I bemoan the collapse of Bretton Woods for other reasons, such as the loss of fixed exchange rates and the rise in speculative currency markets, but the effect on inflation would, by forcing devaluation of the US dollar, have been a magnification of the impact since a devaluation would have automatically forced the price of oil up even more, pushing up production costs, and further hurting output and employment.

The flip side of the coin, however, is that when Bretton Woods was still active in the late 1960s and early 1970s, it allowed the US to "export inflation" through the fixed exchange rate mechanism, since monetary expansion by the US would inevitably mean higher inflation rates for Japan, Germany, the UK, and so on.

So there's arguments on either side for why the retention or lack of it of Bretton Woods was a Good Thing (TM).

As to the Phillips Curve - the explanation there is that due to the rise in production costs for businesses and the wage pressures which resulted (along with what was then seen as a short-term drop in productivity growth) all combined to shift the curve further to the right.

It is true that inflation was coming up in 1968 and 1969, but I have charts that show that the rates were coming down slightly through 1971 and 1972 before spiking up dramatically in 1973 and 1974.

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Originally posted by Rand McNally:
the spending by the US in WW2 or Korea did not produce those same negative results. Was there something different about the nature of government spending in Vietnam? That might be worth looking into.

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It occurs to me that the difference may be that during WW 2 especially, the whole system was shifted by the industrial mobilization efforts.

Vietnam was different in that (for the US at least) there was an expensive war going on alongside a consumer economy that was also running at full-blast. And Vietnam was more expensive than Korea on its face, as well as a more multilateral engagement.

Governments have three ways to pay for expenditures: taxes, borrowing and printing new cash. In the 1960s, the US government wanted both a Great Society and a war in Vietnam. It paid for these in part by printing new cash.

The first result of this was the collapse of the feixed regime of Bretton Woods. Why? Well, other countries - Europe and primarily Germany - did not want to print money at the same fast rate as the US. Hence, the fixed regime was untenable.

Worse, the US entered a period of inflation during the 1970s because of the extra cash being printed. Inflation is a form of taxation (money loses purchasing power) that people try to avoid. The problem is that the exact inflation rate is unpredictable and people must form expectations about it. This is seen most graphically in the nominal interest rate which contains implicitly an expected inflation rate.

Simultaneously, in the 1970s, economists were coming to the conclusion that while macroeconomics was a worthy subject of study, the Keynesian presentation of macro was fundamentally flawed. (Note that Keynes was not concerned about inflation - prices were falling in the early 1930s.)

In 1979, Jimmy Carter appointed Paul Volcker as head of the US Fed and gave him the mandate to be independent of the Administration. Volcker applied a strict monetary policy with a view to stop printing new cash. This pushed the US economy into a serious recession in the early 1980s but it also meant the US Fed had control of the money supply.

Since the mid-1980s, the US inflation rate has been below 5%. The US Fed now conducts monetary policy primarily to avoid inflation.

It wasn't until the 1990s that inflationary expectations finally changed. That is when long term real interest rates dropped to historical levels.

The 1970s saw no real real growth. After the recession of the early 1980s, the US economy grew again. Its best growth period was in the 1990s when real interest rates had fallen.

It is true that there were two oils shocks in 1973 and 1978. The world price of oil in 1978 was $80 barrel (in 2004 dollars). This lead to interest in the supply side of macroeconomics (something Keynes also ignored).

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Originally posted by August1991:
The 1970s saw no real real growth. After the recession of the early 1980s, the US economy grew again. Its best growth period was in the 1990s when real interest rates had fallen.

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Just to play devil's advocate...

3.2% per year for the entire decade of the 1970s for the USA.

[ 16 October 2004: Message edited by: DrConway ]

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3.2% per year for the entire decade of the 1970s for the USA.

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the recession in the early 1980's, here in Canada, was 'policy induced' by Trudeau's government, but none of them at that time were prepared to explain their motives.

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The Fed switched to Keynesian policies and experienced growth for seven years afterward.

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What is striking now about western Central Banks (US Fed, Bank of England, European Central Bank) is how independent they are. Their activism is primarily limited to maintaining price levels.

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The Bank of England ditched hard core monetarism in 1986.

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1950-59 1.7% (11740$ -> 13980$)
1960-69 2.9% (13980$ -> 18580$)
1970-79 2.0% (18580$ -> 22540$)
1980-89 2.4% (22540$ -> 28560$)
1990-99 2.0% (28560$ -> 34940$)

I'm surprised by the "low" number for the 1990s. I think one number to consider is labour participation. Up to 1990, the US labour force was growing because of arriving baby boomers and women opting to work for pay. Since 1990, these trends have stopped.

