Commentary on "Origins of the Great Inflation"

The view that economic ideas were the key source of the Great Inflation, and indeed most of the policy failures and successes of the postwar era, is one that my coauthor, David Romer, and I documented in a series of papers (see Romer and Romer, 2002a, 2002b, 2004). It is, as Meltzer notes, a view with many proponents, especially for the Great Inflation. Taylor (1997, 1999), Sargent (1999), De Long (1997), Mayer (1998), Orphanides (2003), Nelson (2004a,b), and Nelson and Nikolov (2004) have all provided evidence on the central role of economic beliefs. Since Meltzer argues that beliefs were only a small part of the story, I thought it would be useful to discuss the evidence for this alternative briefly and to answer some of Meltzer’s challenges. I will then go on to discuss what parts of Meltzer’s politics hypothesis I think are persuasive and what parts I feel are not. In our papers, David Romer and I use much the same sources and techniques as Meltzer. We show the crucial role of ideas by reading the narrative record. We find that monetary and fiscal policymakers’ economic views evolved drastically over time and that these views played a crucial role in the actions they took. In our analysis, the T he Great Inflation of the late 1960s and 1970s was surely one of the defining moments of postwar economic history. After more than a decade of stable prices and relatively steady real growth, the United States, and indeed the world economy, embarked on a path of steadily rising inflation. By the end of the 1970s, inflation had reached levels unheard of in peacetime. Understanding the origins of the Great Inflation is a crucial task for modern economists and policymakers. Only by understanding how we went so far astray in the 1960s and 1970s can we be confident of avoiding the same fate in the future. In his paper, Allan Meltzer provides his usual mix of probing insight and detailed narrative history. Meltzer makes several arguments about the factors giving rise to the Great Inflation. Some of them I agree with; some of them I do not. But, as is always true of his work, I learned a great deal. Meltzer’s key theme is that politics were crucial. The Great Inflation began and continued largely because monetary policymakers felt constrained to accommodate expansionary fiscal actions. More generally, monetary policymakers felt they needed to support the administration’s and Congress’s desire for low unemployment above all else. Added to this main idea, Meltzer stresses the impact of operating procedures. The need to maintain an “even-keel” during debt issues and an excessively short-run focus in monetary policymaking made concerted antiinflation policy difficult. There is surely truth in Meltzer’s politics hypothesis, especially for the late 1960s. But overall, I feel that Meltzer’s analysis is too narrow. I believe that his painstaking analysis of the day-

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