Podcast Summary
The 1970s Inflation and its Impact on Politics and Economics: The 1970s inflation marked the end of the social insurance state and full employment commitment, leading to a shift towards anti-inflation policies and the rise of neoliberalism.
The inflation of the 1970s played a significant role in ending the era of social democracy and ushering in a new political and economic culture. During the post-World War II era, the US economy was characterized by a social insurance state and a strong commitment to full employment. However, the high inflation of the 1970s led to a shift in political and economic thinking, with policymakers looking to the past for guidance on how to combat inflation. The lessons they took, whether right or wrong, had far-reaching consequences, leading to significant changes in political and economic regimes. Economist Brad DeLong, in his book "Slouching Towards Utopia," explores this period in depth, offering valuable insights into the causes and consequences of inflation and its impact on the broader political and economic landscape.
The Role of Government in the Social Democratic Era: During the social democratic era, the government played a significant role in investment and decision-making through a tripartite bargaining structure. However, with the shift towards neoliberalism, the government's role has diminished, and labor's bargaining power has weakened.
During the social democratic era in the 1960s, the government played a significant role in decision-making through a tripartite bargaining structure involving labor, business, and government. The government spent a large portion of national income on future-oriented investments, such as military, outer space, and civilian projects. This period, known for mass production economies, had a strong labor force with a unified voice, making it easier for them to organize and advocate for their interests. However, with the shift towards neoliberalism and a global value chain economy, the government's role in investment and the labor force's bargaining power have diminished. Inflation during this time was not just about too much money chasing too few goods but rather too much spending chasing too few goods due to people's expectations of stable prices. Understanding this historical context sheds light on the changing roles of government, business, and labor and their impact on economic policies.
Inflation undermines social trust: Inflation can feel like a betrayal of social trust, leading to hidden economic forces that can result in societal destruction
Inflation goes beyond just being an economic concept of too much money chasing too few goods. It also has profound psychological implications, as it can feel like a betrayal of social trust. John Maynard Keynes famously observed that inflation undermines social trust at an extraordinary level. When people experience inflation, they feel cheated because their budgets and expectations are not met. The rate of inflation is also influenced by people's expectations, creating a self-fulfilling prophecy. As Keynes put it, "there is no subtler, no surer means of overturning the existing basis of society than to debauch the currency." This debasement of currency, or inflation, can engage hidden economic forces that lead to destruction, often in a manner that is not easily diagnosable by the average person.
Economic afflictions and their unpredictable nature: Economic policies must be carefully considered and implemented to avoid unintended consequences that can undermine the economy.
Economic afflictions, such as inflation, can be uniquely destructive due to their illogical and unpredictable nature. This was evident during the inflation of the 1960s and 1970s, which was driven by a combination of factors including government policies and geopolitical events. The Democratic administrations of the 1960s pursued a high-pressure economy to achieve full employment, but this collided with the need to fund the Vietnam War and avoid raising taxes. When Richard Nixon took office in 1969, he inherited an inflation problem, and his attempts to address it were hindered by his desire to have a strong economy for his reelection in 1972. Nixon's friend and Federal Reserve chairman, Arthur Burns, advocated for wage and price controls as a solution, but economists disliked this approach due to the administrative challenges and the potential for market distortion. Ultimately, the attempt to control wages and prices failed, and the economy suffered as a result. The lesson here is that economic policies must be carefully considered and implemented, as they can have unintended consequences that undermine the very systems they aim to support.
Understanding the role of market systems and incentives in economic recovery: Market-driven solutions and effective policy responses are essential for addressing economic challenges like inflation and supply chain bottlenecks during recovery from disruptions.
As the world emerges from the COVID-19 pandemic and deals with various economic challenges, including supply chain bottlenecks and inflation, it's crucial to understand the role of market systems and incentives in addressing these issues. Inflation, as economist Friedrich von Hayek argued, can be a necessary component of a rapid economic recovery, especially after a major disruption like a pandemic. However, the political dynamics of the time can influence the response of central bankers and policymakers. For instance, during the 1970s, Republican Fed chairs Arthur Burns and his successor faced pressure not to raise interest rates too aggressively due to political considerations. Ultimately, addressing economic challenges requires a balance between market-driven solutions and effective policy responses.
The oil crisis of the 1970s and its impact on the economy: The oil crisis of the 1970s led to a deep recession and high inflation, forcing businesses to adapt and the economy to experience a significant shift in energy efficiency and productivity growth.
The Fed's interest rate tool, while powerful, is narrowly targeted and can have severe consequences on specific sectors like construction, import-competing businesses, and exporters. The global oil embargo in 1973 introduced a significant increase in oil prices, leading to a recession and high inflation. The economy was forced to adapt to these new conditions, causing a shift in business plans and energy efficiency. The combination of the oil price shock and the subsequent recession resulted in the deepest economic downturn since World War II and double-digit inflation. The Carter administration's approach to managing the economy during this time focused on reducing unemployment despite high inflation, leading to a further decline in productivity growth. The Iranian Revolution and the resulting cutoff of Iran's oil supplies once again disrupted the global oil market and caused another surge in oil prices and inflation. Overall, these events demonstrate the far-reaching consequences of external factors on the economy and the challenges of managing inflation and unemployment simultaneously.
Paul Volcker's unexpected appointment as Federal Reserve Chair in 1979: Paul Volcker's firm stance against inflation led to a severe recession but ultimately lowered inflation rates in the mid-1980s, despite earlier and less drastic disinflation efforts by other countries
Paul Volcker's appointment as Federal Reserve Chair in 1979 was a pivotal moment in U.S. economic history. Volcker, an experienced financial civil servant, was unexpectedly chosen to replace G. William Miller after Carter's administration found itself in a political bind. With inflation expectations on the rise, Volcker took a firm stance against inflation by implementing monetary policies that caused a severe recession. Although criticized for his drastic measures, Volcker's actions ultimately led to a decrease in inflation and brought about a sense of victory over inflation in the mid-1980s. However, it's worth noting that other countries dealing with inflation at the time managed to disinflate earlier and with less drastic measures. The question remains whether there were alternative options for the U.S. in the given situation.
