This is the Cato Daily Podcast for Tuesday, August 19th, 2008.

I'm Caleb Brown.

Oil Shocks, Loose Monetary Policy, and a Fed perhaps more concerned with growth than with controlling inflation.

That was the 1970s, but it's also a common description of today.

Should we expect the return of a decade-long stagflation? Cato Institute Senior Fellow Jerry the a stagnant economy, either a recession or very small slow economic growth, and high

and rising inflation rates.

And of course, that really hit in the 1970s when we had a confluence of very easy fed monetary policy and the oil supply shocks and there were some food socks but mainly oil and so you had a positive

contribution to demand and a negative supply shock in the terms of the two oil cutoffs and you really you really had

the reality of stagflation economic stagnation and inflation. There were only two recessions in the 70s at either end of that decade.

What was driving Fed policy to allow it to tolerate the stagnation and high inflation throughout that decade?

Well, they were constantly worried about slower growth and they were trying to offset

the negative supply shock by creating a positive demand shock which of course on the price

side just reinforced the problem and there was a widespread view among the economics profession

and policy makers in something called the

Phillips Curb which says there's a long-run trade-off between inflation and unemployment

and then you can lower the unemployment rate if you are willing to accept a higher rate of

inflation and the Fed was acting on this and of course if finally that relationship

unraveled and you you started to have a positive correlation. You had higher

unemployment rates and higher inflation and that's the flip side of this

stagflation story. Now people say that today we have slowing global economic growth

especially in the US or Western Europe and Japan and not so much the rest of Asia, Asia X Japan as people say, but

we're having slowing economic growth and rising inflation rates.

...