I tend to think far little attention has been paid to the rapid increase in the work force due to the entrance of baby boomers and women. Economists are so sensitive to any argument against immigration they seem to forget that any growth model that I am aware of will predict a decline in per capita GDP if the population rises fast enough.
He cites a 1999 paper by Athanasios Orphanides, who wriote,
I examine the evolution of estimates of potential output and resulting assessments of the output gap during the 1960s and 1970s. My analysis suggests that the resulting measurement problems could be attributed in large
part to changes in the trend growth of productivity in the economy which, though clearly seen in the data with the benefi t of hindsight, was virtually impossible to ascertain in real-time.
I am glad to see folks renewing their interest in the Great Stagflation. I certainly spend a lot of time on it in the book that I am working on. In my case, I am particularly interested in the human dimension of how it affected economists. There was much more professional turmoil back then. For example, consider how quickly the great economists of the 1960s went from the center of the profession to its periphery. In 1968, if you had held a session at the AEA meetings featuring Walter Heller, Arthur Okun, Lawrence Klein, and Otto Eckstein, you would have needed a ballroom to accomodate everyone who wanted to attend. In 1974, you could have held it in a suite.
Contrast that with the impact of the Great Recession. Who were the big names before it hit? Blanchard, Woodford,, Bernanke, Gali. Who are the big names now? Same ones.
So in the 1970s, unexpected macroeconomic events create a dinosaur extinction. Today, nothing. Explain that to me.
Concerning the point raised by Karl Smith and Steve Waldman, as best I recall, economists back then were making adjustments for changes in the composition of the work force in their calculations of trend productivity growth. That was part of the story for poor economic performance, but not all of it. Some points to consider.
1. As I posted a while back, Alan Blinder thinks that much can be accounted for by a series of supply shocks–from oil price increases to Peruvian anchovy disappearances. I would add that I think that price controls were a self-inflicted supply shock, particularly in the oil market. At the time, many economists (Blinder among them) wrongly thought that price controls were a favorable supply shock. But I think that by messing up market adjustments they were an adverse shock.
2. I think that there was a lot of money illusion in financial markets in the 1970s. That is, people looked at high nominal interest rates and treated them as high real interest rates. Thus, as Modigliani and Cohn (you can Google Modigliani Cohn 1979) pointed out, the stock market seemed to be discounting real earnings at nominal rates. But the main problem was that real rates remained very negative. In my view, this was the fault of the private sector, although I think there was money illusion at the Fed as well. But in my view, regardless of what the Fed was doing with short-term rates, nobody was forcing long-term bond investors to take negative real rates. Yet that is what they did.
So the story I would tell is that the high inflation came from these negative real interest rates, and perhaps from the series of supply shocks Blinder discusses. The high unemployment came from the energy shock, exacerbated by the self-inflicted disruption of price controls.