Looking back, it's tempting to assign culpability for all these serial blunders. Certainly, the presidents, economists and advisers who shaped economic policy from the 1960s through the late 1970s could not take much pride in their handiwork. The nation s economic performance steadily deteriorated. Every president from Kennedy through Carter contributed to the failure with one possible exception: Gerald Ford. Almost from the moment of Nixon's resignation in August 1974—disgraced and facing impeachment over Watergate—Ford focused on inflation. In September, he convened a White House conference on inflation, which he declared "our domestic enemy number one." The White House issued WIN buttons (for "Whip Inflation Now"), though these later inspired scorn because they coincided with an unfolding recession that proved to be unexpectedly harsh.* But the recession did reduce inflation from 12.3 percent in 1974 to 4.9 percent in 1976. Ford's head was in the right place, and a second Ford administration might have cut it further. We will never know.

But it is misleading to blame individuals, when the real source of error lay in prevailing doctrines. It was the power of ideas that ordained failure, not the shortcomings of individuals. All these presidents and their advisers embraced the same basic concepts that, despite modest differences and disagreements, inevitably led them to make bad decisions in the name of a good cause. Different people adopting the same ideas would have ended up in virtually the same place. For the political logic of the "new economics" virtually guaranteed inflation that would, almost automatically, become too great to be halted painlessly.

The impatience to get unemployment as low as possible was fatal. Politicians would demand policies that would promote job creation until there was a reason to stop—the outbreak of serious inflation being the only obvious limit. If that point were 4 percent unemployment, economists' first estimate of'full employment," then fine. If it was lower, better. Economists admitted that their estimates were imprecise, leaving considerable leeway to probe until actual limits

* At the September 5,1974, White House conference, for example, Otto Eckstein—a Harvard professor, former member of Johnson's CEA and head of a major forecasting firm—predicted that unemployment would peak "a little beyond 6.5 percent." In fact, the peak was 9 percent in May 1975.22

were reached. The fact that unemployment tended to decline before inflation rose (reflecting a "lag" between tight labor markets and higher wages) only made the policy more hazardous. The obsession with lowering unemployment meant that, even if there had been no Vietnam War or oil price explosion, there would have been high inflation. The outcome was built into the system.

Everything rested on an illusion, the Phillips Curve: the notion that there was a fixed trade-off between unemployment and inflation. If true, that meant a society could consciously decide how much of one or the other it wanted. If, say, 4 percent unemployment and 4 percent inflation seemed superior to 5 percent unemployment and 3 percent inflation, then a society could choose the former. The trouble was that the trade-off didn't exist, except for brief periods. In an important paper in 1968, economist Milton Friedman explained that, if government tried to hold unemployment below some "natural rate," the result would simply be accelerating inflation. Economist Edmund Phelps of Columbia University developed the concept almost simultaneously. By their logic, governmental efforts to push unemployment down to unrealistic levels were doomed to failure.

Lower unemployment would occur for a brief period because workers didn't anticipate higher inflation. Their wage demands would lag behind price increases, making labor cheaper in "real" terms and causing companies to hire more people. Once workers recognized higher inflation—that is, once their inflation expectations shifted—they would demand higher wages, reducing the incentive of firms to engage in extra hiring. Unemployment would then return to its "natural" level, except that inflation would now also be higher. The only way that government could hold unemployment below the "natural rate" would be to increase inflation indefinitely, so that workers were repeatedly fooled about their wages.* Even targeting the "natural rate," Friedman warned, was difficult, because it couldn't be accurately estimated in advance and might change over time, being affected by workforce characteristics (age, education levels, attitudes) and laws and institutions (minimum wages, unemployment insurance). A country with generous unemployment insurance, for example, might have a higher "natural rate" than one with stingy insurance: Unemployed workers in the first would have less reason to take new jobs they didn't like.

What would actually happen in the 1970s—the constant acceleration of inflation—was all foretold by Friedman and Phelps. But good ideas could not spontaneously displace the bad until actual experience demonstrated the differences, especially because the bad ideas were politically more attractive than the good ones. By the end of the 1970s, inflation was mainly a political and psychological phenomenon that could be reversed only if the underlying politics and psychology changed. Americans—workers, shoppers, small business owners and corporate executives—came to believe that inflation, as much as they hated it, was a semipermanent way of life. Government wouldn't suppress it, because doing so would involve large, politically unacceptable social costs—higher unemployment, lower

* Economists have renamed the "natural rate" the NAIRU, which stands for the "non-accelerating inflation rate of unemployment"—a baffling label that attests to economists' ability to devise exclusionary jargon that confuses almost all noneconomists.

incomes and profits. As long as people believed this, meaning as long as they harbored high inflationary expectations, they would act in ways that made an acceleration of inflation self-fulfilling. Workers would seek wage increases compensating for past inflation, plus a little more, and companies would meet these expectations, because they believed they could pass the higher labor costs along in higher prices. Inflation would feed on itself, and if government permitted it by creating ever-larger amounts of money, it would be unstoppable.

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