In his very coherent account of past mistakes (“Policy errors of the 1970s echo today”, Opinion, June 15), Martin Wolf overreaches in the lessons for today. Yes, the oil price shock hit the US economy hard in the late 1970s and the response was tardy; however, today’s inflation is not due only to fuel prices, but also to food prices, supply shortages, goods stuck at Chinese ports, a trebling of shipping charges and myriad supply-side shocks.
The problem for policy is that not reacting feeds inflationary expectations, while a hard stop risks recession. However, the reality is that raising interest rate signals resolve, but only affects the demand side via investment and does nothing to relieve supply-side bottlenecks.
Despite climate change considerations, producing more traditional energy would bring fuel prices down. Despite trade frictions, both China and the US benefit from getting the supply chain moving again. And forcing shipping costs in a highly concentrated industry down would also be helpful.
Some of the policy errors of 2022 are largely new ones, in fact. Starting with the Federal Reserve’s continuation of asset purchases when unnecessary and continuing with a fateful decision to call all supply-side shocks transitory, monetary policy has been flawed, but differently from the pre-Volcker years. The second main difference between then and now is that deficits are very large and debt levels very high, which limits the role of fiscal policy to prevent recession.
The conundrum is not one of over-optimism, as Wolf claims, but one of weak policy levers to deal with supply-side shocks. The balancing act of the Fed to try and reverse inflationary expectations without causing a recession would be made easier with actions to break bottlenecks and bring down the cost of food and fuel.
Where Wolf is right is that those countries least able to deal with these disturbing trends are the poorest, already reeling from the pandemic and their excessive borrowing. Harking back to the 1980s, let us hope we don’t see another lost decade.
Danny Leipziger
Professor of International Business
George Washington University
MD
Growth Dialogue, Washington, DC