The New York Times Warns of 1970s Stagflation and Calls for a Volcker-Type Recession

July 09, 2022

It doesn’t seem all that similar to the 1970s to me. After all, we have not seen (last two quarters excepted) a sharp slowdown in productivity growth after a quarter century surge. We don’t have powerful unions getting wage gains that match inflation. And, we don’t see the plunging dollar that the inflation hawks predicted. (The dollar has been soaring for those paying attention to which way is up.

Oh wait, this NYT article calling for a Volcker-type recession was from February 2008. That was when the collapse of the housing bubble was throwing the economy into the worst recession since the Great Depression. We had a full decade of lower than targeted inflation. I guess this just shows that, in some circles, it’s always a good time to call for a Volcker-type recession.

For those too young to remember, Paul Volcker was made chair of the Federal Reserve Board by Jimmy Carter in the fall of 1979. Carter was responding to pressure to “do something” about inflation. When Volcker took the helm, he quickly slammed on the brakes on the economy. A set of interest rate hikes, along with limits on credit card debt (a former power of the Fed) gave us a short, but steep, recession in the spring of 1980, probably dooming Carter’s re-election prospects.

Volcker did ease up as he worried about causing a financial crisis, but he got back to work in 1981, sending interest rates at one point to 20 percent. This was a huge jolt to the economy, giving us what was then the worst recession since the Great Depression. The unemployment rate peaked at just under 11.0 percent. 

This did get inflation under control, but the mechanism for reducing inflation was forcing ordinary workers to take big cuts in pay. The median hourly real wage was more than 3.0 percent lower in 1984 than it had been in 1978, in spite of productivity being more than 8.0 percent higher.

Needless to say, most of the fans of Volcker-style recessions were not then, and are not now, in the group facing unemployment or being forced to accept large cuts in pay. This should make us very wary when we see the NYT and many others again calling for a Volcker style  recession to combat inflation that does not look at all like the 1970s wage-price spiral.


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