Jennifer Burns: prediction

Transcript context

…And going even up a level as we started, how epic is it to develop this idea, to hold this idea and then to convince the United States of this idea that money matters, that today we believe is mostly correct for now? And so just this idea that goes against the experts and then eventually wins out and drives so much of the economy, the biggest, the most powerful economy in the world. So fascinating. Yeah. So that’s a fascinating story. And so what happens is Friedman has advanced all these ideas, he’s ruled the economics profession, he’s built a political profile and then he becomes the head of the American Economics Association. And he is asked in that role to give a presidential address. And so he gives his presidential address December 1967, and he says, “I’m going to talk about inflation and I’m going to talk about the trade-off between inflation and unemployment.” And this is what’s generally known as the Phillips Curve and the Phillips Curve in its original form is derived of post-World War II data. So it’s derived of about 12 years of data, and it shows that when inflation goes up, unemployment goes down. And the idea would make sense that as the economy’s heating up and lots of things are happening, more and more people are getting hired. And so this relationship has led policymakers to think that sometimes inflation is good, and if you want to lower unemployment, you could let inflation go a little bit. And in the crude forms, it becomes to seem like a menu. Like you could take your model and you could plug in, I want this much unemployment. And it would say, well, great, this is how much inflation you should do. And so then you would target that inflation rate. So Friedman gets up and he says, “this is wrong. This might work in the short term, but it’s not going to work in the long term.” Because in the long term inflation has… First of all, it has a momentum of its own. Once it gets going, it tends to build on itself. The accelerationist thesis, it accelerates. And once inflation gets going, and the reason it gets going is because workers go to the store and they see the price level has gone up, things have cost more. They ask for their wages to go up, then eventually the wages will go up too high and they will no longer be hireable or companies will decide at these high wages I can’t hire as many workers, I’d better lay off. So if inflation keeps going eventually over the long term it will result in high unemployment. So he says, “theoretically, you could end up in a situation where you have high inflation and high unemployment. This hasn’t been seen,” but he says, “theoretically this could happen.” And then he goes and he says, “and the government has started expanding the money supply in 1966, so we’re going to get a bunch of inflation, and then we’re going to get a bunch of unemployment.” And he estimates about how long it will take. And then he says, “once this all happens, it will take about 20 years to get back to normal.” And- And he predicts the stagflation of the 1970s.…

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