Looking Back at the 70s

Karl Smith says:

I like to focus on inflation because I think just about all of us have agreed that inflation is primarily controlled by actions at the Fed.

I’m ripping this completely out of context1 because it reminds me of a question I have for any economists who care to respond. Here it is: it’s now been 30 years since the stagflation of the 70s. Is it still the consensus view that the inflation of that era was caused by a union-triggered wage-price spiral? Or do we believe that Milton Friedman was right, and inflation is always and everywhere a monetary phenomenon, even in the 70s? Or something else?

Just to be clear, I should add that I’m not asking if the wage-price spiral was a factor — I’m sure it was — but whether it was the proximate cause. Or were loose fiscal and monetary policy the cause, and union demands simply a reaction? The reason I ask is simple: Paul Volcker jacked up interest rates from 1979-1981, and inflation fell. This suggests that union demands were mainly a response to perceived Fed seriousness about inflation, not a primary cause of 70s inflation. Likewise, although unions have declined in the U.S., they’ve remained pretty strong in much of Europe and there’s been no repeat of 70s-style inflation there. This also suggests that monetary policy is considerably more important than union wage demands.

But I don’t know. So I’m tossing it out. Any macro or labor economists care to venture an opinion?

1But you can, of course, click the link to see what he’s talking about. Hint: inflation is going down unless the Fed decides to do something about it.


Mother Jones was founded as a nonprofit in 1976 because we knew corporations and the wealthy wouldn’t fund the type of hard-hitting journalism we set out to do.

Today, reader support makes up about two-thirds of our budget, allows us to dig deep on stories that matter, and lets us keep our reporting free for everyone. If you value what you get from Mother Jones, please join us with a tax-deductible donation so we can keep on doing the type of journalism that 2018 demands.

Donate Now