A Return to 1970s
Stagflation? Remember the 1970s’ high unemployment, empty store shelves, lines at gas stations and skyrocketing inflation? History may be set to repeat! by Michael Kelley
SolStock/Getty Images Plus
M
any are old enough to remember the turbulent economics times of the mid-1970s. The U.S. economy, strong through the early 70s, bounded along with high growth and low inflation—the nirvana that all economists long for. Times were good, at least from an economic standpoint. That began to change rapidly in the fall of 1973. That October, Arab nations attacked Israel on its most solemn holy day, Yom Kippur (the Day of Atonement), when Israeli armed forces would be at rest, setting off months of war. In retaliation for U.S. and European support for Israel, the Arab-controlled Organization of Petroleum Exporting Countries (OPEC) embargoed oil sales to the United States and many European nations. Oil prices skyrocketed, nearly tripling almost overnight. Home heating oil and other oil-based products likewise greatly increased. In 1973 and 1974 poor wheat and corn harvests caused a sharp rise in the price of those commodities. Given the twin “supply shocks” of high oil and commodity prices, Americans soon found themselves paying much more for gasoline and diesel fuel as well as food prices, the latter made even worse by rising transportation costs. The money supply also was growing rapidly. America’s central bank, the Federal Reserve, had added more than $90 billion to the U.S money supply between 1970 and 1975, the dollar being completely disconnected from gold in August 1971. In just one year, from December 1971 to December 1972, the nation’s basic measure of the money supply increased from $228 billion to $249 billion. That trend accelerated in 1975. In one of its most expansionary weeks, July 31 to Aug. 6, 1975, the “Fed” grew the
money supply by $1.9 billion. By 1975, America faced the twin threats of an expanded money supply leading to devalued dollars along with supply shocks in food and fuel prices reducing the dollar’s buying power even further. As people were forced to pay more for these necessities, they had less money to spend on other things. Consumer demand, which has long accounted for about 70 percent of the U.S. economy, dropped. This and other factors led to job layoffs, and unemployment rose. That ran contrary to accepted economic thinking of the time. Economists coined a new term, stagflation, to describe the twin and contradictory phenomena of U.S. economic growth stagnating during a time of inflation. Stagflation was then short-lived, as the U.S. economy rebounded in the second half of the 1970s in an expansion that lasted until early 1980. But stagnation returned in late 1980, somewhat as a result of the Iranian Revolution. A second oil shock lit a fire under inflation, which reached more than 14 percent by late 1980. Back to the 70s again Now, more than 40 years later, we may be seeing the same thing occur again. As the Covid pandemic subsides and life has in some ways returned to normal, demand for all sorts of goods and services has surged. This increased demand, fueled even more by large federal stimulus checks over the past 20 months, has rapidly pushed up prices. Those higher prices have in turn caused workers to demand more pay as prices have risen. As employers have had to raise wages in order to fill B Tm a g a z i n e . o r g
•
May-June 2022
23
