Veterans of Carter-era inflation warn Biden has few tools to tame prices
WASHINGTON – When inflation soared in the late 1970s, President Jimmy Carter invited his top economic advisers to weekly lunch meetings, where they tended to make over-optimistic predictions of how prices would rise.
But the political consequences of price hikes are inescapable: By 1978, Democrats had lost seats in the House and Senate. A year later, Carter’s Treasury Secretary, Michael Blumenthal, was ousted in a cabinet reshuffle. In 1980, Carter lost his bid for re-election by a landslide as the Federal Reserve, intent on lowering inflation, raised interest rates so aggressively that it sent the economy into a painful recession.
President Biden and the Democrats in office now face a similar predicament as they scramble to tame inflation a year after telling Americans that price gains would be short-lived. In recent weeks, Biden has pressured oil refineries to increase production, proposing a three-month gas tax holiday and calling on the Federal Reserve to do what is needed to cool an overheated economy. But for veterans of the Carter administration, echoes of the past call for a greater sense of urgency from Biden despite his limited power to cut prices.
“The fundamental problem this president faces is not very different from the one that Carter faced,” said Mr Blumenthal, who is 96 and splits his time between Princeton, New Jersey and Germany, where he was born. “President Biden faces this dilemma, and I certainly hope he makes a clear choice, he chooses decisively and he is very clear not only about the fact that he understands that he has to deal with inflation, but also that he is really willing to support the painful steps to do so.”
That pain could be excruciating if, as economists increasingly predict, the Fed had to push the economy into recession in order to stamp out inflation. The central bank has already started raising interest rates quickly and has indicated that it will do whatever it takes to restore “price stability” while trying to avoid the mistakes of the 1970s.
Veterans of the Carter administration say Biden would also be wise to learn from the past and avoid half-measures that are popular but do little to solve the underlying problem, as well as forgo big spending initiatives.
The United States has been hit hard by higher prices this year as disruptions to the supply chain that have emerged during the pandemic coincided with soaring food and energy prices due to the Russian war in Ukraine. The Consumer Price Index rose 8.6 percent in May from a year earlier, as price increases jumped at the fastest pace in more than 40 years. Gas hit $5 per gallon in June and now averages about $4.80.
This dynamic is similar to the 1970s, when the Arab oil embargo of 1973-74 and the Iranian revolution of 1979 slashed oil supplies so severely that they fueled shortages, driving up gas prices. Inflation peaked at 14.6 percent in 1980 before declining as Paul A. Volcker, who was the Fed chair, aggressively pushed interest rates to nearly 20 percent and triggered a recession that eventually tamed inflation.
In a “passionate conversation” to the nation in February 1977, Mr. Carter urged Americans to embrace energy conservation to counteract energy shortages and rising fuel costs.
Understand inflation and how it affects you
“We must all learn how to waste less energy,” said Mr. Carter. “By simply keeping our thermostats at, say, 65 degrees in the day and 55 degrees at night, we can save half of the current shortage of natural gas.”
Mr. Blumenthal said Biden should heed lessons from Carter’s failed attempts to curb inflation by avoiding counterproductive measures. He urged Biden to support a significant increase in interest rates and abandon his sweeping legislative package in favor of deficit reduction, which some economists argue could dampen prices by slowing growth depending on how it is handled.
“The fight against inflation comes first,” said Mr. Blumenthal, who fled Nazi Germany and lived in Shanghai during the hyperinflationary period of the 1940s. “It has to show recognition to the public that inflation has lasting adverse effects on the economy, and that by trying to take halving measures now, you are only prolonging the pain of those effects.”
Biden acknowledged that inflation could be persistent and said his administration was doing what it could to ease price pressures. He has primarily blamed President Vladimir Putin and his invasion of Ukraine for the price increase, but he has also blamed American oil refineries and even gas stations. As commuters kick off the July Fourth weekend, Biden accused gas station owners of profiteering and urged them to lower their prices.
“Reduce the price you charge at the pump to reflect the cost you pay for the product,” Mr. Biden said on Twitter.
