macro history and the paleo Keynesian straw man

A comment on Kling on Remembering the 1970s by Robert Waldmann

stagflation

Not a monetary phenomenon by Steve Randy Waldman

What Happened to the Phillips Curve ? by Robert Waldmann

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.

1970s and Arthur Burns reconsidered

Terminal demographics by Steve Randy Waldman

He links to multiple responses.

On the meaning of inflation by Ryan Avent

1970s' firehose of new workers

 Not a monetary phenomenon by Steve Randy Waldman

The root cause of the high-misery-index 1970s was demographics, plain and simple. The deep capital stock of the economy — including fixed capital, organizational capital, and what Arnold Kling describes as “patterns of sustainable specialization and trade” — was simply unprepared for the firehose of new workers. The nation faced a simple choice: employ them, and accept a lower rate of production per worker, or insist on continued productivity growth and tolerate high unemployment. Wisely, I think, we prioritized employment. But there was a bottleneck on the supply-side of the economy. Employed people expect to enjoy increased consumption for their labors, and so put pressure on demand in real terms. The result was high inflation, and would have been under any scenario that absorbed the men, and the women, of the baby boom in so short a period of time. Ultimately, the 1970s were a success story, albeit an uncomfortable success story. Going Volcker in 1973 would not have worked, except with intolerable rates of unemployment and undesirable discouragement of labor force entry. By the early 1980s, the goat was mostly through the snake, so a quick reset of expectations was effective.

demand management

Bubble, Bubble, Conceptual Trouble by Krugman

What Dean Baker and Neil Irwin were discussing. Rogoff and Reinhart's "This Time It's Different" is often used by the usual suspect Centrists as an excuse to be fatalistic and say nothing can be done. Which is wrong. A bigger stimulus, a back-up Plan B stimulus and more unconventional monetary policy would have helped. If we had had no stimulus and the Fed has been even more complacent, things would have been worse.

What Krugman Said, With a Not So Small Addendum by Dean Baker

Anyhow, that is the quick story on the recession. My difference with Krugman is that it is the story of a collapsed bubble, not a financial crisis. (I recall in 2009 hearing folks like Stiglitz praise the well-regulated Spanish financial system and how this had allowed Spain to avoid a financial crisis. Well, maybe that wasn't quite right.) Furthermore, deleveraging will not get us back to full employment. We will need more fiscal stimulus or a lower dollar. Alternatively, we can go the German route of using work sharing to sustain full employment even in an economy that is operating below its potential. 

http://en.wikipedia.org/wiki/Demand_management

Demand management in economics 

In economics, demand management is the art or science of controlling economic demand to avoid a recession. In natural resources management and environmental policy more generally, it refers to policies to control consumer demand for environmentally sensitive or harmful goods such as water and energy. Within manufacturing firms the term is used to describe the activities of demand forecasting, planning, and order fulfillment. 

In economics the term is also used to refer to management of the distribution of, and access to goods and services on the basis of needs. An example is social security and welfare services. Rather than increasing budgets for these things, governments may develop policies that allocate existing resources according to a hierarchy of needs. 

It is inspired by Keynesian macroeconomics, though today elements of it are part of the economic mainstream. 

The underlying idea is for the government to use tools like interest rates, taxation, and public expenditure to change key economic decisions like consumption, investment, the balance of trade, and public sector borrowing resulting in an 'evening out' of the business cycle. 

Demand management was widely adopted in the 1950s to 1970s, and was for a time successful. However, it is widely regarded as a force behind the stagflation of the 1970s, though the supply shock caused by the 1973 oil crisis could have also caused that. 

Theoretical criticisms of demand management are that it relies on a long-run Phillips Curve for which there is no evidence, and that it produces dynamic inconsistency and can therefore be non-credible. 

Today, most governments relatively limit interventions in demand management to tackling short-term crises, and rely on policies like independent central banks and fiscal policy rules to prevent long-run economic disruption. 

In the environmental context demand management is increasingly taken seriously to reduce the economy's throughput of scarce resources for which market pricing does not reflect true costs. Examples include metering of municipal water, and carbon taxes on gasoline.

 Note the uncertainty when the 1970s comes up.

YES, JIM MEDOFF MOVED THE NEEDLE by DeLong

Andy Harless: [T]he Medoff-Abraham paper… said was that there was not nearly as much “stag” in the stagflation as we thought. The labor market, it suggested, had been booming during much of the 1970’s despite the appearance of high unemployment. The implication was that the unemployment of the 1970’s was largely “structural”… once you realized that, the accompanying inflation shouldn’t surprise you.

Charles Lane Is Unhappy That the Fed Is Taking Steps to Create Jobs by Dean Baker