More on Inflation: Reply

Abstract

The virulence and stubbornness of inflation in the United States, and indeed throughout the world, has been a nasty surpnse to most economists, certainly including me. Events of the past seven years seem to deviate markedly from the relationships, econometric and informal, inferred from previous observations. If it all happened according to an advance script of Mr. Tullock's, then he and his analysis deserve great credit and credence. l A common hypothesis, not Mr. Tullock's, is that it never would have happened in the United States if Lyndon Johnson had not opened Pandora's box. His rapid escalation of Vietnam war spending without taxes to match violated the fiscal precepts of economists of all schools, including his own advisers. It drove the unemployment rate far below anything experienced for fifteen years and far below the government's own target of 4 percent. In this unexplored territory, the Phillips curve proved steeper than expected, and subsequently the inflation entrenched by high-pressure war years proved much more resistant than expected to relaxation of demand pressure and recession. Nevertheless, the presumption would be that in the absence of Vietnam and Johnson's fiscal policy, the dimensions of our inflationunemployment problem would not be greatly different from those of 1953-1965. A second hypothesis, which complements and modifies the first, is that the structure of labor markets and of the labor force changed adversely during the sixties. Dispersion among labor markets increased; given that wages respond more to excess demand than to excess supply, an increase in dispersion adds to overall inflationary bias. At the same time the labor force, especially the unemployed, became more heavily weighted with teenagers, women, and other workers who spend more time in voluntary job search than do primary breadwinners and have less effect on wage setting. A third hypothesis is that inflation is merely one economic symptom of a general disintegration over the past seven years of the bonds of social consent and trust. Economic and political interest groups have obtained and exercised new power to enlarge and protect their members' incomes. Disillusionment with the fairness of government and of competing groups has weakened the legal, moral, and political constraints which previously held this process within tolerable bounds. Inflation arises because the powers of the various interest groups are mutually inconsistent;