Remembering Prosperity (In A Forgotten Time)

A guest post by Benjamin Cole

Given the rampant defeatism in modern economy policy circles, I thought I would re-visit an era of robust growth in the United States: The late 1970s.


But the 1970s were one, long ugly bout of stagflation in the United States, right?

And not only! The 1970s featured ugly clothes, strange hairdos, a squalid and losing war in Vietnam, and soaring crime in the US cities. While U.S. automakers made garish vehicles that fell apart, the serial liar Richard Nixon Watergated the  Presidency, where he was succeeded by the mushy wimp Jimmy Carter.

It is a decade Americans prefer to forget, except for maybe the disco dancing. But relying on memories and anecdotes can be treacherous.

How about this: From 1976 through 1979 the U.S. economy expanded (and in real terms) by 20 percent, after the two-year recession for 1974-1975. These are the stats:

Year      Real GDP Growth %

1976       5.4

1977       4.6

1978       5.6

1979       3.1

That four-year recovery is not stagnation; it was a honking great economic expansion. And it coincides with President Jimmy Carter’s watch, the man remembered for his pious pleas that Americans live on less in chilly houses, due to oil shortages.

Except while Carter sermonized, the economy roared. The number employed in the United States rose from 88.8 million to 98.8 million in the four years, an 11 percent jump for the Carter Administration.

The Price was Prices?

Of course, I have left out part of the late 1970s picture: The hobgoblin inflation. Especially as measured by the consumer price index (CPI), a series that then tended to overstate inflation. Be that as it may, by 1979 the CPI topped an 11 percent annual increase.

The Federal Reserve Board chiefs of the day were Arthur Burns (1970-78) and then William Miller (1978-79), the latter a man nearly erased from Federal Reserve histories. Today, Burns and Miller routinely get blamed for “runaway inflation.”

Today, no one ever says the pair of central bankers “oversaw a 20 percent expansion in real GDP to finish out the last four years of the 1970s.”

Blame Burns and Miller deserve—but only so much. In fact, inflation barely reached double-digits in the late 1970s, a long way from Zimbabwe or the Weimar Republic horror stories. Inflation was probably too high for comfort in the late 1970s, but it was not so high for the time and place.

The Forgotten Context

Back in the 1970s, a 5 percent rate of inflation was considered okay; as we have seen in this space, both the Nixon and Reagan Administrations pushed the Fed to ease when inflation was in that range. Even the towering inflation-fighter and Fed Chairman Paul Volcker (1979-87) cooled his guns when inflation retreated to 4 percent.

Yes, Volcker relented when inflation was double the rate that today sends Fed officials cowering.

So, to be fair to the invisible man Fed Chief Miller, he presided over a rate of inflation that was up 5 percent from what had been deemed acceptable, or was double the then-acceptable rate. It is key to remember that inflation did not rise from 1 percent to 10 percent on Miller’s watch, but more from the mid-single digits to bottom of the double digits.

Miller also operated in an economy much more prone to inflation than today. The top marginal tax rate was 70 percent, unions were still a force in the private sector, and international trade was growing but far from levels reached in the 2000s. Transportation, telecommunications and finance were heavily regulated. It was the pre-Internet age, with all the transactions costs of that era. COLA contracts were common.

And Today?

What inflation pain would it be worth it to obtain a 20 percent expansion of real GDP in the United States—and to create 15 million jobs? What if policymakers had to accept an increase in inflation to, say, the 5 percent to 6 percent range?

Our not-so-long central-bank ancestors would sneer at our timidity. They thought inflation in the 5 percent range was the norm. They would put the money-printing press needle in the “Red Zone Hot” and take a long weekend.

Moreover, is not clear the United States would get up to 5 percent inflation, even in a robust boom. The traditional model of inflation assumes that an increase in the money supply (assuming static velocity) will boost demand, leading to an increase in output. Competition keeps a lid on prices. Only after output reaches full capacity do sellers ration by price, and then inflation results. In real life, not so clean, but that is the general idea.

But what of an economy (the United States) that sources globally? Can the U.S. economy really cause global supply lines to reach demand-pull inflation? If Ford raises prices, do Kia and Toyota and BMW?

Sadly, our central bankers do not even want to find out what level of demand prompts inflation. They think 2 percent inflation is the monetary River Rubicon—and so our Fed is evidently targeting 1.5 percent inflation, as an average. Other prominent monetary thinkers call for zero inflation, or even deflation.

For me, that says we are in the Economic Dark Ages. What is nearly certain is the United States will never see a robust 1976-1979 type recovery, as long as the Federal Reserve is so obsessed with inflation.

