It Really Is The 1970s All Over Again—People In Power Are Underestimating Their Ability to Fix Things

Pre-Volcker thinking about inflation.

Gerald Ford Presidential Museum

Matt O’Brien has a good post about how many people refuse to admit that the problems of the 2010s aren’t the same as those of the 1970s. That said, I also like Christina Romer’s point (PDF) that in a sense we really are replaying the central political problem of the 1970s—the people in charge are refusing to admit that they have the ability to solve the major macroeconomic problem of the time.

Today that problem is unemployment and stubbornly low levels of investment spending. In the 70s it was, obviously, inflation. 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. People looked to high-profile politicians to provide solutions, and so high-profile politicians cooked up solutions. Gerald Ford wanted us to Whip Inflation Now largely through a campaign of exhortation.

When Paul Volcker came around and accepted responsibility for the problem, the adjustment turned out to be quite painful. But it wasn’t logistically difficult to pull off, it didn’t take very long, and all things considered we would have been a lot better off deflating in 1973-75 than waiting all the way until 1980-82.

We’re talking about different problems that need to be solved with different policies. But in both cases, the first step to fixing policy is for the people with the ability to change direction to admit that they have the power to make change happen. In both the United States and Europe, central bankers need to move past claims about their own impotence and accept responsibility while public figures need to move beyond “now more than ever” thinking and address the outstanding problem of the day.