Excesses and Sins

from Paul Krugman's blog

May 19, 2013

The Mythical 70s

Matt O'Brien is probably right to suggest that Michael Kinsley's problems
— and those of quite a few other people, some of whom have real influence
on policy — is that they're still living in the 1970s. I do, however,
resent that thing about 60-year-old men …

But it's actually even worse than Matt says. For the 1970s such people
remember as a cautionary tale bears little resemblance to the 1970s that
actually happened.

In elite mythology, the origins of the crisis of the 70s, like the
supposed origins of our current crisis, lay in excess: too much debt, too
much coddling of those slovenly proles via a strong welfare state. The
suffering of 1979-82 was necessary payback.

None of that is remotely true.

There was no deficit problem: government debt was low and stable or
falling as a share of GDP during the 70s. Rising welfare rolls may have
been a big political problem, but a runaway welfare state more broadly
just wasn't an issue — hey, these days right-wingers complaining about a
nation of takers tend to use the low-dependency 70s as a baseline.

What we did have was a wage-price spiral: workers demanding large wage
increases (those were the days when workers actually could make demands)
because they expected lots of inflation, firms raising prices because of
rising costs, all exacerbated by big oil shocks. It was mainly a case of
self-fulfilling expectations, and the problem was to break the cycle.

So why did we need a terrible recession? Not to pay for our past sins, but
simply as a way to cool the action. Someone — I'm pretty sure it was
Martin Baily — described the inflation problem as being like what happens
when everyone at a football game stands up to see the action better, and
the result is that everyone is uncomfortable but nobody actually gets a
better view. And the recession was, in effect, stopping the game until
everyone was seated again.

The difference, of course, was that this timeout destroyed millions of
jobs and wasted trillions of dollars.

Was there a better way? Ideally, we should have been able to get all the
relevant parties in a room and say, look, this inflation has to stop; you
workers, reduce your wage demands, you businesses, cancel your price
increases, and for our part, we agree to stop printing money so the whole
thing is over. That way, you'd get price stability without the recession.
And in some small, cohesive countries that is more or less what happened.
(Check out the Israeli stabilization of 1985).

But America wasn't like that, and the decision was made to do it the hard,
brutal way. This was not a policy triumph! It was, in a way, a confession
of despair.

It worked on the inflation front, although some of the other myths about
all that are just as false as the myths about the 1970s. No, America
didn't return to vigorous productivity growth — that didn't happen until
the mid-1990s. 60-year-old men should remember that a decade after the
Volcker disinflation we were still very much in a national funk; remember
the old joke that the Cold War was over, and Japan won?

So it would be bad enough if we were basing policy today on lessons from
the 70s. It's even worse that we're basing policy today on a mythical 70s
that never was.