70's redux?

Paul Krugman has an op-ed on why this is not your father's inflation:

Here’s an example of the way things used to be: In May 1981, the United Mine Workers signed a contract with coal mine operators locking in wage increases averaging 11 percent a year over the next three years. The union demanded such a large pay hike because it expected the double-digit inflation of the late 1970s to continue; the mine owners thought they could afford to meet the union’s demands because they expected big future increases in coal prices, which had risen 40 percent over the previous three years.

At the time, the mine workers’ settlement wasn’t at all unusual: many workers were getting comparable contracts. Workers and employers were, in effect, engaged in a game of leapfrog: workers would demand big wage increases to keep up with inflation, corporations would pass these higher wages on in prices, rising prices would lead to another round of wage demands, and so on.

Once that sort of self-sustaining inflationary process gets under way, it’s very hard to stop. In fact, it took a very severe recession, the worst slump since the 1930s, to get rid of the inflationary legacy of the 1970s.

But as I said, this time around there’s no wage-price spiral in sight.

The inflation hawks point out that consumers are, for the first time in decades, telling pollsters that they expect a sharp rise in prices over the next year. Fair enough.

But where are the unions demanding 11-percent-a-year wage increases? (Where are the unions, period?) Consumers are worried about inflation, but you have to search far and wide to find workers demanding compensation in the form of higher wages, let alone employers willing to accept those demands. In fact, wage growth actually seems to be slowing, thanks to the weakness of the job market.

There's a conundrum here: people really value job security and predictible wage increase. But job security makes the economy much more rigid. When labor prices are calculated over three year periods, it takes a really nasty adjustment to wrench the economy around in the event of a shock. That's what Paul Volcker provided in the form of interest rates that briefly topped 20%, and the deepest recession since the Great Depression. Those kinds of long term coontracts ease the initial shock, but make the adjustment more jarring in the long run.

This is probably a good metaphor for life, actually. The longer you remain in denial, the harder it becomes to face reality.