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Jeff Christie's avatar

The disturbing implication of a Phillips curve that turned out to be flat is that the Fed has, for the last 48 years, pursued a policy that has kept millions of people unemployed, kept millions in poverty, and suppressed trillions of dollars in wage growth under the false belief that it would control inflation. This Phillips curve “mistake” has caused an incredible amount of damage to the American working class.

Wage growth essentially stopped after 1973 because of Nixon’s wage and price controls. Wage suppression continued with the “Council on Wage and Price Stability”, and then the Fed policy to keep unemployment high based on the Phillips curve. If wages had continued to grow with economic growth, the median income would be twice as high as it is now. The Rand paper, “Trends in Income From 1975 to 2018”, said “From 1975 to 2018, the difference between the aggregate taxable income for those below the 90th percentile and the equitable growth counterfactual totals $47 trillion.” That was a pretty expensive “mistake”!

America had terrific wage growth between 1933 and 1973. Median income went up by about a factor of 5. Most of that time there was only moderate inflation. For instance, between 1948 and 1973 real median income grew by 2.5% per year. The average inflation rate during that time was 2.4%. But between 1974 and 1981 the average inflation rate was 9.2% while median incomes shrank 1.2% per year. This is the opposite of the “higher wages cause inflation” theory.

The poverty rate went from about 70% in 1933 to 11% in 1973, and then stopped going down. If not for wage suppression poverty could have been virtually eliminated by now.

Shouldn’t the economy exist to benefit the people, instead of sacrificing people for the supposed benefit of the economy? What’s the point? That’s pretty messed up.

The 70’s inflation was not caused by an oil shock. In his 1968 paper Milton Friedman said, “Every major inflation has been produced by monetary expansion.” And Nixon did pressure his Fed chairman into an expansionary monetary policy to goose the economy in order to help him get re-elected (from “How Richard Nixon Pressured Arthur Burns: Evidence from the Nixon Tapes”). Nixon knew this would create inflation but was willing to accept the tradeoff. He said, “I’ve never seen anybody beaten on inflation in the United States. I’ve seen many people beaten on unemployment.”

The 2002 – 2008 oil shock was even bigger than the 70’s oil shock, but it did not produce inflation. That should have driven a stake through the heart of the “oil shock creates inflation” idea.

“Stagflation” wasn’t a real thing. From 1975 to 1979 the average GDP growth rate was 3.68%. That’s a funny kind of stagnation. That growth was better growth than Trump’s “greatest economy in history” and better than the 3.1% average GDP growth during the 80’s. There were 10.345 million jobs created during the Carter administration. The job growth rate of 12.82% was better than any presidential term since then. The labor participation rate was also growing rapidly. The number of manufacturing jobs hit an all-time high in 1979. I have wondered for years why people keep saying there was stagflation in the 70’s. Marcus Nunes made my day with his comment! Stagflation is like the Emperor’s New Clothes, not really there.

Robert Mundell was the economist who identified the economic condition of the late 70’s as “stagflation”. By some coincidence he had a way to fix it, Supply Side Economics. In other words the snake oil salesman diagnosed the disease that he said he could cure. His student Art Laffer cooked up a curve to show that tax cuts create economic growth so that the tax cuts would pay for themselves.

Reagan’s tax cuts did not produce any extra growth and the tax cuts did not pay for themselves (see “The Economic Consequences of Major Tax Cuts for the Rich” by Hope and Limberg). The tax cuts for the rich were paid for with public debt. From 1933 to 1981 high top tax rates effectively imposed a cap on top incomes. Reagan’s tax cuts removed that cap and allowed unlimited incomes. This enabled the top 0.1% to take the $47 trillion that the bottom 90% didn’t get.

In summary, a fake “stagflation” boogeyman was used as a justification for using the bogus Phillips Curve as rationale to suppress wages and the bogus Laffer Curve as rationale to cut top tax rates. That’s how trillions of dollars in income were redistributed from the wage earners to the rich.

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Steven Woolley's avatar

In the 70s I was a young exec. leading a small team on public policy issues in the midwest and Rocky Mtn. region. The land was awash with high anxiety over commodity shortages, hyper inflation, the pragmatic value of taking on huger personal debt, and screwball investment schemes. It seemed like emotions drove most decisions, even as speakers rolled through town promoting rational choice economics. It just didn’t pass the smell test, but we were young, junior, and doubted our own suspicions in the face of senior expertise.

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