Whip Inflation How?
With his Whip Inflation Now program of 1974, President Gerald Ford attempted to enlist the American people in a national battle against rising prices.
Amongst other practical tips, Ford asked "volunteer inflation fighters" to conserve energy by giving their dogs less time to enter and exit the house, according to Alan Blinder's new book, A Monetary and Fiscal History of the United States.
And to decrease the supply of money, he asked Americans to "voluntarily pay a little more in taxes and encourage others to do the same," according to ChatGPT.
Some old-fashioned Google searching suggests ChatGPT may have made that one up. But, true or not, it accurately reflects the pervasive sense of helplessness embodied by the WIN program.
The WIN pledge that Ford asked George Harrisson to help promote was only slightly less realistic than asking people to overpay their taxes:
"I pledge to my fellow citizens that I will buy, when possible, only those products and services priced at or below present levels."
Ford's CEA chair, Alan Greenspan, later said his immediate reaction to the plan was, "this is unbelievably stupid."
But no one seemed to have any better ideas: The OPEC-induced inflation of the 1970s introduced the terms "supply shock" and "stagflation" to the economic lexicon, so there was no established playbook on how to deal with either phenomenon.
Flummoxed by the volatility, both fiscal and monetary policymakers flip-flopped between easing and tightening financial conditions: In October of 1974, Ford called for a tax hike to fight inflation.
In January of 1975, he called for a tax cut to fight recession.
Academic economists were not much help: Keynesians didn't know whether stagflation called for higher or lower government spending.
And while Friedmanites were sure that the answer to every inflation question was "the supply of money," they couldn't agree among themselves that the 1970s inflation even was inflation.
Into this breach of economists' despair stepped the beau ideal of central banking, Paul Volcker.
Final answer: all of the above
The academic debates of the 1970s have never been fully resolved, but we at least have Volcker's real-world playbook to go by: fighting inflation with recession-inducing interest rate hikes.
Volcker himself would tell you it's not that simple, however: "Following a mechanical operation because we think that's vital to credibility and driving the economy into the ground isn't exactly my version of how to maintain credibility over time."
Instead, Volcker was a pragmatist willing to try the last-ditch option: "all of the above."
He started out with a Friedmanite focus on the supply of money but abandoned explicit monetarism because the supply of money is too hard to measure.
He cut rates by 10 percentage points in response to a slowdown in 1980 before raising them 12 percentage points by the end of the same year.
He thought the government had to reduce spending but was nonetheless credited for the great disinflation that was somehow coincident with Reagan's exploding budget deficits.
It was all a lot messier than it seems from this far removed.
And even with the benefit of hindsight, we don't really know what worked or why.
Academics are still squabbling over what does and does not cause inflation and what the exact definition of inflation even is.
Fortunately, today's Fed has Volcker's policy playbook to follow: All of the above.
Feeling their way around
The Fed has raised rates to increase the cost of money, reduced its balance sheet to lower the supply of money, and frightened the government into spending less of the money it doesn't have.
Although Chair Powell was reluctant to acknowledge it this afternoon, it seems to be working.
"All of the above" is not exactly science, however, as Fed Governor Christopher Waller recently conceded: "We'll kinda feel our way around as to where we should stop."
So what if they stop too late and the economy rolls over into recession? Or they stop too early and inflation turns back up?
Or what if the economy rolls over and inflation turns back up?
It's possible. On a recent episode of Forward Guidance, Felix Jauvin predicted a recession in 2024 followed by a return to double-digit inflation in 2024.
Resurgent inflation seems unlikely with GDP growth and government spending both lower.
But the example of the 1970s shows that low growth doesn't necessarily mean low inflation.
And the example of the 1980s shows that high deficits aren't necessary for high inflation.
All of which is to say, we should hold our assumptions lightly: Inflation might go up while interest rates also go up. Or go down while deficits also go down. Prices may go up while unemployment goes down. Or go down while money supply goes up.
We don't know. And neither does the Fed.
The 1970s response to inflation was chaotic and often contradictory. And with all of the big policy questions still unresolved, it's not clear how much we've learned in the interim.
Were stagflation to recur, policymakers would have no more clue what to do about it than their counterparts from the 1970s did.
(Or Copernicus from the 1520s even???)
If so, we'd most likely get a lot of "unbelievably stupid" policy choices, just like back then.
So get ready to tell your dog they shouldn't be going out so much.
And to volunteer a little extra on your taxes.
(Because policymakers may soon find themselves resorting to ChatGPT, too.)
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