“I want to lower inflation without increasing unemployment, but they tell me it’s impossible. As I do?”.
The dialogue took place between Richard Nixon, the presidential candidate of the United States, and the economist Edmund Phelps in 1968. Decades later, Phelps would be the winner of the Nobel Prize in Economics and recalls that exchange in the Oval Office in his new book by memories My travels in economic theory.
Trained and used to speaking in class and in public, Phelps confessed to work that at the time it was not easy for him to react. “That whole room full of people looking at me was no place to convey my thoughts.”
Inflation and unemployment are a difficult and delicate combination for governments. It doesn’t matter their political sign or their condition of origin or legitimacy.
‘The military was terrified of the recession’once said José Martínez de Hoz, Minister of Economy of the last dictatorship. “They saw an unemployed person as a potential guerrilla.”
The Army and Navy asked Martínez de Hoz something similar to what Nixon proposed to Phelps: bring inflation down from three digits a year to double digits by the end of the administration, but on the condition of not ‘losing full employment’expression with which economists refer to when unemployment is frictional, i.e. people who are temporarily unemployed, entering and exiting the labor market.
So, in the time of the military, they settled on that idea of curb inflation through mini-devaluations and relative price adjustments (La Tablita) instead of the classic orthodox recipe of adjusting the interest rate and cooling the economy by pushing up unemployment.
The latter had a name in economics and was the terror of many leaders.
In 1958 Arthur Phillips, a professor at the London School of Economics, published a study of wage trends in Great Britain between 1861 and 1957. The Phillips curve is an inverse relationship between the unemployment rate and the growth rate of wage inflation.
The finding quickly became a key element of macroeconomic policy analysis. Politicians and economists believed that one could choose between different combinations of unemployment and inflation rates. For example, having a low level of unemployment as long as they were willing to accept high inflation as in the Sixties in Argentina and in the world.
But the Phillips curve would not have worked well in the 1970s and 1980s. Nobel laureates in economics Milton Friedman and Phelps himself argued that sooner or later unemployment in an economy converges to an equilibrium level regardless of inflation. The workers are not stupid, they are interested in the real salary, not the nominal one.
In the book The hour of the economists (Binyamin Appelbaum) Nixon is also said to have told his advisers in 1968 (the same year he joined Phelps) that you don’t lose an election to inflation. “People are more worried about unemployment than the supermarket”. Or that the German Federal Minister of Economy, Helmut Schmidt, told the Germans could cope better with 5% inflation than 5% unemployment despite the memory of the hyperinflation of the 1920s.
When he finally became president, Nixon appointed Arthur Burns, a trusted economist, to head the Federal Reserve, prompting him to issue money to stimulate employment.“Always lean on the side of inflation”said Nixon.
The president was also advised by Friedman and Alan Greenspan, two ultra-Orthodox economists. But he never cared too much about what they said to him, as we read the man who knewabout the life of Greenspan (Sebastián Mallaby).
Nixon replaced William McChesney Martin on the Reserve, whom he always blamed for causing him to lose the 1960 election. raising rates before the electionand in his place he then nominated Burns.
Nixon summoned the new president to the Oval Office.
“Yes, Mr. President”replied Burns, lighting his pipe.
Nixon continued: “The Federal Reserve and the supply of cash and notes are more important than the Treasury and the Budget.”
Burns agreed.
Years later, both the Labor Party in Britain and the Democrats in the United States would lose elections, partly due to high inflation and later because they tried to halt rising prices with price controls. Inflation would slow, yes, with what no leader wanted: high unemployment.
Source: Clarin