Maybe forgotten Fed Chief William Miller was not that bad.  And disco was great.


11 thoughts on “Remembering Prosperity (In A Forgotten Time)

  1. 1976 to 1979: a time frame when I was an “economic innocent”, for those were good times and I had not yet been “burned” in the workplace by recession! Like you, I felt that the “sky was the limit”. Hard to explain, to someone who wasn’t trying to choose from multiple options of work or business possibilities for the first time, in those years.

  2. Great post, re-writing history, but in a good way. I tried to argue your case with some clever economist-type colleagues brought up (like me) in those times and I was amazed by the hostility, I was literally howled down. I think they have come to their senses after my shock treatment, but they didn’t like being forced to face facts that you set out so well. The great stagflation bogeyman needs to be slayed and slayed again. Well done.

      • An interesting paper by the BoE’s new Deputy Governor for Monetary Policy from Jackson Hole points out that things in the mid-70s weren’t so benign as in the US. It’s a puzzle why despite being smart he can’t see his way clear to targeting nominal wages.

        The public only understand inflation, apparently. He couldn’t be more wrong, of course. Inflation is impossible for the public to really understand given increasing hedonic shifts in consumption patterns (thinking surfing the web from your sofa) while nominal wages/income is easy, just look at your payslip.

  3. Hi Benjamin. You realize, of course, that with this “growth was good in the 1970s” thing, you are contradicting Scott Sumner.

    As it happens, I support zero inflation, at least in principle. But I thought your post was really good, because you point out something that everyone seems to want to overlook: Growth was good in the 1970s. If growth was slow at all, it was slow because the Fed was slowing it, creating recessions to combat inflation.

    To show this is true, I have more than once relied on graphs from Marcus Nunes. For example here, where I wrote:

    Marcus’s graph shows the blue [RGDP] line at or above trend for the entire inflationary period. By contrast, before 1965, and again after 1980, the blue line is at or below trend. The inflationary period seems to show particularly good economic performance. I find this odd, because Sumner (and everyone) says growth was not good in the 1970s. Sumner says “growth was slowing”. Marcus’s graph does not agree.

      • Okay, thanks Marcus. That’s a good post you link to, and it has the best graph on oil NOT being the prime mover of the Great Inflation, the best graph I’ve ever seen on that. Now…

        In your “Cherished Myth” link you have Sumner saying “Growth was normal” in the 1970s.

        In the link I gave above I have Sumner saying “I am not denying that growth in US living standards slowed after 1973, rather I am arguing that it would have slowed more had we not reformed our economy.” He is saying growth was slow until “neoliberals” rescued the economy: “The neoliberal revolution occurred precisely because growth was slowing almost everywhere in the 1970s and 1980s…

        The quote is from Sumner’s America’s amazing success since 1980: Why Krugman is wrong. Even the post title suggests growth was slow in the 1970s.

        In that post Sumner says: “the neoliberal reforms after 1980 helped growth” — again suggesting that growth was slow in the 1970s.

        And in that post Sumner says: “For those of you not old enough to remember 1980, let me explain …. Britain had been the sick man of Europe for decades, growing far more slowly than Germany, France and Italy. The US wasn’t doing as badly, but certainly wasn’t doing that well either. We had also been growing much more slowly than Europe and Japan.”

        I think it is pretty clear. Sumner is saying U.S. growth was slow in the 1970s. I know, I am pulling quotes from Sumner’s side of a dispute with Krugman. And perhaps Sumner is overstating his case because he is involved in a dispute. But I see only one way to interpret what he said: He said growth was slow in the U.S. in the 1970s.

        … Is that what I’m “not quite right” about?

    • Arthurian:

      Thanks for your comment.

      Actually, I say growth was good 1976-9, the four-year period. I mean, a 20 percent expansion of real GDP is something. You can’t blink that away. Keep in mind also what a 20 percent expansion of GDP and some inflation does to the national debt to GDP ratio….

      There were recessions in the 1970s. And ugly cars.

  4. Art
    Scott says: “So there you are, all these countries support my hypothesis that neoliberal reforms lead to faster growth in real income, relative to the unreformed alternative.” That´s after 1980. For the period before he says the US was growing more slowly than France, Germany, Japan (which were on “catch-up” mode at least to the mid 70s).
    The 70s, especially after 1976, saw strong growth, although volatile and accompanied by high/rising inflation.That combination made “perceptions” negative. The GM had much more stable (and still robust) growth and falling/low inflation. “Feelings” were much better. Check-out the behavior of the stock market.

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