from a review by NOAM SCHEIBER of Robert Samuelson's THE GREAT INFLATION AND ITS AFTERMATH: The Past and Future of American Affluence >... The villain in Samuelson's morality tale is a group of intellectuals who >came into fashion during World War II, then came into power with the Kennedy >administration. John F. Kennedy himself had sound economic instincts. But he >was seduced by his chief economic adviser, a University of Minnesota professor >named Walter Heller, who argued that more rational management of the economy >would produce permanently higher growth. "Heller was an aggressive salesman >for what ultimately became known as the 'new economics,' " Samuelson writes, >but he was "hardly a one-man band." Many of the day's leading economic lights >— James Tobin of Yale and Robert Solow and Paul Samuelson (no relation to >Robert), both of M.I.T. — held similar views.
> At the heart of the "new economics" was a concept called the Phillips Curve, > which summarized the trade-off between unemployment and inflation. The idea > was that an economy could experience very low unemployment and high > inflation, or very high unemployment and low inflation, or any combination > therein. Heller persuaded Kennedy to move leftward along this spectrum by > stimulating the economy — effectively accepting higher inflation in exchange > for more jobs. > It worked for a time. The economy flourished; inflation inched up only > marginally. But as the Kennedy administration became the Johnson > administration became Nixon became Carter, growth stagnated and inflation > skyrocketed. It was clear that, over the long term, the government could no > more trade "a little inflation" for sustained growth than a drug addict could > use "a little heroin" for a sustained high. Achieving the same economic > payoff required ever more stimulus. Some presidents struggled to control > their addictions, while others didn't even try. "Nixon frequently reminded > Burns," Samuelson writes, referring to Arthur Burns, then the chairman of the > Federal Reserve Board, "that the president's political fortunes depended > heavily on the Fed's ability to increase economic growth."< I don't know about Samuelson's book, but this is crap. Heller's ideas are much (much!) less important than the fact of the Vietnam war (which pumped up demand, as all wars do, while reducing labor-power supplies by drafting people) and LBJ's political inability to raise taxes enough to prevent the inflationary impulse. That inability reflected his losing war in Vietnam, urban riots, etc. and was not the result of Heller's ideas. This also ignores the dramatic increase in oil prices that occurred twice in the 1970s along with the end of the Bretton Woods fixed exchange-rate system (which punished those countries with above-average inflation like the US with balance of trade problems). > What the new economists didn't realize was that inflation accelerates: > workers demand raises to keep up with higher prices; companies raise prices > to keep up with rising wages; the process spirals upward. The only way to > break the cycle is with a deep recession, which creates vast surpluses of > goods and labor. Companies with scads of inventory eventually lower prices. > High unemployment makes workers less pushy... < Abba Lerner, an early Keynesian, was quite familiar with the fact that inflation can accelerate (get worse even without unemployment falling). Now, why were his ideas ignored? perhaps because it's politics that drives economic policy, not economists' personalities (or lack thereof)? -- Jim Devine / "Nobody told me there'd be days like these / Strange days indeed -- most peculiar, mama." -- JL. _______________________________________________ pen-l mailing list [email protected] https://lists.csuchico.edu/mailman/listinfo/pen-l
