Arnold Kling  

The Seventies

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American Politics & Economics:... What I Think About Financial R...

Bryan writes,


I'm too young to remember much about the politics and economics of the Seventies. From books, though, I get the impression that American political economy was in complete disarray

The first thing that I would say is that the economy was never the central issue that it is today. Until 1973, the war in Vietnam and the divisions that the war created at home were the dominant issues. In May 1970, it was tin soldiers and Nixon's comin'. By early 1973, Watergate had taken over the front page, and it stayed that way until Nixon's resignation, which I'm remembering as August 1974.

In between Kent State and Watergate, there was August 1971, when Nixon ended Bretton Woods and imposed wage and price controls. These policies were very popular, and the combination of controls with rapid money growth produced low inflation and low unemployment in 1972, helping propel Nixon to a landslide victory in his quest for re-election.

By late 1973, the wage and price controls were failing, and the Arab oil embargo (starting in October of 1973) generated a run-up in oil prices. The economy foundered in 1974-75, falling into what was at that time the worst post-war recession. A school of thought emerged to say that there were "limits to growth" because of resource constraints. Robert Solow was on the right side of that issue, arguing against the models used by the "limits to growth" theorists, which assumed zero substitutability and zero technological progress.

But in 1976, Jimmy Carter's victory probably owed as much to residual disgust with Watergate (Gerald Ford's pardon of Nixon was thought by many pundits to have cost him the election) as anything going on in the economy.

In 1978-79, the Iran-Iraq war caused another run-up in oil prices [oops--it was the Iranian revolution of 1979, the war started in 1980], and this in turn coincided with another upward ratchet of inflation while unemployment rose. Hence, the "misery index" (the sum of unemployment and inflation). But the big news story was not the economy--it was the interminable Iran hostage crisis. That humiliation, including the botched rescue attempt, is what made Carter unpopular and propelled Reagan to victory. Ironically, Carter undertook some pretty good economic policies late in his Administration, including deregulation of trucking and airlines and the appointment of Paul Volcker as Chairman of the Fed.

In short, I remember the early 1970's as dominated by unrest over the Vietnam, the mid-1970's as dominated by Watergate, and the late 1970's as dominated by the Iran hostage crisis and tensions with the Soviets, primarily over Afghanistan.

There was a lot of pessimism about the ability to control inflation. By the end of the 1970's, the stock market was in the toilet. But economic woes were not the dominant news story the way they have been the past two years. From a libertarian perspective, the experiment with wage and price controls would have seemed scary, but then within a couple of years it was abandoned (except for residual controls on oil prices) and discredited. Notwithstanding the poor economic performance under Carter, his deregulation policies meant that the decade ended with a more market-oriented economy than it began.

If you compare right now with, say, 1979, we can say that inflation is lower, the misery index is lower, and the stock market is doing better. But unemployment is higher, and government policy looks to me to be moving in a much less market-friendly direction.


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COMMENTS (18 to date)
Ilya Somin writes:

Very interesting. But I don't think the Iran-Iraq War could have caused an oil crisis in 1978-79, given that it didn't begin until 1980.

Arnold Kling writes:

Maybe it was the Iranian revolution, then.

Joe Calhoun writes:

Arnold,

What Fed Chair presided over the following:

•In his first three years as head of his central bank, inflation averaged 9.88%
•In his first six months in office, gold prices rose 283%
•Over the next 18 months, gold prices fell 66%
•During his first three years in office, the unemployment rate rose 68.3%
•In the third year of his term, the banks in his country had to be bailed out due to bad loans to a foreign country

That would be Paul Volcker and I can't believe that you've fallen for the Volcker myth too. He was not the great central banker everyone wants to remember.

JPIrving writes:

@Joe Calhoun

I'm not emotionally invested in the Volker as savior story, but as I understand it he inherited a lousy situation and brought a decade of inflation to an end by the time he left. Is your position that he should have begun tightening sooner? Should the Reagan administration get the credit then for ending inflation? If not who?

Mommsen writes:

"...and the Arab oil embargo (starting in October of 1973) generated a run-up in oil prices."

No, the rise in oil prices was largely due to the price controls. The embargo itself leaked so badly that it can only be considered a failure.

Lord writes:

The energy crisis was fairly significant economically, generating lines for gas, triggering both recessions, obsoleting a great deal of capital, and creating a lot of pessimism as rising real oil prices always do.

spencer writes:

Mommsen-- of course you have some widely respected economic studies you can reference to support your statement that the oil price controls caused the rise in oil prices.