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Originally posted by August1991:
I would not characterize the Fed's policies since 1980 as "Keynesian".

What is striking now about western Central Banks (US Fed, Bank of England, European Central Bank) is how independent they are. Their activism is primarily limited to maintaining price levels.

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Officially, yes, but the ECB is the most dogmatic about it, while the Fed is traditionally a bit looser about maintaining the inflation rate at low levels. I will not argue the main point, that central banks have switched from being a policy instrument to maintain full employment, to being a policy instrument unto themselves to maintain price stability.

Paul Krugman would disagree with you about the Fed not being "Keynesian" post-1982, by the way.

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So every time you read an article worrying that declining consumer confidence may tip us into recession, or that interest rate cuts will soon spark a recovery, or even that this time interest rate reductions may not do the trick, you are reading Keynesian economics. Like the man who was unaware that he had been writing prose all his life, these writers may not know that they are Keynesians — but they are.

And you would have to search far and wide to find anyone who thinks that the U.S. government should slash spending and raise taxes to offset the budget impact of this year's downturn, or who thinks that the Fed is wrong to cut interest rates in the face of a slump. (There are some people who think that the Fed has overdone it — but they aren't opposed to the policy in principle.)

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[ 17 October 2004: Message edited by: DrConway ]

The primary concern of the Fed is price stability. It has said many times that it will not hesitate to make reserve funds difficult to obtain if there is a threat of inflation.

Nevertheless, the Fed provided liquidity in October 1987 and more recently with the dot.com bust.

Many economists (although probably not Krugman) feel that the Fed is fiddling too much with the dial.

I agree that this kind of intervention is far from the pre-1980 type. The Fed looks at economic activity now in terms of potential inflation.

Either that, or Krugman feels some basic notions of Keynesian interventionism should not be discarded.

It's three decades since I studied this stuff but I seem to remember that you get completely different results when you express the rates in 2000 prices vs when you express them in 1970 prices. (Used to be very useful to political candidates of different parties in times of high inflation as one might 'prove' that living standards have gone up, while the other might 'prove' that they have gone down over a number of years.)

I also seem to remember that the longer the period the greater the difference. Isn't thirty years a little long for this type of statistic?

[ 18 October 2004: Message edited by: DrConway ]

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Originally posted by DrConway:
Ahem. The point of the website link is to show that claiming an "index number" problem means that any attempts to make historical comparisons are invalid, thus obviating the very real concerns that we leftists have with corporate dominance of the Canadian and American political scenes, because boosters of the Washington Consensus can then just wave their hands and insist that everything is juuuuuuust fine.

[ 18 October 2004: Message edited by: DrConway ]

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Of course I said none of the above. ('any attempt' in particular)

I did my graduate work in Economic History 'specialising' in the British industrial revolution.

Please spare me the 'we leftists' (I must be a rightist then?) and the corporate elite and all this.

I only spoke of the index number problem, which you acknowledge exits and as I remember is no satisfactory solution. (I could be wrong and maybe somebody who is better in maths than myself has come up with one. The one I seem to remember is picking prices at the midpoint.)

Why three curves?
1992 prices in a series extending from 1920 to 2000?
Give me a break!

And to top it all up there is a Consumer Price Index from 1920 to 2000!!! How many electronic gadgets (and many other products that make up the index today) were there in 1920?

I mentionned my graduate work because to estimate output from 1750 to 1850 (the generally agreed date of the first industrial revolution) is a lot more complicated than 1920 to 2000.

I did not say impossible.

[ 18 October 2004: Message edited by: VanLuke ]

Specifically with respect to what you see on that website, the point made there is that depending on whose normalization factor you use to "Boskinize" the CPI, you can adjust the nominal-dollar statistics to obscure the fact that there has been a long-term slow-down since 1973, more clearly elucidated here.

[ 18 October 2004: Message edited by: DrConway ]

I haven't even mentioned the difficulty in determining the rate of unemployment (since the thread is about the Philips curve it's a necessary ingredient, isn't it?).

Under Trudeau's 'reign' alone the unemployment rate was redefined about half a dozen times and each time the number of unemployed went up (they actually took samples in those days), but the rate went down. (Bringing in seasonal adjustment was just one of the changes and usually, but not always, it produces an unemployed rate lower than the actual one.)

People on welfare (many of whom have given up the search for work as hopeless) are not included among the unemployed and hence "the rate".

So what unemployment rate do you use?

