The Mirage of Steady Inflation

Arthur M. Okun

AMO

Arthur M. Okun

DEVELOPMENTS WITHIN THE ECONOMY and the profession in recent years have generated a marked swing toward pessimism in the appraisal of the tradeoff between inflation and unemployment. During the fifties and the sixties, a 4 percent unemployment rate was generally accepted as a target for full employment. At that time, it was expected that it might be accompanied by an inflation rate of 2 or, at most, 3 percent. In contrast, some recent readings of the Phillips curve reported in this journal suggest that, under present circumstancesa, 4 percent unemployment rate means as much as 5 percent inflation for the long run, while holding the inflation rate down to 2 percent would require an unemployment rate of 51/2 percent. Some economists have responded to this unhappy news by espousing either “brake riding” or “gas pumping,” as I have characterized these positions elsewhere.