A Great Inflation Redux? Economists Point to Big Differences.
Prices climbed for years before the runaway inflation of the 1970s. Economists see parallels today, but the differences are just as important.
The last time big government spending, supply chain shocks and rising wages threatened to keep inflation meaningfully higher, President Biden’s top economic adviser was in diapers.
Jump forward half a century, and some aspects of 2021 look a little bit like a do-over of the late 1960s and the 1970s, which many economists think laid the groundwork for the breakaway inflation that took hold and lasted into the 1980s. At a time when prices have popped and debate rages over how quickly they will moderate, those comparisons have become a hot topic.
Yet many inflation experts point out critical differences between this era and that one, from the decline of unionization to the ascent of globalization and shifting demographics, and say those discrepancies are part of the reason faster inflation is likely to be short-lived this time around. White House officials — including Brian Deese, Mr. Biden’s top economic adviser, who is 43 — say they expect price pressures to calm.
“We’re looking at the implications of an economy that comes out of a policy-induced coma and comes roaring back,” Mr. Deese said at a recent event, explaining why prices have moved up.
Inflation concerns may already be easing among investors. Yields on government debt rose earlier this year as investors demanded higher interest rates to compensate for the risk of higher inflation, among other factors. But yields have since fallen amid signs that the economic recovery is proceeding more slowly than initially expected.
The main certainty that emerges from the debate is this: Like half a century ago, the American economy is being rocked by big and unusual changes that have hit all at once. But those trends make it hard for analysts to guess what will happen, since their tools use the past to predict the future — and there’s no historical precedent for reopening from a global pandemic. This won’t be 1969 or 1978 again, but what it will look like is difficult to foresee.
“History doesn’t repeat itself,” said Rebecca L. Spang, a historian at Indiana University who has studied money and inflation. “Recognizing the complexity of any particular moment is something that economics, with its ahistorical models, is not very good at.”
Monetary policy: Fine tuning, take two?
The Federal Reserve entered the 1960s with the same two-part job that it has now: fostering stable inflation and maximum employment by keeping the economy growing at an even keel using its monetary policies, which influence how expensive it is to borrow money.
Back then, the Fed was very focused on the employment part of its goal. The Employment Act of 1946 had instructed the government to dedicate itself to creating a strong job market. Years of weak price gains made runaway inflation seem like a distant risk, and a growing number of economists had come to believe that higher employment levels could be “bought” with slightly more inflation.
Even when the then-Fed chair, William McChesney Martin, grew worried about price pressures in the mid-1960s, the institution was slow to move, because some of his colleagues hoped to drive unemployment down to 4 percent. When it did raise rates, it did so slowly — a situation that was exacerbated in the 1970s, when Mr. Martin’s successor, Arthur Burns, came under intense political pressure from the Nixon White House to keep easy-money policies in place.
By the time the Fed began to fight inflation in earnest, it was too late.
Some economists draw parallels between that era and now. The Fed last year renewed its focus on the labor market, calling full employment a “broad-based and inclusive” goal. And after years of tepid price gains, officials have signaled that they would be willing to accept periods of higher prices.
Yet unlike in the 1960s, the Fed now has a clear framework for dealing with inflation. It no longer has a specific numeric goal for full employment — it looks for signs like faster wage growth. It has given no signal that it would again tolerate years and years of higher prices.
“The Fed is very focused on keeping inflation relatively settled,” said Alan Detmeister, a former central bank economist who is now at the bank U.B.S. Plus, the White House now stresses the Fed’s separation from politics, and the Fed itself often talks about that “precious” independence.
An Inflationary History
Consumer prices are rising quickly, but inflation is far from levels in the 1970s.
Source: Bureau of Labor Statistics
By The New York Times
Fiscal policy: Expansive then and now.
The current moment resembles the period that laid the groundwork for America’s Great Inflation in another way: a rapid increase in deficit-funded government spending.
Back then, the culprit was the Vietnam War. President Lyndon Johnson began ramping up U.S. troop levels in the mid-1960s, and with public opposition to the war rising, he was reluctant to pay for it by raising taxes or cutting spending elsewhere in the budget. The result was what amounted to a jolt of fiscal stimulus at a time when the U.S. economy was already strong — a classic recipe for inflation.
Today, the economy is growing quickly, and many companies have complained of difficulties in finding enough workers, suggesting that the United States might be closer to full employment than standard measures propose.
“We’re not beyond full employment at this point, but a number of people are predicting that we will be, and there’s very little question that we are experiencing a big surge in demand,” said Alan Blinder, a Princeton economist and former Fed vice chairman.
