It starts with the occasional rock as the policymakers row over the sea of denial. Then many more rocks appear. Finally, they see that they are sailing towards an inflationary cliff. Only with great effort do they turn the ship around and row to safety.
This is how the world is beginning to feel to someone whose life as an economist began in the 1970s. Few wanted to believe Milton Friedman’s warnings. But he was right. The process began to be visible with jumps in prices in what the late John Hicks called “flexprice” markets, such as those for food. Some jumps in prices could be explained away by supply restrictions, such as the oil embargo of 1973-74. In what Hicks called “fixprice” markets we saw excess demand and shortages. But, as price rises became more general and real wages were being eroded, workers became increasingly militant. Finally, a general wage-price spiral became all too visible.
What lay behind all this? The answer is: over-optimism on potential supply, until it was too late. Are we making the same errors now? In my view, yes. Even if the price rises we are seeing could be transitory, they risk becoming permanent. Moreover, even if one is more optimistic than this, it seems impossible to justify present monetary policy settings, especially in the US. Current policy would make sense in a depression. But we no longer risk a depression.