A commenter named Captain Parker recently left this comment:

Ok, so, inflation is a monetary phenomenon and Burns should take the blame. This I believe. Yay Milton Friedman.
But if you look at ’72 through ’76 you would conclude Burns was doing a pretty good job of creating a nice stable growth path for NGDP (exactly like a market monetarist would want) yet real GDP began falling in mid ’73 and by ’74 we were in recession. So, a casual observer would say NGDP path targeting doesn’t work that time. I raised this issue once before and Dr. Sumner was kind enough to reply that wage and price controls were the problem. But, those controls were gone by early ’74 and in any event what would have been the clue in ’73 -’74 that the nice stable path of NGDP wasn’t doing it’s job? It can’t be the jump in inflation because MMs have been arguing for higher inflation targets if that’s what it takes to keep NGDP on the desired path. And it can’t be the ‘stance’ of monetary policy as measured by interest rates. If MMs try to claim you can judge the stance of monetary policy based on interest rates they will get both barrels from Bob Murphy.


1. Let me know when Bob Murphy finds an actual contradiction in my blogging.

2. It’s not quite true that NGDP growth was stable during 1972-76:

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NGDP growth did slow in 1974. But out of respect for our nation’s military, I’ll concede to the Captain that the NGDP growth rate during this period (a bit over 8%) was high enough so that we really should not have had a severe recession in 1974. In this case, we do need to look beyond NGDP.

The musical chairs model suggests that it’s the interaction of NGDP and wages that determines the business cycle. Normally, wage growth falls during recessions. Indeed it almost always falls, or at worst is relatively stable. But not in 1974—for some strange reason wage growth shot up during 1974, despite rising unemployment. Why? What’s wrong with the model?

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Those who have read my book on the Great Depression (The Midas Paradox) know that I argued that five autonomous wage shocks slowed the recovery during the New Deal. In 1974, there was no explicit government program to boost wages, as there had been during the Depression. But there was a removal of the wage controls that Nixon had imposed in 1971.

Although these were called “wage and price controls”, they were actually all about holding down wage growth. The price controls were the price they had to pay to get Big Labor to go along. Then the Fed juiced NGDP growth, and the combination of fast NGDP growth and slow wage growth created a boom, and Nixon’s 49 state landslide victory in 1972.

But there was a price to be paid for this recklessness. The removal of the wage controls led to fast wage increases. At the same time the Fed was trying to slow inflation, which had shot up from a combination of fast NGDP growth, removal of price controls, and a major oil shock after the 1973 Arab-Israeli War. A perfect storm of bad policy and bad luck came together to produce a modest slowdown in NGDP growth and a sudden rise in wage growth—a toxic combination for the economy.

I do think NGDP by itself is a pretty good model of the business cycle. But it’s not perfect. Recessions can also be caused by real shocks, especially policies that distort the labor market. The slow recovery after July 1933 was one example, and the steep 1974 recession was another.