Andrew Watt is an unhappy camper:
What is surprising and worrying in this case is that Brad Delong… has missed out the thirty important years of economic history, and very much downplays Keynesian economics in that period…
What brought the 30 Glorious Years of the first post-World War II generation in the North Atlantic economy to an end? There have always seemed to me to be five causes, each of which deserves some responsibility:
- Bad luck I--adverse energy supply shock--The tripling of world oil prices in 1973 as result of that Arab-Israeli War, plus Henry Kissinger's brainstorm that this rise in oil prices was a good thing because it gave the Shah of Iran money to modernize his army and hence cause trouble for the Soviet Union on its southern border.
- Bad luck II--adverse growth supply shock--The productivity growth slowdown that hit the North Atlantic for reasons that are still not well understood in the 1970s removed the wedge between nominal wage growth and inflation.
- Technological Backlog Exhaustion--long-run growth--The Great Depression and World War II had left a huge backlog of unexploited opportunities for technological improvement and capital investment; that fueled rapid income growth could not be sustained beyond the mid-1970s.
- Political economy--institutions--During the 30 glorious years government guaranteed full employment and a growing social insurance state, which pleased big business and big labor; in return big business agreed to moderate its margins and big labor agreed to curb demand for wage increases in order to control inflation; this bargain broke down in the 1970s.
- Hubris--Governments believed that they could run economies at overfull employment indefinitely without de-anchoring expectations of inflation, and in the 1970s it turned out that they were wrong.
I have always given the greatest weight to (5)--assigning it 60%, and each of the others 10% each. But I could be wrong. And it is definitely miss you were thinking about and worth rethinking…