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The 70s redux...

by Metatone Thu Jan 10th, 2013 at 05:35:07 AM EST

Benjamin Studebaker has published an interesting blog on this topic:

Stagflation: What Really Happened in the 70′s « Benjamin Studebaker

If you argue long enough about economics, you are bound to run into the stagflation argument. The stagflation argument claims that the big state and stimulus caused high inflation, high unemployment, and poor growth during the seventies. Usually this argument is not fully argued by those who believe in it-it is merely asserted, and the rest of us are expected to accept that it is simply the case that the seventies happened that way. Today I'd like to endeavour to illustrate what actually happened in the seventies, what the real causes of stagflation were, and what sort of lessons might be pulled from it.

front-paged by afew


Well worth reading it all, although I think our discussion here on ET in a previous diary of mine ranged more widely - and in looking at a wider timespan and range of variables concluded that there were some deeper things going on than Studebaker describes.

However, I'd endorse his conclusions for sure:

Stagflation: What Really Happened in the 70′s « Benjamin Studebaker

So what we see here really is not any kind of complicated challenge to the notion that expansionary Keynesian policy is expansionary and contractionary Keynesian policy is contractionary. What we instead see is a crisis in the price of a very necessary good, namely oil, which creates an unacceptably high basic inflation rate and makes doing all kinds of business prohibitively more expensive.

All the normal Keynesian rules applied during the seventies-higher interest rates meant less inflation and more unemployment, lower rates meant less unemployment and more inflation. The only difference was that the baseline for inflation was much higher-the choice was between insane inflation and high inflation, not between high inflation and some kind of normal or acceptable level. Ultimately in both the mid-seventies case and the early eighties case, inflation only comes down permanently from its high baseline when the economy has adjusted to the higher oil price as a new normal and/or when the oil price itself comes down.

What would have prevented us from enduring the misery of the seventies? Less economic dependence on oil, both in terms of energy and throughout the wider economy. Jimmy Carter made a pitch for it, though the country declined to take him up on it at the time.

The issue was never one of needing to switch from stimulus spending to tax cuts for the rich, or of needing to care exclusively about inflation and ignore unemployment. People who interpreted the seventies in that fashion misunderstood fatally what was going on. That misunderstanding fuels and feeds their misunderstanding of the present problems.

There is not going to be hyperinflation or stagflation or any of the various seventies style horrors the economic right likes to conjure in its criticisms of stimulus and Keynesianism, because there is no giant spike in any ubiquitous, necessary thing like oil. Ronald Reagan dropped the interest rate and increased state spending in 82/83, and that, in tandem with falling oil prices, is what brought about "morning in America". Those are Keynesian tactics; there's no paradigm shift here. The conventional wisdom about this period in our history is just wrong-to the extent that Reagan did good economically, he did good not because of some new conservative economic agenda, but because he followed Keynesian orthodoxy and had the good fortune to see oil prices fall during his presidency.

The only lesson that can be taken from the seventies is that it is a very foolish thing for a state to become dependent on a particular resource or product that it cannot make for itself and must import, because that puts the economic welfare of that state at the mercy of the exporting nations. No matter how powerful a country is, if it is dependent in this way, otherwise small, powerless nations can bring it to its knees.

I'd also remark that the difference between imported inflation in inelastic goods and general inflation seems to be a major theme of current economic crises and misunderstanding of those crises by the powers that be.

Austerity/recession (via interest rates or other means) may be a workable treatment for general inflation, but it has much less meaningful effect on inflation of imported essentials like food or fuel that are rising in price because of worldwide demand.

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Metatone
our discussion here on ET in a previous diary of mine

So what really happened in the 70s?

by afew (afew(a in a circle)eurotrib_dot_com) on Tue Jan 8th, 2013 at 02:38:05 AM EST
Not entirely relevant, but the 70s also saw the rise of the Bankster Corporates using exchange rates as weapons to control national governments

keep to the Fen Causeway
by Helen (lareinagal at yahoo dot co dot uk) on Wed Jan 9th, 2013 at 12:35:03 PM EST
[ Parent ]
Whereas under the Bretton Woods system, using exchange rates as political weapons to control national governments was exclusively the prerogative of the US State Department...

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Fri Jan 11th, 2013 at 02:30:55 AM EST
[ Parent ]
The issue was never one of needing to switch from stimulus spending to tax cuts for the rich, or of needing to care exclusively about inflation and ignore unemployment. People who interpreted the seventies in that fashion misunderstood fatally what was going on. That misunderstanding fuels and feeds their misunderstanding of the present problems.

The use of the words 'misunderstood' and 'misunderstanding' is to me the most problematic aspect of the above quote. I am sure there was a lot of misunderstanding. I have to wonder at the thought that it was all just a big misunderstanding.

