Comment of the Day: Robert Waldmann: "I disagreed with that analysis in 1980. So did Solow. The argument was gradually reducing inflation was possible, would work fine, and wouldn't cause such a severe recession. I still think that. But why are the 70s so memorable? (For us, obviously, our teens are memorable.) Krugman thinks they are remembered with horror because they were very bad for investors. Also it was part of a general ideological shift. But it is amazing how inflation around 10% (mostly a transfer which can be avoided with indexed contracts not a welfare loss) had such a huge effect on policy and academic economics and the great recession had such a small effect. I think it is very hard to reconcile this with the idea that economics is a science or that policymakers have well defined objectives and models. Also, it is clear that a bit of suffering for me and people I know has more effect than huge suffering of people of another social class. You didn't explain where the 2% target came from or why a 4% target is rejected. I don't think you can. Given the liquidity trap it makes no sense (as you and Larry Summers argued decades ago)...
Comment of the Day: Charles Steindel: in reply to Robert Waldmann: "You are precisely right about the 70's (I wuz there). Even with the big 73-75 recession it was essentially a period of strong growth; a lot of jobs created as our generation flooded the labor market. A major reason for the runup in inflation, as has been fairly well-documented (by Athanasios Orphanides), was the unexpected drop in productivity growth—that led to overestimates of how much tightening of policy would reduce inflation. A key issue examined by some in that era was the real cost of the inflation. At least as I saw it careful analysis suggested little (of course, some misallocation of resources reflecting the non-indexed tax code, but that is a fairly straightforward matter to correct). I was amused a few years ago when Olivier Blanchard may have been apparently implicitly relying on that line of reasoning in suggesting higher inflation targets; I got that message back then from the long paper Stan Fischer and Franco Modigliani wrote and it could be Olivier heard it the same as I did...
#commentoftheday
