Why did interest rates increase? In oil prices increased. What is the relation between higher oil prices and inflation?
And as many of us would still remember, it was indeed a time of prosperity and opportunity.
Starting in the late s and culminating in the mids, came a series of events that would cast a shadow across the post-war boom. The Golden Age was too good to last forever. In the hands of ambitious politicians, optimistic economists and a public whose expectations were rising, the system was stretched to breaking point.
Thirty years after the onset of the Golden Age, it succumbed to a new phenomenon called Stagflation, which meant both high inflation and high unemployment at the same time. So what killed the Golden Age, and how did the transformation occur? The answer to this is in three parts.
The first is summarised in one word: The second is to point out that the form of Keynesian economic policy that came to be practiced was fundamentally unstable. The third is to say that what was initially a good policy eventually was pushed too far, well beyond its natural limits.
As I expand on these three explanations, it will become apparent that they are all different dimensions of the one problem. I would like to start with the last of the three explanations, the gradual tendency to push the system too far.
I turn to the late s, when I Inflation and golden age entered the economics profession. The vast majority of economists at that time thought that the Keynesian system of demand management had provided the answer to the macroeconomic problem.
Furthermore, they felt that if the economy was not attaining the desired rate of economic growth and low level of unemployment, the remedy was simply to apply more of the Keynesian medicine: The only restraint on more expansionary policies at that time was the fear that they would lead to a widening in the current account deficit and hence a threat to the maintenance of the fixed exchange rate.
Very few people thought that the prospect of rising inflation should act as a constraint on demand management policy.
Few took the threat of inflation seriously for the good reason that no-one could remember a time when inflation had been high enough to cause any problems.
This is because inflation had not been an important issue through human history, other than in wartime or its immediate aftermath when governments had created money to pay for their war efforts. There had never really been a serious peacetime inflation in the sense of high inflation continuing year after year.
For most people, the likelihood of high inflation was thought to be a negligible risk. The view in any case was that a rise in inflation would be a small price to pay for a reduction in unemployment.
Expressed this way, it was almost a moral choice. Unemployment was clearly a bad thing, but slightly higher inflation seemed to be only a minor irritant to most people. Similarly, unemployment was something that predominantly affected poor people but the losers from inflation were thought to be mainly people rich enough to be living off interest receipts, that is, the rentier class.
This is the framework within which the trade-off between unemployment and inflation was viewed, and not surprisingly, the vast majority of people of all political persuasions largely dismissed the inflation threat and supported policies that were aimed almost exclusively at growth and employment.
As a young economist at the time, I shared this consensive view and like most others did not really change it much until the damage became apparent. The tendency to focus almost exclusively on unemployment became most pronounced in the second half of the s and the early s. An important turning point occurred when the United States which had been reluctant to pursue Keynesian policies for quite a while after the war, changed to a clearly expansionary setting of policy under the Kennedy-Johnson Administration in In the event, it proved politically impossible to unwind it, and government spending was further pushed up by the great society programs, such as health, welfare and education spending, and the expenditure associated with the Vietnam War.
And the other example of extremely expansionary policy action is provided by the changes to monetary and fiscal policy that occurred in Australia in and After a few years of largely ineffectual attempts to rein in inflation, macro economic policy turned sharply expansionary in Because the unemployment rate had risen from 1.
Monetary policy was eased in latea supplementary budget was introduced in Aprilcontaining significant tax cuts. The main motivation for these actions was to head off rising unemployment, which it failed to do, other than in the very short term.
Australian economic historian, Boris Shedwin, thinks this interpretation is too cynical and summarises it as follows: The Reserve Bank switched its emphasis from inflation to unemployment.
Treasury maintained a much firmer position but also adjusted its policy advice. The episode indicates the continuing social sensitivity to even modest levels of unemployment.
The United Kingdom was perhaps the most obvious example of Keynesian extremism, resulting in the devaluation of sterling in and culminating in the dash for growth under the Heath Conservative government in the early s.An interesting case study on socialism and the effects it has had in Brazil.
A lot of the problems that the speaker mentions with Brazil have to do with corruption, and defenders of socialism might say that it was the corruption of the people implementing the system that was the problem rather than inherent problems of socialism itself.
THE GOLDEN AGE Ferdinand and Isabella. The marriage in of royal cousins, Ferdinand of Aragon () and Isabella of Castile (), eventually brought stability to both kingdoms. May 02, · The most remarkable aspect of the Economic Report of the President, issued just three months ago, was its suggestion that the American economy this year stands on the threshold of a golden age.
Thirty years after the onset of the Golden Age, it succumbed to a new phenomenon called Stagflation, which meant both high inflation and high unemployment at .
13 days ago · [ANALYSIS] Golden age? Inflation reached 50% during the Marcos regime. The last thing the country needs right now is . It was the Golden Age of the U.S. economy, the quarter century between and , when the U.S.
reigned supreme, manufacturing flourished and the American middle class prospered.