For a central banker, a particularly critical difference between then and now is what has happened to inflation and inflation expectations.
The overall inflation rate has averaged about 3-1/2 percent over the past four quarters, significantly higher than we would like but much less than the double-digit rates that inflation reached in the mid-1970s and then again in 1980.
Because the members of today's graduating class--and some of your professors--were not yet born in 1975, let me begin by briefly surveying the economic landscape in the mid-1970s.
The economy had just gone through a severe recession, during which output, income, and employment fell sharply and the unemployment rate rose to 9 percent.
Moreover, the increase in inflation has been milder this time--on the order of 1 percentage point over the past year as compared with the 6 percentage point jump that followed the 1973 oil price shock.
From the perspective of monetary policy, just as important as the behavior of actual inflation is what households and businesses expect to happen to inflation in the future, particularly over the longer term.As basic economics predicts, when a scarce resource cannot be allocated by market-determined prices, it will be allocated some other way--in this case, in what was to become an iconic symbol of the times, by long lines at gasoline stations. crude oil well below world prices, growth in domestic exploration slowed and production was curtailed--which, of course, only made things worse.In 1974, in an attempt to overcome the unintended consequences of price controls, drivers in many places were permitted to buy gasoline only on odd or even days of the month, depending on the last digit of their license plate number. In addition to creating long lines at gasoline stations, the oil price shock exacerbated what was already an intensifying buildup of inflation and inflation expectations.Meanwhile, consumer price inflation, which had been around 3 percent to 4 percent earlier in the decade, soared to more than 10 percent during my senior year.The oil price shock of the 1970s began in October 1973 when, in response to the Yom Kippur War, Arab oil producers imposed an embargo on exports.But I do think that our demonstrated ability to respond constructively and effectively to past economic problems provides a basis for optimism about the future.I will focus my remarks today on two economic issues that challenged us in the 1970s and that still do so today--energy and productivity.In part, this was because policymakers, in choosing what they believed to be the appropriate setting for monetary policy, overestimated the productive capacity of the economy. Federal Reserve policymakers also underestimated both their own contributions to the inflationary problems of the time and their ability to curb that inflation.For example, on occasion they blamed inflation on so-called cost-push factors such as union wage pressures and price increases by large, market-dominating firms; however, the abilities of unions and firms to push through inflationary wage and price increases were symptoms of the problem, not the underlying cause.These, obviously, are not the kind of topics chosen by many recent Class Day speakers--Will Farrell, Ali G, or Seth Mac Farlane, to name a few.But, then, the Class Marshals presumably knew what they were getting when they invited an economist.