hange rate measures, is a highly inefficient strategy for fighting inflation. When it does succeed moderately, it succeeds at extremely high costs. Charles Schultze, CEA Chairman, had recognized that monetary curbs "would require a long period of very high unemployment and low utilization of capacity" (1978, p. 150). It might take at least six years of economic slack to cut the inflation rate from 6 percent to 3 percent with the resultant loss of $600 billion (1977 prices) in output.(6) Even if the inflation target were successfully reached, the sad consequence is that subsequent efforts to revive aggregate demand and to restore growth in output and jobs would soon generate renewed price pressures. The gains might, at best, be temporary! By the end of the 1970s, two broad policy alternatives existed. One, essentially Keynesian, acknowledged the complex supply conditions of inflation and recognized the high costs of monetarist restraint. The other, essentially monetarist, deliberately belittled the short-term unemployment costs. Policy makers settled for the second. Despite all the evidence from the 1970s through the early 1990s regarding the great inefficiencies and painfully high costs of a slack-demand "credibility" strategy, this view prevails today among policy makers and central bankers (Mussa, 1994, pp. 111-114; Feldstein, 1994, pp. 4-12). The Fed's anti-inflation efforts exclusively with classic monetary restraint have produced very high costs of unemployment in 1974-75, 1980, 1981-82, and 1990-91. They also had an impact on the distribution of income and wealth as powerful as any changes in federal tax policy. Congress, however, can pass tax legislation affecting income distribution only after the most excruciating public scrutiny, and then the president must sign it. The Federal Reserve, on the other hand, has no such built-in checks and balances. Since the oil price shocks of 1973-74, and again in 1979-80, inflation fears h...
