The Fed Alone Can’t Slay Inflation

This fairytale memory spooks us in part because of the all-too-real data points of the period: joblessness crossing 10%, a stock market that ended the decade where it began, and punishing mortgage rates, sometimes as high as 17%, that abided even after prosperity returned.

We can avoid a 1970s repeat. But doing so requires questioning the all-monetary fable.

Inflation is no mystery. It is as simple as its simplest definition: too much money chasing too few goods. You can acknowledge the money side—and power of the Fed chairman. But the “goods” side matters too. The more “goods”—a shorthand here for production of all kinds—the more money the economy absorbs, and the less inflation. To produce more goods in innovative ways, businesses need free rein in deciding what they will produce, and a clear signal that they will have that freedom.

A thought experiment is to review the 1970s independent of monetary policy, with an eye to each moment the U.S. government failed to send an encouraging signal to producers. In such a review the period looks less like a mystery siege and more like a series of squandered opportunities.

The nonmonetary version starts in the late 1960s, when Congress pushed a preplay of the kind of tax redistribution sought today. To punish wealthy citizens, lawmakers pushed through what became the Alternative Minimum Tax and surprised business by announcing a series of increases in the capital gains tax, culminating in a top 35% rate in 1972. As if that wasn’t enough, in 1976 they acted again, pushing the effective top rate up to more than 49%.

Though few actually paid that rate, it was a heck of a symbol to business. Congress and…