Policy-Making in Real Time: Bill Polley on the 1974 Recession

Bill Polley continues the discussion on Gerald Ford’s WIN speech – schooling yours truly on the timing of recessions:

By NBER dating, the economy had already been in recession for just short of a year when he made this speech and was only 5 months away from pulling out of it. The labor market is a lagging indicator, so while the unemployment rate was still high

NBER does show the economy peaking in 1973QIV and hit its trough in 1975QI. This dating is consistent with the real GDP data that I noted in my update.

Bill and I (as well as others) have the luxury of looking at this from a historical perspective. But the real question is what did the President’s economic advisors know at the time when policy decisions had to be made and what did they advise the President? Even today – economists debate whether aggregate demand should have been restrained to fight inflation or whether we needed aggregate demand expansion to offset the recession?

I suspect David Altig would have preferred monetary restraint, which also seems to be what King Banaian would have counseled. Had the three of us served on Ford’s CEA, I would have argued for aggregate demand expansion. But hey – the 1970’s was a very difficult period for policy makers and their economic advisors.