The 1960 paper by Paul Samuelson and Robert Solow and the issue it addressed were the topic of James Forder's 2010 paper Economists on Samuelson and Solow on the Phillips Curve:
The question they were addressing was that of the explanation of the inflation of the 1950s – particularly the period 1955-57 – and the implications it had for macroeconomics. Mild though that was later to seem, this 'creeping inflation' as it was called was, at the time, a source of much anxiety.
This graph shows the years 1948 to 1978. The blue line shows inflation using the "urban" data that seems to serve as a "nationwide" measure. The red line shows the interest rate that the Federal Reserve raised or lowered to control inflation:
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| Graph #1: Blue is Inflation, shown as "percent change from year ago" of the CPI. Red is the "Federal Funds" interest rate for which the Federal Reserve set targets. |
After the end of the second World War, it took a few years to get inflation stabilized. But inflation (blue) did quiet down to below 1% by the end of 1952. The Federal Funds rate (red) doesn't appear on the graph until July 1954, but we can reasonably assume interest rates rose enough to reduce early-1950s inflation and create a recession in mid-1953: My proxy for FedFunds rises from the end of the 1949 recession to the start of the 1953-54 recession.
The red line shows the FedFunds rate following the same pattern after the 1953-54 recession: persistent increase from the end of one recession to the beginning of the next; rates only fall as the ensuing recession slows the economy and starts to bring inflation down.
The graph shows the Federal Funds interest rate rising almost immediately as the 1953-54 recession ends. The graph shows that the interest rate kept going up even as prices fell for a whole year: The blue line (inflation) went below zero in September 1954 and didn't surface again until September 1955. As Lorraine Lee rightly says, "counterinflationary policy is basically severe austerity."
The increase in the blue line between 1955 and the 1957-58 recession was the inflation that Samuelson and Solow were writing about in 1960, the "creeping inflation".
And again, almost immediately after the 1957-58 recession, the Fed started raising the interest rate. The FedFunds rate hit bottom in July 1958 and started going up. Inflation continued falling until April 1959, and only rose after that.
This brings us to the 1960 recession.
The 1960 recession began in April 1960 and ended in February 1961. CQ Researcher provides Wage Policy in Recovery, a remarkable article by H. B. Shaffer dated June 21, 1961. The opening paragraph:
Satisfaction over multiplying signs that the country is fast leaving the recession behind is currently clouded by fears that too vigorous a recovery will set in motion a new inflationary surge. The risks in the situation have impelled the Kennedy administration to make special efforts to prevail on labor and management to keep wage-price levels steady as business activity expands.
Shaffer's words emphasize the
bipolar approach to inflation management that is visible in the
historical data. March, April, May, June: It took four months to go
from "Things are great!" to "Oh, no! Things are too good!" -- and
Shaffer's article was written even before June was out. There was "much
anxiety" about inflation, as James Forder said.
2 comments:
Above I quote H. B. Shaffer, less than four months after the end of the 1960-61 recession, saying: "Satisfaction over multiplying signs that the country is fast leaving the recession behind is currently clouded by fears that too vigorous a recovery will set in motion a new inflationary surge." I called the rapid change of view "bipolar".
The same rapid bipolar shift in view can be found at the Federal Open Market Committee as the previous recession was ending:
"Almost as soon as the trough of the 1957–1958 recession was reached in the spring of 1958, the FOMC began to worry about inflation. The members felt that they had not reacted soon enough in 1955, and they were willing to risk another slowdown and Congressional anger to keep inflation from rising again."
From A Rehabilitation of Monetary Policy in the 1950’s by Christina D. Romer and David H. Romer (2002).
The Romer paper, by the way, takes the position that policy in the 1950s was good -- that the bipolar shift was a good thing because it kept inflation to a minimum.
It is a narrow vision that looks at the economy and sees no problem but inflation and no cause but the quantity of money or the rate of interest or whatever they use now to control inflation.
It is insane to say that cost pressures do not matter, to say that if we control the money we control inflation, and the cost pressures will fade quietly away.
What fades away is the health and vigor of our economy. And if we don't recognize that problem and act on it, what fades away is civilization.
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