Alan s. Blinder and Jeremy B. Rudd write,

This paper reexamines the impacts of the supply shocks of the 1970s in the light of the new data, new events, new theories, and new econometric studies that have accumulated over the past quarter century. We find that the classic supply-shock explanation holds up very well; in particular, neither data revisions nor updated econometric estimates substantially change the evaluations of the 1972-1983 period that were made 25 years (or more) ago. We also rebut several variants of the claim that monetary policy, rather than supply shocks, was really to blame for the inflation spikes.

In his 1967 AEA Presidential address (published in 1968), Milton Friedman predicted the death of the Phillips Curve. When this prediction apparently came true a few years later, most of the profession shifted toward the view that inflation is a monetary phenomenon. A few economists remained unconvinced, and Blinder appears to be one of them. Blinder has always blamed the high inflation of the 1970s on rising food and energy prices and the removal of the wage-price controls of 1971-73. He and his co-author write,

a permanent increase in the level of energy prices should cause a quick burst of inflation which mostly, but not quite (because of pass-through to the core), disappears of its own accord. Once again, headline inflation quickly converges to core, but now core inflation remains persistently higher than it was before the shock.

This sentence would horrify anyone who took macro at MIT when I was there, by which point there was a monetarist influence, coming from Dornbusch and Fischer. Blinder is saying that a one-shot increase in the relative price of oil will cause a permanent increase in the rate of inflation. And he is ignoring the money supply. As an aside, he seems to be casually equating a the level of prices with the rate of change of prices.

I actually admire this willingness to go against prevailing fashion. Moreover, he may be right. It is an article of faith among economists that the 1970s inflation and the 1980s disinflation both came from monetary policy, but that does not make it a proven fact. Maybe we have too much faith. Instead, we should be willing to examine data and adopt a skeptical perspective.

In any case, this is a must-read paper for anyone interested in macroeconomic history. It reminds us of the “food shocks” that took place. It reminds us that the CPI used to include the mortgage interest rate. It reminds us that

the main effect of the OPEC I production cuts, which were neither exceptionally large nor long-lasting, was to create significant uncertainties about oil supply, which induced a surge in precautionary demand for oil.

In fact, I wonder if the first oil shock might have been more U.S.-based than OPEC-based. The Democratic Congress and Presidents Nixon and Ford were obsessed with trying to keep consumer energy prices and oil company profits down. They concocted a Byzantine scheme of price controls, oil allocation, and “windfall profits” taxes. The technocrats spoke of “old oil” (oil that had been discovered in the U.S. prior to the fall of 1973) “new oil” (oil discovered since that date), and “imported oil.” Their goal was to try to make the energy market work as if oil companies were selling “old oil” at pre-1973 prices. Perhaps it was these attempts to centrally administer oil production that were the real supply shock.

The authors continue,

Similarly, the rise in prices associated with the second OPEC shock appears to have been driven more by fear of future shortages than by actual reductions in supply.

Or perhaps the oil industry anticipated another round of byzantine regulation and punitive taxes. Recall that instead, when President Reagan took office in 1981, one of his first acts was to get rid of the remaining price controls in the energy market.

Blinder comments on the puzzle that subsequent energy price shocks had less effect on both inflation and unemployment. He cites a number of possible explanations: a less energy-intensive economy; more flexible wages; more public confidence that the Fed will hold down inflation. I think that the answer might be less attempts to regulate prices and profits in the domestic oil market.