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 %
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.
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.