Transformational Growth and Full Employment
Edited by Edward J. Nell and Mathew Forstater
Chapter 9: Are These Trade-offs Necessary?
James S. Duesenberry For over 50 years, monetary and fiscal policy have been guided by the twin objectives of full employment and price stability. The painful memories of the Great Depression made full employment a top priority for many people, but the long tradition of sound money and the inflation of World War II were enough to force a compromise, weakening the full employment commitment of the Employment Act of 1946. Inflation fears were reinforced by the Korean War and even more by relatively mild inflation of the late 1950s. The rapid inflation set off by the Vietnam War and oil and commodity shocks made further resistance to inflation a political priority, so much so that the Federal Reserve was able to take the drastic measures required to start the disinflation process in the recession of 1979 to 1981, action that would have probably been impossible after the first oil shock five years earlier. I want to begin this chapter with a review of postwar inflation experience and the evolution of theory as a way of evaluating the concept of nonaccelerating inflation rate of unemployment (NAIRU). This will hopefully provide a background for a discussion of the problems of managing monetary and fiscal policy. In the second part of the chapter, I shall outline the evolution of attitudes leading to the primacy of monetary policy and the current neglect of any concern for a rational fiscal policy, that is, for any form of Ôfunctional finance.Õ I will conclude with some...
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