It’s inevitable that a major economic threat becomes politicized. This discipline was once called “political economy.”
With today’s rising inflation, Republicans are eager to portray President Joe Biden as Jimmy Carter and today as the stagflationary 1970s. The term came from a period that combined high inflation and stagnant growth.
In fact, Carter, who took office in 1977, inherited much of the inflationary pressures that defined his single term.
In 1971, President Richard Nixon tried to restrain a relatively mild uptick in inflation with wage and price controls. It only suppressed the problem, which grew worse when the restrictions came off after 90 days.
Two years later, oil prices skyrocketed and gas lines formed in Western countries when OPEC, led by Saudi Arabia, declared an embargo against nations supporting Israel in the Yom Kippur War.
By middecade, President Gerald Ford tried a psychological approach — remember WIN (Whip Inflation Now) buttons? All this time weak Federal Reserve chairs contributed to the problem.
Carter had the misfortune to be in office when the second oil shock hit from the Iranian Revolution. Much of Iran’s oil production shut down in 1979. Then Iraqi exports were stopped by war with Iran in 1980, while OPEC failed to keep up.
But Carter appointed the formidable Paul Volcker as Fed chair. Volcker risked the worst recession since the Great Depression to smash runaway inflation, and he succeeded.
But historical facts are receding into the rearview mirror of American life, so the current gambit might work for the GOP. Inflation “truthers” claim the government is hiding much higher inflation numbers.
They’ve done it before, when the Federal Reserve engaged in unorthodox measures in the Great Recession. The truthers predicted high or hyperinflation would result. It never did. The central bank’s actions successfully avoided a ruinous deflation.
(Back in the late 1990s, the New York Fed did a deep dive into the accuracy of the Consumer Price Index, finding it was generally correct but “probably tends to overstate the true rate of inflation.)
“This is not the inflation of the 1970s,” Tyler Cowen, an economist at George Mason University, told The Washington Post this month. “Pandemic macroeconomics is a new macroeconomics. We are facing new and unprecedented challenges, and we cannot look to past data to get a sense of how to calibrate our choices. We are to some extent flying blind … We should be genuinely uncertain here about what to do next.”
Inflation is a serious concern. The Consumer Price Index increased at 6.2% in October, the biggest jump since November 1990. The core CPI — removing volatile energy and food prices — was 4.6%, the biggest in 30 years. Rising gasoline prices were the biggest driver.
Although wages increased in October, inflation more than erased the gains.
(My colleague Gene Balk laid out the items rising most in price in a recent column — gasoline was up 47.3% in the third quarter compared with the same period in 2020.)
With reports like the October CPI, it’s becoming harder to stick with the “transitory” school of inflation watchers led by Nobel laureate economist (and New York Times columnist) Paul Krugman. They label the current bout of inflation as “transitory,” reasoning that it’s a passing, one-time event brought on by special circumstances.
In this case, those circumstances would be supply chain issues and an overheated economy recovering from the pandemic (“too much money chasing too few goods”). An analogy is made to the short inflation of 1946-48. But we may be in for a tougher challenge.
We should also, however, be cautious about inflation hysteria. Some inflation is healthy in an expanding economy. The Federal Reserve’s benchmark target is 2%.
In a paper published last month, Daniel Alpert, an investment banker and adjunct professor at Cornell, argued that 1970s-style inflation is highly unlikely now. Globalization, technological development and four decades of relative fiscal austerity bolster his contention.
“That the unique historical and economic circumstances of the 1970s gave rise to a near cultish obsession with changes in price levels, shunting aside the importance of equitable growth, is a tragedy,” he writes.
Yet consumers are pessimistic today, despite a strong economy, at least based on a University of Michigan survey.
Higher inflation is being driven, if at all, only at the margins by Biden’s bipartisan infrastructure bill. Starving public investment won’t stop it.
William McChesney Martin, the longest-serving Fed chair, said it was the job of the central bank “to take away the punch bowl just as the party gets going.” In other words, to raise interest rates when the expansion peaked. In the 1970s, the punch bowl was left out too long.
Now the buck again stops at the Federal Reserve, specifically Chair Jerome Powell. He’s up for reappointment this year and many liberals are pushing for Fed Gov. Lael Brainard.
Powell was picked by President Donald Trump when he denied Janet Yellen another term as Fed chair. She’s now Biden’s Treasury Secretary. Powell is a known commodity but has been criticized as pro-deregulation. He was also in charge when two regional Fed presidents and the vice chair were caught trading stocks.
Brainard would be an excellent choice. She’s smart and well-regarded, a Harvard Ph.D. economist. Some worry she would be an inflation dove in the service of equality and job creation. Remember, the Fed has a dual mandate: Price stability and maximum sustainable employment.
But her prescience about the danger of deregulation running up to the Great Recession and comments on vigilance regarding inflation show she would take a sober, balanced approach.
No matter who the next Fed chair will be, Professor Cowen’s point is important. We’re flying blind.
A hawkish Fed facing the contraction of the early pandemic could have made things far worse by keeping the benchmark Fed Funds rate steady, or hiking it.
From the late 1980s until 2008, Americans enjoyed the “great moderation” — low inflation, modest recessions and steady growth. After the Great Recession, the pandemic downturn and now higher inflation, returning to that era of calm will be challenging.