Taking lessons for this crisis from Great Inflation crisis of 1970s??

Richmond Fed President, Jeff Lacker in a recent speech draws lessons from the inflation crisis of 1960s and 1970s:

The history of the pursuit of full employment in the 1960s and 70s provides several important lessons for us now. The first is the risk of presuming that we know more than we really do about what the unemployment rate can or should be at any moment. An economy in recession is responding to shocks that have disrupted the normal process of economic growth. The ability of the economy to quickly reemploy its workforce may depend on the nature of the shocks and the nature of the adjustments businesses and households must make in order to redeploy labor and capital between sectors. A permanent increase in energy prices, for instance, will shift demand away from energy-intensive goods and services. The required resource reallocations will be quite different following a collapse in residential construction resulting from the buildup of a substantial oversupply of homes, which is arguably the situation we are in right now. Historical data can be useful in understanding how different parts of the economy have moved together in response to various shocks, but are imprecise guides for normative judgments about whether unemployment is too high or too low given the most recent shocks.

A second lesson is the danger of overemphasizing the pursuit of “maximum employment.” Numerous accounts from participants in the policy deliberations of the 1960s demonstrate that reducing unemployment was viewed as the primary objective of macroeconomic policy, and containing inflation was a secondary objective. Moreover, some academic economists advocated a policy framework that implied that any arbitrary unemployment rate could be sustained if society was only willing to tolerate a somewhat elevated inflation rate. This is now widely recognized as a fallacy, as was pointed out in 1968 by Milton Friedman, among others. Monetary policy can alter unemployment only temporarily. Trying to keep unemployment permanently lower than it otherwise would be, as was the objective in the second half of the 1960s, is a recipe for continually accelerating inflation.

A third, and related, lesson is that it can be very costly to bring inflation down once it has become elevated. As the inflation rate creeps up, consumers and businesses can start to believe that monetary policy will continue to generate elevated inflation. They then build into their decision making the expectation that inflation will continue. The process of restoring price stability and re-establishing some semblance of monetary policy credibility following the inflationary spiral of the 1970s was a painful and costly experience. In hindsight, it would have been far better to have prevented the initial upward creep in inflation in the first place.

A fourth, and final, lesson is to avoid entanglements with fiscal policy. Attempting to fine-tune monetary policy to offset shifts in the stance of fiscal stimulus risks subordinating monetary policy to short-term political considerations, to the detriment of independence, credibility and the stability of inflation expectations.

Not sure whether right lessons are being drawn. We are not looking at full emploment but high unemployment and high inflation is unlikely given the slack…

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