American commentators and politicians freak out about inflation without understanding and explaining why it came on the scene last summer as COVID-19 receded. The growing consensus among inflation hawks says that higher prices are a result of the Federal Reserve’s failure to raise interest rates and slow the economy soon enough. Even worse, hawks are telling Americans that the Fed must push hard and that its “mistake” could lead to a prolonged period of “stagflation” like the one the United States suffered from 1974 to 1981. It is important to respond to this folly. .
Today’s inflation completely fails to explain the two most important facts about the recent surge in prices. The first is that energy prices are the main driver of inflation here and in the rest of the world, and the United States does not control these prices. Even in Germany, where fighting inflation is a civil debt, Prices are rising almost on average in the US. The second most important fact is that there is a big difference between the technology-driven US economy of 2022 and the inflation-prone economy of the 1970s. The economy of the 1970s was built around post-World War II industries dominated by monopolies and oligopolies that were often able to raise prices without regard to supply and demand. Today’s American economy is led by technology companies that, whatever their flaws, battle each other for markets and usually grow through innovation and lower prices.
To start, it should be clear that energy prices tell the story of inflation in 2022 as much as they did in the 1970s. Gasoline more than doubled from $1.94 a gallon in April 2020 when COVID-19 curtailed driving, to $4.60 the other day. A sharp rise in gasoline prices means the OPEC oil cartel is once again in the driving seat, pushing oil from $41.47 a barrel in 2020 to nearly $113 in May 2022. It’s a painful reminder of what happened half a century ago when OPEC cut supplies led Oil and prices from $1.82 a barrel in 1972 to $35.50 in 1980, a 19-fold increase. (There are 42 gallons in the barrel.)
Higher oil prices increase the cost of gasoline, of course, but also the prices of diesel, heating oil, propane, and hydrocarbons “feedstock” made from natural gas, oil and coal that are often alternatives to oil. Higher oil prices and oil substitutes, in turn, lead to inflationary increases in prices for a whole range of products and services. They drive up electricity costs, heating and cooling for homes and offices, manufacturing, plastics, textiles, transportation of all kinds, farm prices (fertilizer, tractor fuel, shipping costs to markets), restaurant meals, and much more.
However, the US economy has changed since the 1970s, which will make managing inflation less painful if we don’t let inflation hawks frighten us. The American economy in the 1950s, 1960s, and 1970s was dominated by post-World War II depression industries that were protected by government-sanctioned price-fixing arrangements that raised prices year after year. The US economy is different in 2022. The ability of OPEC to cut supplies and raise prices remains in place, but price-stabilization arrangements in communications, transportation, manufacturing, finance, retail and many other areas are gone, so prices are now as low as they are rising.
In the 1950s, 1960s and 1970s, prices in large sectors of the economy were “managed” by business, labor and oligopolies, so that prices rose year after year, but rarely fell. The most famous economist of the period, John Kenneth Galbraith, a brilliant writer and friend of President John F. Kennedy, wrote about it in his 1967 book, The New Industrial State. Galbraith said the economy falls into two broad categories: those in which prices and wages are “managed” and those in which competition has kept inflation low. He was certainly right about this, but he was wrong in thinking that the political power of established industries and unions would prevent this situation from changing.
The economy did not change radically between 1973 and 1983-1984. The administrations of Presidents Gerald Ford and Jimmy Carter, with bipartisan help from Congress, took action to break the inflationary price-setting arrangements that had been the heart of the post-World War II economy. Details are a must as Americans think about inflation today.
In the 1970s, Presidents Ford and Carter backed the courts and the Federal Communications Commission (FCC) that broke the monopoly of AT&T (also known as Ma Bell) on the telephone. Communication costs fell in the 1980s – in some cases by 95 percent – and today businesses and individuals have low-cost options that were unimaginable in the 1970s. Ford and Carter also backed the Securities and Exchange Commission (SEC) and several federal banking regulators who opened up stock markets and banking services to more competition, lowering financing costs. Along the same lines and under the direction of Ford and Carter appointees, the old ICC opened trucking, railroads and pipelines to price competition that broke the power of existing price-fixing interests. The Civil Aviation Board (CAB), with support from Ford and Carter, also finalized comfortable airline price fixing and policies that closed new air carriers since 1938. These reforms were implemented despite fierce opposition from established companies and unions in each of these areas.
Manufacturing has also changed. Resolution 3-2 led by Carter’s appointees to the International Trade Commission (ITC) had the effect of fully opening the US auto market to imports from Europe and Japan and to companies from Japan, Germany and Korea that now manufacture cars in the United States. The United States This undermined the pricing power of the Big Three American auto companies that had dominated US manufacturing since the 1920s. In 2022, there is significant price competition, not only in new cars, but in most of the machine building, metal forming and bending industries that cater to the automakers. (The shortage of computer chips is lowering supply and driving up prices for cars and hardware now, but that will pass as new chip-making capacity comes online.)
Natural gas was the hardest thing to penetrate politically. Carter struggled for two years to open up both natural gas and electricity to price competition, with partial success. As a result, natural gas prices have been staggeringly low for decades, reducing the country’s dependence on coal and oil.
All of these structural changes in the economy have lowered inflation for 40 years and made the current inflation caused by oil, transportation, and a few bottlenecks less likely to take hold. None of these structural changes had anything to do with the federal monetary policy that caused the recession in the early 1980s, and they are always credited with overcoming this inflation. What the country needs now to combat inflation rather than another Fed-made recession are policies to rapidly develop new sources of energy (more wind and solar would be a good thing), continue to modernize transportation infrastructure, and reduce supplier-price stabilization arrangements that make American health care. Too expensive, and increased production of things like computer chips. Slowing the economy by raising interest rates and causing a recession hampers investment in these areas and will bring much more pain to working Americans than inflation today.
Paul A. London, Ph.D., was Senior Policy Adviser and Deputy Under Secretary of Commerce for Economics and Statistics in the 1990s, Associate Deputy Director in the Federal Energy and Energy Administration, and Visiting Fellow at the American Enterprise Institute. A legislative aide to Senator Walter Mondale (D-Minnesota) in the 1970s, he was a diplomatic staffer in Paris and Vietnam and the author of two books, including Solving Competition: The Bipartisan Secret Behind American Prosperity (2005).