Adam writes:

I agree that Vietnam and Watergate dominated the early seventies. However, the economic issues of surging energy prices, inflation, and slow growth definitely were on the public agenda, especially after the oil price crisis of 1974. Remember Ford ballyhooed Whip Inflation Now program?

I recall how difficult it was to get a job in 74 as a new college graduate--so much so, I decided to get out of town by joining the Peace Corps. By the end of the 70s, inflation and interest rates were surging, gas lines were a continuing problem, and the world outside seemed in chaos after the Iranian revolution. The Soviet Union was, for all appearances, solidly in place with internal cruelty and external threat of of nuclear annihilation.

Leaving aside the foreign policy issues, I'd say the economic conditions were a lot worse than now for the non-homeowner. Perhaps if you owned a home with a fixed mortgage, it didn't seem so bad with nominal prices rising rapidly.

Admittedly, current economic conditions are grim for the unemployed 55+ year old with a high school education. But for those employed, economic conditions are not so bad, relative to the late 70s. Indeed, if you work in the public sector, where's the worry?

What does look grim now are a Congress that ignores the electorate and a President that single-minded pursues policies of greater and greatest centralized control. Spending is out of control, but, again, the negative effects of that are in the future.
What hurts now are more the prospects for the future--the consequences of exploding Federal debt and the loss of liberty that comes with pervasive Federal control.

Ted Craig writes:

One misconception mentioned earlier is the long lines at the gas stations were entirely the result of the oil embargo. The required shift to unleaded gas that started in 1975 played a role as well. Undercapitalized gas station owners were slow to make the switch.

Ted Craig writes:

I agree with Adam, also, that you may be downplaying economic issues. Scandals seem to affect mid-term elections (1974,1986) more than presidential elections. I often wonder what hurt Ford more – pardoning Nixon or telling a large number of voters to drop dead?

Mark Bahner writes:

Hi,

I remember it being very difficult to get a summer job for a teenager in the mid-1970s...likely due in significant part to the fact that the real minimum wage was very high (>$8 an hour):

Mininum wage history

And the advent of disco music didn't improve this (perpetual) teenager's attitude.

Mr. Econotarian writes:

Here is a good analysis of the oil embargo / energy crisis issue:

http://www.cato.org/pub_display.php?pub_id=3272

Oil prices rose in 1973 long before the "embargo" due to the end of Bretton Woods and the Yom Kippur War. The "embargo" didn't help animal spirits, even if it is itself did not lead to dramatic reductions in oil sold.

The US government price controls and other petroleum industry regulation changes an oil price rise into a gasoline shortage.

Also see:

http://en.wikipedia.org/wiki/1973_oil_crisis#Price_controls_and_rationing

SydB writes:

"very difficult to get a summer job for a teenager in the mid-1970s..."

Los Angeles had plenty of jobs for kids willing to work. I've never had a problem employing myself. I think it's probably worse now.

mark writes:

The other things I would add are (1) the impact of interest rate mismatches between long term fixed rate assets and short term liabilities destabilized the financial sector; (2) disintermediation in finance occurred as commercial paper and money market funds became more significant components of money and credit; (3) in corporate governance and theory of the firm, a consensus developed that realized one reason for economic stagnation was that agents were extracting too much value at the expense of owners and that led to stock options as a form of compensation and laid the groundwork for the change in sentiment toward unions in the Reagan / FAA clash.

James A. Donald writes:

I see a massive rewrite of history. The Soviet Union was winning, and everyone expected it to win. Reagan did not run on Iraq. He ran on the Soviet Union. He claimed it was less powerful than it seemed, that our defeat was not foreordained by the forces of history.

Everyone was afraid, and everyone was visibly relieved when the Soviet Union fell.

MernaMoose writes:

I think the economy was more of an issue than Arnold implies it was. Today we also have other distractions like Iraq and Afghanistan. But those things, then as now, largely happen "over there".

Scarce jobs, inflation, shortages -- those were the things we all lived with day to day and we were acutely aware of them. Inflation especially, if you were living on the lower end of the economic ladder, really hurt. You wondered what a loaf of bread would cost next week.

How big an issue the economy is depends much on a) how high up the economic ladder you are and b) whether or not you've got a job.

Dan writes:

I was in business school from 1971 to 1975. I don't remember what year it was, but I remember all the business faculty being in shock that Penn Central had gone bankrupt. They just couldn't understand how it could have happened.

Unrelated to the Penn Central thing, I also remember one of my professors (finance, I think) telling the class that he was investing in high quality corporate bonds at 16%. He said it was a once in a life time opportunity.

Aussie writes:

this was a period of world-wide stagflation. It started to hit by mid-1970s. The oil embargo did not cause it, but the previous expansionary policies of governments had an impact.

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