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US: back to the seventies?


In the debate on economic policy in the US, some commentators warn we may be returning to the seventies. It was a period of major shocks – the move to floating exchange rates, two oil crises –, high and accelerating inflation and an increased role for government.

TRANSCRIPT // US: back to the seventies? : May 2021



François Doux: In the late 1960s, the Beatles were singing “Back in the U.S.S.R.”. Today the refrain is more likely to be “Back to the seventies”. In Three Questions, we will talk with William De Vijlder about the 1970s and why they are back in the economic news. Hello William.

William De Vijlder: Hello François.

François Doux: First question: why this reference to the 70s?

William De Vijlder: The reference is inspired by recent opinion pieces, notably by the former US Treasury Secretary Larry Summers. They claim that the United States is now experiencing a paradigm shift in terms of economic policy. It has been the biggest change since Ronald Reagan and Paul Volcker were at the helm. At his inauguration in 1981, it is Ronald Reagan who said that “government is the problem.” Clearly, government was not going to be the solution, but today, the administration has taken a whole new direction with a series of initiatives launched by Joe Biden. Paul Volcker arrived at the end of the 1970s. He too made a fundamental change.

François Doux: Second question William De Vijlder. What was the problem in the 1970s? There was oil and inflation, there were even ideas.

William De Vijlder: Larry Summers’ comments implicitly referred to the major problem of the 1970s, not only in the United States but also in many other countries: runaway inflation that was impossible to control. Several factors were at play. First, by the end of the 1960s, the US economy was already beginning to overheat, which fuelled an upward trend in wage growth and inflation. Second, there were several major shocks. There were two oil price shocks, with more inflation in the economy, and an inappropriate monetary policy. It was clear that in the 1970s, before the arrival of Paul Volcker, the Fed chairman lacked the courage to tighten monetary policy because it was not really in keeping with the times.

François Doux: Third and last question. In 2021, what lessons can we learn from the 1970s? There is currently a lot of talk about inflation expectations.

William De Vijlder: What is feeding fears today is a whole range of factors pointing towards accelerating inflation. It can be seen in the latest surveys of business leaders.

Commodity prices have risen sharply, there is a shortage of semiconductors… Jerome Powell, chair of the Federal Reserve, said: “Yes, we see all that, it will be fleeting and temporary. What is very important is that inflation expectations have not risen. Thus we can continue to be relaxed about it”. This is an extremely important point. In a recent speech, he insisted strongly that the Federal Reserve had learnt the lessons of the 1970s. In other words, it had learnt the lessons of its monetary policy errors. If there were a bigger and more sustained increase in inflation, the Federal Reserve would not hesitate to act and to raise its key rates. This scenario must be monitored closely, notably by keeping an eye on inflationary expectations. One thing that is clear today is that financial markets are not expecting a severe monetary tightening.

François Doux: So we must monitor the statistics that foreshadow inflation, along with the Fed’s communications, of course. Thank you, William De Vijlder, for these Three Questions.

William De Vijlder: Thank you.

François Doux: Tune in again next month for a new edition of EcoTV.

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