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To Avoid Double-Dip Recession, Remember Lessons of 1980s

Author: Amity Shlaes, Former Hayek Senior Fellow for Political Economy
June 20, 2011
Bloomberg.com

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Is our economy headed back into a recession? A look at a past double-dip, the recessions of 1980 and of 1981-1982, suggests we are due. That double-dip also suggests the Federal Reserve should raise interest rates earlier and faster than you might think.

In fact, the 1980s experience points to something horrible: We need a recession to get a true recovery.

The trouble that time actually started in the 1960s. Back then, policy makers feared inflation less than a recession. Scholars alleged they knew how to manage "creeping inflation" before it morphed into "galloping inflation," the unstoppable animal. A famous economic textbook at the time, written by Paul Samuelson, claimed that inflation was all right as long as it stayed below 2 percent. John Kenneth Galbraith deemed inflation "a normal prospect." The view was that oil shocks, loose monetary policy, taxes, deficits and labor strikes were also mere obstacles to grow past.

In the mid-1970s, the inflation rate -- measured using the Consumer-Price-Index value for urban consumers -- crept above 5 percent, and it seemed to want to stay there.

Federal Reserve Chairmen Arthur F. Burns and G. William Miller tightened interest rates repeatedly over the decade's course, so that the prime rate, the interest rate charged by banks to creditworthy customers, climbed from 8.5 percent in February 1970, when Burns began in the job, to an astounding 11.75 percent in early August 1979, when Miller left office.

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