I think a discussion of these shortcomings is far more useful than personal attacks branding people as right wing on the basis of having pointed out a statistical problem without a SATISFACTORY solution.

And just to illustrate my point furhter re a conusmer price index from 1920 to 1992: Tell me how much jet fuel entered the index in 1920? Or computers? Or fast food (having replaced the "free" production of "housewives"? Or what weight in the index automobiles had in 1920? Tires? Packaged vacations?

And so on........

I had a reason for not continuing in eco theory and to choose eco hist instead other than the unemployment it mainly brought.

How many horse buggies and horse whips are there in the 1992 index?

Economics is horseshit by and large (Krugman's interesting articles notwithstanding; I read them all the time)

[ 18 October 2004: Message edited by: VanLuke ]

Stiglitz (I believe it was) wrote a beautiful paper in the early 70s saying that there is nothing that can be expressed in mathematical terms that cannot be expressed in words without giving the false impression of precision and HIDING the underlying assumptions.

This is why buying into their sillyassed "index number problems" is a bit counterproductive.

One of the reasons why Congress wanted a Boskin CPI adjustment was so they could come up with a good reason to cut back Social Security benefits by, in effect, making inflation look smaller than it really is.

Another reason why Boskin is manna from heaven to conservatives is because of the preceding posts I made - it allows them to retroactively adjust the data so things "look better".

Besides, stating an "index number problem" defeats the purpose of looking at history. It creates an ahistorical analysis of the world we live in, with no reference to whether we're doing better or worse.

Choose Year One as base year for prices.

Or:

Choose Year Ten as base year for prices.

You get two different results .... seems to endemic to economics but in this case it is a STATISTICAL problem. (Didn't I say that before?)

Viz. Sharing a Nobel Prize for saying opposite things. (Hayek and Myrdal)

Aggregated data has major problems. IMV, it is a fundamental problem of Keynesian (macro) economics. How to add people together?

In fact, this is a problem of democracy. In a collective decision, how to weigh my opinion against yours? One person=one vote, or one dollar=one vote or some other scheme (in Canada, a voter in Charlottetown matters more than a voter in Calgary)?

Also true, growth in real GDP per capita does not mean everyone is better off (unless you believe in trickle down). This is one basic argument against indexed data. (Another is best illustrated in the question: with $1000, would you prefer to buy from the 1950 Eaton's catalogue or the 1990 Eaton's catalogue.) Or, how to include DVDs in an index starting in 1920?

In my stats above, I used the St-Louis Fed (BEA) 'chained' data from 1950. [In my defence, I did the numbers by decade.]

I have seen stats showing average annual growth of US real GDP per capita sinec 1800 at 1.5%. God knows what any of this means.

But.

I think that ordinary people live better now than 50 years ago and certainly better than 100 years ago. I walk cemeteries for my evidence. I look at gravestones, dates, children. I think of my four grandparents, into the kinds of houses they were born.

Quibble, if you will, over the exact accuracy of statistics. It is a worthy field. But let us not lose sight of the main point.

Interesting to note that in the ten years before the Free Trade Agreement, 1979 to 1988, Canada's surplus of exports over imports came to $88.173 billion. During the first decade of the FTA, our surplus dropped by $14.275 billion, down to $73.898 billion. Our trade balance dropped by over $14 billion. The Liberals have often boasted that every billion dollars of exports represents about 11 000 jobs.

Yes, comparisons can be useful. By comparison, there are millions more American's living below their Census Bureau's outdated 1960's guidelines for poverty. Among first world nations, the U.S. has the highest percentage of low wage jobs. Canada now brings up the rear in second place. Canada and the U.S. also have the lowest percentages of unionized work force among rich nations. Infant mortality and child poverty are highest in Mexico, the United States and Canada while other first world nations are making real progress in attacking the problem at the source.

[ 19 October 2004: Message edited by: Fidel ]

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Originally posted by August1991:

Quibble, if you will, over the exact accuracy of statistics. It is a worthy field. But let us not lose sight of the main point.

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In spite (or maybe because) of everything I said above I fully agree with you.

Going back to the topic, the Phillips Curve: I think such a relationship exists in broad terms. What I was 'railing against' above is this alleged accuracy of a science (???) that is better called Political Economy and implies input from various other disciplines, e.g. psycholgy, political science, history and more. And its main point ought to be to shed light on human relations in the economic field. Certainly not to mystify hidden behind clever jargon and fancy mathematics.

Also by putting variables in such 'accurate graphs' implies the hiding of all the unrealistic assumtptions of economics. Thus while graphs are useful to represent relationships they should never be seen as picturing reality.