FYI

[Jim Devine <jdevine@xxxxxxxxxxxxxxx>]

The following may be of interest:

... DeLong (1997 [in the Romer & Romer volume]) asks why the U.S.
government and the Federal Reserve did not engage in Volcker-type
disinflation (i.e., persistent high unemployment) during the 1970s. Instead
of answering that they had a bad theory and lacked political will, as he
does, it would be more reasonable to argue that a broad constellation of
political forces opposed such policies.  It is true that memory of the
Great Depression played a role, as DeLong argues, in that economic
policy-makers are like stereotyped French generals who constantly fight the
last war. But the opposition to disinflation was deeper. At the earliest
stages, inflation arose from Vietnam war spending and President Johnson's
fear that raising taxes would provoke even greater societal instability and
electoral opposition. Such fears continued under Nixon. So the persistence
of inflation during the late 1960s allowed the rise of the inflationary
hangover [a.k.a., "inertial inflation"].

What cause these Presidents' fears? The opposition to disinflation arose
not simply from the (secularly waning) power of working-class institutions
opposing high unemployment, but also from large numbers of businesses,
fearing bankruptcy as capacity utilization rates fell. On top of that, for
several years, many industrial capitalists could compensate for low
profitability by taking advantage of low and sometimes negative real
interest rates. Similarly, many "middle class" elements opposed
disinflation for similar reasons. Finally, many saw the stagflation of the
1970s as largely temporary phenomenon, due to exogenous shocks.
...

(from a paper I'm working on, titled "The Rise and Fall of Stagflation:
Toward Empirical Tests of Alternative Theories")

Jim Devine

James Devine
Professor of Economics
Econ. Dept., Loyola Marymount Univ.
7900 Loyola Blvd., Los Angeles, CA 90045-8410 USA
310/338-2948 (work); FAX: 310/338-1950
jdevine@xxxxxxxxxxxxxxx & http://clawww.lmu.edu/~JDevine