I would apply the principle that the law used in the case of 'erroneous' pricing of items in the data from which barcode readers obtained prices at the check stands in California supermarkets in the '90s. The fact was that the errors were always in the direction of the store chains and the chains were required to refund a condiderable amount of money.

Of course my knowledge and memory are far from complete or perfect, so perhaps others can remind me of the times when 'misunderstandings' in economic theory have redounded to the benefit of the average citizen. For the life of me I cannot think of any.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Tue Jan 8th, 2013 at 10:23:12 PM EST
The store, in this case, being those private interests that subsidized the economic theory that failed to clear simple empirical hurdles but gave the answers they wished to hear.

There are always misunderstandings available in a social science (or social faith, in the case of neoclassical economics) ~ however, as in bar code reader errors being reliably to the favor of the store, the "misunderstanding" persistently involves accepting a weaker argument that happens to originate from an approach to the studying the economy that was originally developed to justify the wealth and power of the wealthy and powerful.

I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Wed Jan 9th, 2013 at 08:04:07 PM EST
[ Parent ]
In How Institutions Think Mary Douglass cited a cultural anthropologist to the effect that whenever the discourse with elites in any culture approached the most sacred subjects, which were often some of the most important for the maintenance of the social order, everyone became evasive and reluctant to speak clearly. So it is with us.

One of the most powerful protective spells at play in our culture is the cloak provided by the taboo surrounding anything that can be considered 'conspiracy theory'. One might think that all events in human history have been the result of single actors acting alone, as absurd as that might seem, given the ease with which the adverse label of 'conspiracy theory' diverts consideration away from the very possibility that, for instance, the rise to prominence and the long reign in prominence of what is, sadly, the present formulation of 'Mainstream Economics', aka neo-classical economics.

All who wish to be part of that 'mainstream' know, as if by instinct, to ignore anything that seriously challenges that system, prized as it is by those who hand out preferment and tenure. The evidence provided by Mason Gaffney in his monograph that this system was created and enshrined specifically to undermine the criticism of Henry George and his supporters at the behest of wealthy university benefactors whose interests would have been seriously damaged is studiously ignored. Henry George is systematically forgotten by academia, along with others who challenged what has become the Conventional Wisdom, such as Henry Wallace, so that few today have any idea of what they advocated or what might have been. The intellectual shuffle that has repeatedly occurred in economics, where strong versions of beloved theories are convincingly falsified, the field falls back on weak versions temporarily, and, after a suitable time and some non-refutation by some approved authority, moves back to the preferred version without ever dealing with the falsification, as described by Yanis Varoufakis in A Most Peculiar Failure, and on and on.

Hell! The taboo on 'conspiracy theory' explanations are tame stuff compared to the self censorship which most seem to so readily accept.    

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Wed Jan 9th, 2013 at 10:20:35 PM EST
[ Parent ]
If we ever have a return to sanity the post-70s period will be known as the Lost Century - that moment when collective intelligence was on the brink of creating something remarkable, but was stopped in its tracks by an organised capitalist counter-reformation.

Although ultimately the issue is the on-going war between those who simply want to do cool stuff and get along and the few deviants who want to have it all themselves and enjoy screwing over everyone else.

When the deviants are labelled honestly we might see some progress towards civilisation again.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Thu Jan 10th, 2013 at 06:17:31 AM EST
[ Parent ]
The only lesson that can be taken from the seventies is that it is a very foolish thing for a state to become dependent on a particular resource or product that it cannot make for itself and must import, because that puts the economic welfare of that state at the mercy of the exporting nations.

The answer to that is Jane Jacobs' analysis of Import Replacement:

Jacobs believed that the best way to achieve such sustainable economies is to examine what is now imported into a region and develop the conditions to produce those goods from local resources with local labor. She referred to this process as "import replacing."

What happened in the 70s provided an opening to move away from imported oil, replacing it with other forms and means of energy production.  This would have required a number of actions all of which where stomped on by TPTB, notably the Big Seven oil companies.  The reasons for the stomp is easy: import replacement restructures the economy, replacing the companies importing the good and the companies relying on the imported good for their profit margins.  


Skepticism is the first step on the road to truth. -- Denis Diderot

by ATinNM on Thu Jan 10th, 2013 at 12:07:31 PM EST
But import replacement is illegal state aid, and socialism, and interference with the workings of the free market, and inefficient, and...

I distribute. You re-distribute. He gives your hard-earned money to lazy scroungers. -- JakeS
by Migeru (migeru at eurotrib dot com) on Thu Jan 10th, 2013 at 12:10:39 PM EST
[ Parent ]
I think you meant to write:

SOCIALISM!!!!!




Skepticism is the first step on the road to truth. -- Denis Diderot
by ATinNM on Thu Jan 10th, 2013 at 12:23:29 PM EST
[ Parent ]


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