation expectations was beyond their power. And they invoked arguments you'll be familiar with today. They thought there were major credibility and time-consistency problems. They thought money was already tight as evidenced by high interest rates so there was nothing more to be done. They noted, accurately, that the structure of the American economy was changing and then insisted, wrongly, that this somehow made it impossible or irrelevant for them to do their own jobs properly."

I comment (In this post I have added text to my comment over there)

Give me names and quotes.  In fact Arthur Burns said that disinflation would involve huge costs as it did.

I am going to do some deep deep historical research and quote from the Wikipedia article on Arthur Burns (emphasis mine)

"From the Board of Governors meeting minutes of November 1970, Burns believed that:

...prospects were dim for any easing of the cost-push inflation generated by union demands. However, the Federal Reserve could not do anything about those influences except to impose monetary restraint, and he did not believe the country was willing to accept for any long period an unemployment rate in the area of 6 percent. Therefore, he believed that the Federal Reserve should not take on the responsibility for attempting to accomplish by itself, under its existing powers, a reduction in the rate of inflation to, say, 2 percent... he did not believe that the Federal Reserve should be expected to cope with inflation single-handedly. The only effective answer, in his opinion, lay in some form of incomes policy.

I was alive in the 70s.  I can absolutely promise you that I can recall no cases of anyone saying that it was impossible to get inflation down to 4%.  It was agreed that the Fed could cause high unemployment and high unemployment would cause low inflation.  Your totally unsupported claim about the debate is incorrect.

I do recall Robert Solow saying that he thought it would be better to disinflate gradually.

The claim was that reducing expected inflation would involve huge effects on the economy *before* inflation expectations declined.  The conflicting claim was that a firm commitment to disinflation would cause inflation expectations to fall first and then the economic effect would be low inflation iwthout high unemployment.  The counter argument was totally wrong.  Expected inflation declined slowly following a huge recession.

The 70s are indeed relevant to the current debate.  Data from the 70s and early 80s prove that you are wrong.  The Fed could fight inflation by causing a huge gigantic change in the Federal funds rate which caused double digit unemployment which caused low inflation as one would expect with an adaptive expectations augmented Phillips curve.  The Fed could not fight inflation by causing a shift in expectations which preceded the effect of monetary policy which occur whether or not expectations shift.

The fact that the Fed drove the federal funds rate up by over 1,000 basis points shows nothing about what it can do when it can't possibly drive it down by more than 11 basis points.  It also shows that Volcker thought the huge shift in a variable which Bernanke can't control was needed.

But the main point is that you made a claim of historical fact and present no evidence.  You said that people said something.  I will be charitable and assume you checked and have quotes and just wanted to save pixels.  I challenge you for names and quotes.  I think that intellectual integrity requires you to provide them or retract your claim.

No comments: