Alan Blinder writes:

Thursday’s surprise report on gross domestic product in the first quarter could again contribute to déjà vu’s sentiment. High inflation reminded many Americans of the unhappiness of the 1970s, when food prices plummeted in 1973-74 and oil prices plummeted in late 1973 – and a severe recession followed. We led for a repeat performance?

Not quite. One big difference is that now the Federal Reserve and other central banks understand stagflation better. In 1973 it was a wonderful new event and No one knew how to think about it. Economists and central bankers at the time lived through a history where a growing economy led to rising inflation and a slower economy led to rising unemployment. The two diseases did not occur simultaneously. (Added italics)

This is Alan S. From Blinder, “If we get a recession in 2022 or 2023, it will be a lighter one.” The Wall Street JournalApril 28, 2022. (April 29 print edition.)

But here is what Milton Friedman said in his December 1967 speech to the President of the American Economic Association:

Let us assume that the financial authorities try to peg the “market” rate of unemployment to a level below the “natural” rate. For precision, suppose it takes 3 percent as the target rate and the “natural” rate is more than 3 percent. Suppose we start at a time when prices are stable and when unemployment is above 3 percent. Accordingly, the authorities increase the rate of financial growth. It will be expansive. The nominal cash balance exceeds human aspirations, it tends to lower interest rates primarily and stimulates spending in this and other ways. Income-expenditure will start increasing.

In the beginning, most or all of the increase in income will take the form of increase in production and employment instead of price. People expect prices to remain stable and on that basis prices and wages have been fixed for some time in the future. It takes time for human needs to adapt to new conditions. Producers will respond to the initial expansion of overall demand by increasing output, employing employees longer hours, and taking jobs for the unemployed, now at a nominal wage. This is pretty much the ideal doctrine.

But it only describes the initial effects. Because the selling price of a product usually responds to an unexpected increase in nominal demand faster than the reason for production, real wages have been received যদিও although real wages expected by workers have increased, as employees have indirectly assessed wages paid at previous price levels. . Indeed, at the same time the fall of the former position in the actual wages of the employers and the previous increase in the actual wages of the employees which has enabled the employment to increase. But the fall of the former position in real wages will soon affect expectations. Employees will start counting for the rising prices of the things they buy and demand higher nominal wages for the future. “Market” unemployment is below the “natural” level. There is an additional demand for labor so actual wages will increase towards their initial level.

Although the high rate of economic growth continues, real wage growth will reverse the decline in unemployment and then lead to growth, which will bring unemployment back to its previous level. To keep the unemployment target at 3 percent, the monetary authorities need to further increase fiscal growth.

In other words, Milton Friedman, long before the 1973 stagflation, expected anyone to get “stagflation,” a combination of high unemployment and high inflation.

What has confused Alan Blinder is that the economists he studied under, Robert Solo and Paul Samuelson, did not anticipate this combination because they were blinded by the thinking of their Keynesian Phillips Curve.

But it was not the whole universe of economists. Friedman saw this clearly 5 years before the 1973 stagflation.

Here is David R. Henderson, version has my biography of Milton Friedman. A Brief Encyclopedia of Economics. Here’s Kevin D. Excellent entry from Hoover’s Phillips Curve Encyclopedia.

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