The Biden administration was looking for ways to lower oil prices globally. Treasury Secretary Janet L. Yellen has been lobbying her European counterparts to impose a price cap on Russian oil exports, and the Group of Seven industrialized nations agreed last week to explore the idea.
Economists have rejected some proposals to ease inflation’s pain on Americans, such as a gas tax credit or student loan debt relief, saying they might make inflation worse. Others have been criticized, such as Biden’s upcoming visit to Saudi Arabia, which some have described as pandering to a country the president once likened to a “pariah” for its role in the assassination of Jamal Khashoggi, a Washington Post columnist and prominent figure. renegade. Biden said last week that he would not ask the Saudis to increase oil production.
Fred Bergstein, Assistant Secretary of the Treasury for International Affairs from 1977 to 1981, said that the United States should avoid the kind of domestic oil price controls that were in place during the 1970s and which the Carter administration eventually abandoned in 1979. He described them as ” A fiasco,” Mr. Bergstein said, distorted energy markets.
“One of the lessons from the Carter administration is not to do it,” said Bergstein, 81. “Energy price controls dampen production and reduce the supply side over time.”
Bergsten suggested that rolling back some Trump-era tariffs on $360 billion in Chinese goods, which economists say have raised costs for American consumers, could offer some marginal relief from inflation. He also believes that Democrats should consider raising taxes, mostly targeted at the wealthy, to reduce pent-up demand in an economy that continues to drive prices higher. Proposals like a gas tax credit would likely drive up inflation, he predicted, by giving drivers more money to spend, and would make the Biden administration look desperate by resorting to gimmicks.
Mr. Bergstein, who made several trips to Saudi Arabia in the 1970s, tried to persuade Riyadh to increase oil production.
The moment is politically perilous for Biden, with the November midterm elections looming and politics complicating the federal response.
Realizing the political power of rising prices, Republicans have used inflation as a major talking point before the midterms, often comparing Biden to Mr. Carter.
What is inflation? Inflation is the loss of purchasing power over time, which means your dollar won’t go as far as it did today. It is usually expressed as the annual change in the prices of everyday goods and services such as food, furniture, clothing, transportation, and toys.
“Americans who are experiencing high prices and the highest inflation in 40 years need to demand the results that President Ronald Reagan and Donald Trump have given them,” Newt Gingrich, the former House Speaker, wrote last week. “They need to reject the political failures of Presidents Jimmy Carter and Joe Biden.”
Barry B. said: Bosworth, who led the Carter Administration’s “Wage Price Board” from 1977 to 1979, argued that in an ideal world a government could enact policies to reduce or delay government spending on new programs or public works initiatives. However, it is much easier to find bipartisan support to stimulate the economy than to take the air out of it.
It is clear to Mr. Bosworth that the $1.9 trillion pandemic aid package that Democrats passed in 2021 has fueled inflation. Now, he said, it will be largely up to the Federal Reserve to get it under control.
“It was clearly excessive,” said Mr. Bosworth. “It is clear that the amount of transferred money that we have injected into the economy over a short period of time has increased inflation.”
For those who have lived through bouts of high inflation, anticipating an end point is fraught with risk and uncertainty.
Mr. Blumenthal noted that when he was Treasury Secretary, he tried to provide anecdotal evidence from companies that often conflicted with the more optimistic economic forecasts of other White House economic advisers who had less frequent contact with corporate executives. They were sometimes reluctant to make a grim numerical forecast for the president.
Biden’s advisers also miscalculated the inflation risk.
In the early days of the Biden administration last year, Mr. Blumenthal attended a meeting of Treasury secretaries past and present. Summers, who has spent the past year warning publicly that inflation is a bigger problem than Biden administration officials understood, expressed concern to the group that inflation could worsen. Others, including Ms Yellen, emphasized that prices are under control and will be moderate.
“Once you are in this course, it is very difficult to be precise,” said Mr. Blumenthal, who has a Ph.D. in Economics from Princeton. “Traditional analysis tools are of limited value in this case.”
He added: “And hope is an eternal fountain.”