But there are obvious differences between the two periods. The 1960s saw historically low unemployment while the current economy is still missing millions of jobs. According to many standard measures, the recovery remains fragile enough that government spending should lead to faster job growth, not more inflation. Plus, fiscal stimulus will likely slow with time as pandemic-era programs such as enhanced unemployment benefits end.
Supply shocks: Then it was oil, now it’s computer chips.
In the 1960s, an overheating economy gradually pushed up prices, but it was in the 1970s when inflation really took off. Inflation jumped to 12 percent in late 1974, then moderated, and hit a peak of more than 14 percent in early 1980.
The cumulative effects of that much inflation were eye-popping. In January 1970, $100 would have been able to buy as many goods and services as $280 could buy in January 1985. By comparison, $100 of purchases in 2005 would only have cost $135 by 2020.
The immediate culprit, in both big 1970s spikes, was oil. The Arab oil embargo of 1973-74 and the Iranian revolution of 1979 both contributed to an oil slump, leading to price spikes and gas shortages, which in turn pushed up prices elsewhere in the economy. Shortages in commodities including lumber and agricultural goods also contributed.
Oil prices are also rising now, jumping higher this week after talks between the Organization of the Petroleum Exporting Countries and its allies failed to reach a deal to ramp up production — but the situation is not as dire as the disruptions half a century ago. The economy is also facing snarls as it reopens and a dearth of computer chips is pushing up prices for video game systems and used cars. The Biden administration, much like the Nixon, Ford and Carter administrations, has been examining what it can do to ease the bottlenecks, including creating a task force to look into disruptions affecting construction, transportation, semiconductor production and agriculture.
“It gave me a feeling of deja vu, because that’s what we were doing in the ’70s — we were trying to get supply-side effects,” said Barry P. Bosworth, a senior fellow at the Brookings Institution who led the Council on Wage and Price Stability under President Jimmy Carter. The efforts failed to control overall inflation, he said.
“It doesn’t work,” he said. “As a macro policy, you can’t go around trying to put your finger in the dike everywhere it pops up.”
One idea from the 1970s that isn’t even on the table right now: outright wage and price controls. In 1971, President Richard M. Nixon imposed a 90-day freeze on wages and prices, which eventually turned into a decade-long effort across three presidential administrations to limit price increases through direct government control. Those policies are widely seen by economists as a failure. When they were removed, prices took off.
Wages: The trouble with spirals.
The big price spikes in the 1960s and 1970s reversed once the underlying conditions that created them eased. But not all the way — in each case, the rate of inflation bottomed out a bit higher than the time before. Many economists believe that pattern had to do with human psychology: Workers and businesses had come to expect a higher rate of inflation, and had adapted their behavior accordingly, creating a self-sustaining cycle.
Economists particularly highlight the role of wages. Businesses can cut prices just as easily as they can raise them, but cutting wages is harder. No worker wants to be told that a job that was worth $10 an hour yesterday is worth just $9.50 an hour today. And if workers expect prices to rise at 5 percent per year, they will want raises to keep up with inflation.
Most economists believe that the forces driving the current surge in inflation will ease in the months ahead. The question is whether that will happen before expectations shift. Some surveys have found that consumers are already beginning to anticipate faster inflation to stick around, although that evidence is mixed. Wages, too, have continued rising as employers struggle to rehire workers, although it’s not yet clear that they are taking off.
One reason that temporary price increases turned into permanent wage increases in the middle of the 20th century is that many union contracts had escalator clauses that tied wage gains directly to inflation. Those provisions effectively helped lock in price increases, feeding into the price spiral, said David Card, an economist at the University of California, Berkeley, who has studied the role of union contracts in inflation. Far fewer workers are members of unions today, and few contracts have inflation clauses, in part because they haven’t been necessary in a period of low inflation.
There are also other differences between the two eras. In the 1970s, the oldest members of the giant Baby Boom generation were entering adulthood, spending on houses and goods. Now, millennials — also a large generation — are well into adulthood and are hitting those milestones, but the population overall is aging, which can help keep inflation low. Global supply chains have also become more flexible thanks to the rise of manufacturing hubs in China and elsewhere, helping to keep prices in check.
Perhaps the largest difference of all? Time. In the 1960s, it took years of price spikes and policy failures for Americans to lose confidence that their leaders could keep inflation under control.
“What happened by the ’70s took almost 10 years to develop,” Mr. Card said. “I don’t think it’s that feasible that it could happen that quickly.”