The working middle and modest-income classes in the United States are struggling with rising prices and stagnant incomes. They are also hoping government will “do something” to ease their pain. Unfortunately, most often government is the cause of the pain, not the cure.
An article dated November 2013, on the website Federal Reserve History, has some interesting things to say about the Great Inflation of 1965-1982.
Here are a few quotes from that article:
“The Great Inflation was the defining macroeconomic event of the second half of the twentieth century … It was, according to one prominent economist, ‘the greatest failure of American macroeconomic policy in the postwar period.’ “
“In 1964, inflation measured a little more than 1 percent per year. It had been in this vicinity over the preceding six years. Inflation began ratcheting upward in the mid-1960s and reached more than 14 percent in 1980.”
“While economists debate the relative importance of the factors that motivated and perpetuated inflation for more than a decade, there is little debate about its source. The origins of the Great Inflation were policies that allowed for an excessive growth in the supply of money—Federal Reserve policies.”
“The late 1960s and the early 1970s were a turbulent time for the US economy. President Johnson’s Great Society legislation brought about major spending programs across a broad array of social initiatives at a time when the US fiscal situation was already being strained by the Vietnam War.”
“A more disruptive force was the repeated energy crises that increased oil costs and sapped U.S. growth. The first crisis was an Arab oil embargo that began in October 1973 and lasted about five months. During this period, crude oil prices quadrupled to a plateau that held until the Iranian revolution brought a second energy crisis in 1979. The second crisis tripled the cost of oil.”
“The Nixon administration introduced wage and price controls over three phases between 1971 and 1974. Those controls only temporarily slowed the rise in prices while exacerbating shortages, particularly for food and energy. The Ford administration fared no better in its efforts. After declaring inflation “enemy number one,” the president in 1974 introduced the Whip Inflation Now (WIN) program, which consisted of voluntary measures to encourage more thrift. It was a failure.”
“In 1979, Paul Volcker, formerly the president of the Federal Reserve Bank of New York, became chairman of the Federal Reserve Board.”
“By this time, it was generally accepted that reducing inflation required greater control over the growth rate of [bank] reserves specifically, and broad money more generally. … Lending activity fell, unemployment rose, and the economy entered a brief recession … But the Volcker Fed continued to press the fight against high inflation with a combination of higher interest rates and even slower reserve growth … Unemployment peaked at nearly 11 percent, but inflation continued to move lower and by recession’s end, year-over-year inflation was back under 5 percent.”
The meaning, summarized:
*Government spent too much thanks to the Federal Reserve’s generous increase in the money supply and its failure to change monetary policy when inflation started to rise significantly.
*There was no oil price gouging. The significant increase in the price of gas and energy was the result of shortages caused by the Arab oil embargo and by the Iranian revolution.
*The Nixon administration’s wage and price controls did not work. They resulted in massive shortages of goods and an inflation rate of 11%.
*The Ford administration’s measures to encourage corporate and consumer thrift did not work either.
*What did work in bringing inflation down to 3.66% by 1987 were the policies of Paul Volcker, Federal Reserve Chairman from August 1979 to August 1987. He raised interest rates as high as 19.08% and decreased the money supply.
*The Federal Reserve continuously plays a balancing act in abiding by its objectives of maximum employment and price stability.
The Somewhat Great Inflation of 2022-2024.
The 9% inflation rate of 2022 pales by comparison to the 13.88% 1980 rate.
However, just as spending on the Vietnam war and the Great Society fueled inflation, spending in response to the 2019-2023 pandemic did as well. In 2020 federal spending increased 45% from 2019, as compared to a 18% increase in spending in response to the Great Recession of 2008-2009.
The Nixon administration price and wage control did nothing to stabilize prices. So far, neither has the Biden administration Inflation Reduction Act. However, interest rate increases have made a difference.
The unadjusted 12-months ended July 2024 inflation rate for all items of goods and services was 2.9%, down from 3.2% in 2023 and 8.5% in 2022. The decrease is thanks to the Federal Reserve Bank steadily increasing the Federal Funds rate from 1.68% in July 2022 to 5.33% in July 2024.
Other factors besides spending.
There are certainly other factors besides excessive government spending without significant increase in production that can trigger inflation. The factors that contributed to the current inflation are mentioned in these two studies:
*A study reported in July 2024 by MIT Sloan School of Management indicates the following triggers and their relative influence on the current inflation:
Money supply 2.90%
Yield curve 3.30%
Wages and salaries 4.80%
Personal consumption 6.20%
Producer prices 10.10%
Interest rates 14.30%
Inflation expectations 16.90%
Federal spending 41.60%
Federal spending outweighs all other influences. Interestingly, money supply is not a significant contributor according to this study. Although, this paragraph from Statista Research dated May 14, 2024, disagrees.
“While between 2000 and 2019, the M1 money supply increased at a slow pace, there was an exceptionally sharp increase in 2020, which was the result of the Federal Reserve’s quantitative easing in response to the COVID-19 pandemic. The sharpest increase took place in May 2020, when the M1 money supply was increased from 4.8 to 16.2 trillion U.S. dollars.”
*And from Brookings Institution research dated June 13, 2023:
“The pandemic-era inflation has been a complicated phenomenon that involved both multiple sources and complex dynamic interactions. Ultimately, as many have recognized, the inflation largely reflected strong aggregate demand, the product of easy fiscal and monetary policies, excess savings accumulated during the pandemic, and the reopening of locked-down economies.”
Additional factors.
Indeed, the current inflation is complex, with many variables. One variable that the above-mentioned studies do not emphasize because it does not play a major role in inflation is corporations’ ability to raise prices in a consolidated market. Microsoft and Alphabet are examples of near monopolies that are often accused of setting rules and prices largely undisturbed by competitors.
Although those accusations are partly true (Procter & Gamble’s recent report of sales decline attests that the company’s ability to raise prices is not unlimited!), the clamor that government “do something” is laughable, since it is government’s “easy money” that allows formation of such monopolies. Remember, buyouts are mostly leveraged, facilitated by low interest rates.
In conclusion.
Once upon a time, the U.S. dollar was backed by gold. In those old days, politicians could not get re-elected by just spending unlimited amounts of government fiat money giving their constituents the moon – today they can.
Unfortunately, unbridled spending brings on inflation. When inflation gets so high that voters complain, politicians can dance around the challenge by implementing price controls, breaking up big corporations, or trying other gimmicks that have never worked. Or they can refrain from pressuring the Federal Reserve, and allow them to bring inflation down by increasing interest rates and decreasing the money supply.
Thankfully, politicians do not simply step into their roles – they get elected by voters. Thus, voters can fix things that go wrong, like inflation, by voting wisely.
Just Vote No 