Godley and Krugman

Wynne Godley and the Hydraulics by Krugman

The second big problem involved inflation. We can argue how many economists really believed in a stable tradeoff between inflation and unemployment, but that’s certainly what got taught to many students. In came Friedman and Phelps to argue that rational price-setters would build expected inflation into their choices, so that sustained low unemployment would produce accelerating inflation. And the stagflation of the 70s seemed to vindicate their argument.

Did it vindicate their argument though? Possibly Arthur Burns allowed inflation to accelerate because the alternative - allowing a steep rise in unemployment during the uppity 70s - was politically undesirable. As Steve Randy Waldman argues, by the time Volcker comes on the scene, the demographic goat has mostly passed through the snake.