Thanks for posting this chapter. It was very helpful.It certainly did look like Volker had done his very best to exact blood around the world when he raised interest rates so much. (1979-1981)
I made a long and I hope constructively critical comment on this and it has disappeared. I wonder what happened - did you see it?Basically, I thought you are exagerating the class warfare aspect of this and perhaps missing angles - the cult of the manager - microeconomic structures - that could be important. I thought the long-run Phillips had died, and so I don't really understand why you think that the Fed alone can make a tradeoff being high but stable inflation and low unemployment. I agree with you about the problems, but I'm skeptical about your proposed solutions. I think you need more institutional reform not just fiddling macro-economic dials.
Reason, Your comment appeared on my blog, unsettling economics. I responded to you there & tried to write a personal note to you, which bounced.
My postmmm.I’m not necessarily convinced. Having lived through the seventies, I know that the market power of some individual workers (through unions) was exploited to the detriment not so much of their employers as of other workers. This simple class story is not convincing to me. It also ignores the current paradox of prices not having fallen sufficiently to offset stagnant or falling nominal wages - there surely is a story to tell here about market structure. And I don’t believe we should just accept high levels of inflation. I don’t believe in a long run Phillips curve. Ultimately you need micro-economic measures to avoid the attempt to maintain very high levels of employment ending in ACCELERATING inflation. You haven’t shown me why that isn’t the case with your simple the Fed is the agency of the devil story.The ideal(ised) market story has a nice story to tell of how conflicts are resolved without power struggles. It is still worth telling the tale of why that doesn’t work - information assymetry, agency problems and market distortions. And how do we stop this conflict being about naked power in the end?Ultimately, I wonder if you don’t have the wrong villain. (As an ex central banker, maybe I’m biased). Have you thought of going after managerialism (or if you like the Cult of the Manager) - say like Chris Dillow?Your replyObviously, there are inequities in wage differentials. What we see is that as corporate power eclipsed union power, real hourly wages have stagnated while profits soared. The Federal Reserve never bothers step in to hold asset inflation in check or to curb profits, but only when wages are increasing to help labor increase its share.My reply again...Yes the Federal Reserve has perhaps not behaved with perfect wisdom. But it is not OBVIOUS that it could have done better if you compare the results with international experience. US commenters often seem to me, to be too US centric and to ignore international experience (which gives a wider choice of historical policy responses). There is a case to made the problem lies not in the attitude of central bankers, but in the concensus model that they work with. After all the neo-classical model doesn't really understand finance from my point of view (nor do I by the way). The links between the financial world and the real economy are very poorly defined. But still back to my main point, this chapter reads to me like a declaration of war on the Federal Reserve rather than a detached analysis of a very real problem. And I think having found its bogeyman it oversimplifies the problem.
And of course to clarify, I should make the case that the Federal Reserve would reply that workers should not be so concerned about nominal wages, but with real wages. The Fed doesn't believe its actions set real wages, but that they (long term) influence the growth in nominal wages. You may disagree, but you should leave it open that central banks mostly act in good faith. "Never explain by malice what can adequately be explained by stupidity."
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