Three Failures (MMT, Statism, Keynesianism) And A (Monetarist) Success

The Great Inflation lasted from 1966 through 1981, or perhaps the early 1990s if you wait until inflation had reached a roughly 2% trend. But I’ll focus on 1982 as the traditional end date for the Great Inflation.

Soon after the Great Inflation got underway, policymakers began looking for solutions. Ever since 1934, the $35/oz. gold price peg had provided a sort of anchor for prices. Yes, it was a weak anchor, as the gold standard was gradually being dismantled, but it still had some ability to hold down inflation expectations. Once that price peg was lifted in March 1968, LBJ looked for alternative solutions. His first choice was MMT. Then Nixon tried statism (or socialism, if you want to troll the Sanders/AOC supporters). Then Carter tried Keynesianism. They all failed. Then Reagan tried monetarism. He succeeded. This is their story.

In 1968, LBJ raised taxes sharply as a way to slow inflation, the MMT solution. In one sense this policy was a smashing success, as the budget swung into surplus during the 1968-69 fiscal year (which went from July to July in those days). That was a mind-boggling accomplishment at the time. When does a country balance its budget in the midst of a major war, and when it is also rapidly scaling up the “Great Society”? (Everything from expanded welfare, to Medicare, Medicaid, housing programs, moon landing, etc.)That’s crazy!

Unfortunately, it was a complete failure at holding down inflation, which continued to accelerate. That’s because it was based on the false model that fiscal policy determines inflation, whereas, in fact, it is monetary policy that determines inflation.

In August 1971, Nixon adopted wage/price controls. These did briefly slow measured inflation, but by 1973, inflation was soaring to new highs even as shortages were developing. Nixon ended the controls during 1974. (And no, the 1972-81 inflation was not about oil, as NGDP grew at 11%/year and RGDP grew by a bit over 3%/year. It was money.)

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