mythology of conservative's

The stagflation myth

Via Dean Baker, Robert Samuelson declares — as a simple fact — that

Johnson’s economic policies, inherited from Kennedy, proved disastrous; they led to the 1970s’ “stagflation.”

Wow. I didn’t know that. Neither, as far as I know, did any economist who has actually studied the issue.

Seriously, this is a standard bit of conservative propaganda. Ever since Reagan, conservatives have been using the evils of stagflation to denounce liberal economic policies. Yet mainstream economics — even at Chicago — has never made that connection.

Stagflation was a term coined by Paul Samuelson to describe the combination of high inflation and high unemployment. The era of stagflation in America began in 1974 and ended in the early 80s. Why did it happen?

Well, the textbooks basically invoke two factors. One was a series of “adverse supply shocks”, mainly the huge runup in the price of oil. The other was excessively expansionary monetary policy, especially in 1972-3, which allowed expectations of inflation to become entrenched. (Ken Rogoff — a Republican, by the way — attributes that expansion to the desire of Arthur Burns to see Richard Nixon reelected.)

The appearance of stagflation was a win for conservative economics, but it was conservative monetary economics that was partly vindicated: Milton Friedman’s assertion that there is no long-run tradeoff between inflation and unemployment turned out to be correct, and is now part of the standard canon.

But where is the Great Society in all this? Nowhere. The claim that stagflation proved the badness of liberal ideas is pure propaganda, which not even conservative economists believe.

Posted via web from Jim Nichols