The 1970s inflation crisis weakened public trust in social democracy and government intervention: The 1970s inflation crisis exposed social democratic governments as ineffective in managing the economy, leading to a shift towards neoliberal policies emphasizing free markets and individual responsibility.
The inflation crisis of the 1970s led to a shift in perception against social democracy and government intervention in the economy. The failure of social democratic governments to effectively address inflation, which resulted in high unemployment and stagflation, made them appear incompetent. Additionally, the belief that inflation was a result of a permissive society that couldn't say no to organized interest groups fueled the idea that a return to an unpermissive view was necessary for economic stability. Inflation also stripped away the mask of the social democratic era by revealing that the distribution of goods and prosperity was not as rational or deserved as it seemed. This shift in perception paved the way for the neoliberal era and its focus on free markets and individual responsibility.
Feeling powerless during economic instability: During economic instability, people may feel powerless without the support of institutions, leading to distrust and a desire for change, as seen in the late 1970s and today.
During times of economic instability, such as inflation, people may feel that the system is working against them if they don't have the support of powerful institutions like labor unions, big business, or the government. Additionally, inflation can erode confidence in institutions and experts, leading to a distrust of authority and a desire for change. The conversation also touched upon the idea that worker power, instantiated in unions and work ethic, has been a target in some economic ideologies, leading to wage-price spirals and productivity declines. The discussion suggested that these issues are not new, as similar criticisms were made during the late 1970s, and they continue to resonate today with the rise of neoliberal policies and the perceived decline of worker power.
Debating the Desirability of Income Inequality: Neoliberal era aimed to widen income gaps, but outcomes did not align perfectly, leading to ongoing debates about its morality and effectiveness
During the discussion, both sides presented contrasting views on income inequality. Some argued that it is desirable to have a greater income gap as an incentive for hard work and achievement, while others believed that excessive income inequality leads to social issues and a lack of motivation for the less fortunate. The neoliberal era, driven by a desire for change, aimed to widen income gaps, reduce the power of interest groups in the social insurance state, and promote entrepreneurship and enterprise. However, the outcomes did not align perfectly with the initial plan, leading to ongoing debates about the morality and effectiveness of the neoliberal economic story.
The Neoliberal Era Discredited by Economic Shocks: The financial crisis and inflation have challenged the neoliberal belief in individual control and market supremacy, leaving people seeking new narratives to understand the world.
The neoliberal era, which began with the Macintosh launch commercial's promise of individual control over information and the rise of the knowledge worker, has been discredited by two major economic shocks: the financial crisis and inflation. The financial crisis exposed the rich's lack of knowledge and the villainous role of bankers and financiers. Inflation, coming at a time when there's a shift towards more active government involvement, challenges the idea that the market always knows best. This moment of economic instability and uncertainty is a dangerous time for attempts at social democratic revival in the US, while in Britain, it may mark the end of the conservative party as we know it. Overall, these economic shocks have disrupted the neoliberal narrative and left people searching for new stories to make sense of the world.
Misinterpreting Lessons from the Past: Assuming current economic conditions match past eras and applying outdated solutions can lead to missteps. Instead, focus on addressing modern challenges like transitioning away from carbon energy and geopolitical instability.
The economic and political landscape has significantly changed since the mass production economy of the New Deal order, and trying to recreate past political or social bargains on new foundations is unlikely to work. The wrong lessons to take from the inflation and monetary policy of the 1970s for today include assuming we're in the same position as Paul Volcker was in 1979 with strongly entrenched inflation expectations. Instead, the bond market expects lower inflation than the Fed's target in five years. The odds of repeating the inflation waves of the 1940s are higher than those of the 1970s, but external factors like geopolitical instability and our reliance on carbon energy could change that. If the Brad of the early Clinton administration could go back in time, he would emphasize the importance of addressing the transition away from carbon energy and the geopolitical vulnerabilities it creates.
Shifting focus from consumption to investment: In a low-interest economy with income inequality, governments should invest in tech and infrastructure to promote economic growth and shared prosperity.
In a world with historically low borrowing costs and increasing income inequality, it's crucial for governments to shift their focus from consumption to investment in technology and infrastructure. This era, with its potential for info-biotech dominance and globalized gift exchange relationships, requires a moral economic narrative that recognizes our interconnectedness and the importance of mutual obligations. Adam Smith's concept of a market economy as a gift exchange network among trusting individuals can serve as a guiding principle. We should remember that the people who contribute to society's well-being deserve to benefit as well. The intricate dance of favors and obligations, now globalized, calls for us to recognize our shared humanity and the value of the contributions from every corner of the world.
The importance of continuous learning and considering new perspectives: Brad DeLong emphasized the significance of being open to new ideas and learning from different perspectives, even if they challenge one's own beliefs. He recommended three books that have influenced his thinking.
Learning from this conversation with Brad DeLong is the importance of continuous learning and being open to new ideas. DeLong emphasized the significance of being aware of and considering different perspectives, even if they challenge one's own beliefs. He mentioned three books that he wished he had read while writing his own, emphasizing their relevance and impact on his thinking. These books are "The Rise and Fall of the Neoliberal Order" by Gary Gerstle, "Free Market: From Cicero to Friedman" by Jacob Sowell, and "Adam Smith's America: A Cultural History" by Glory Lu. DeLong's willingness to acknowledge the value of these works, despite not having read them during his own writing process, highlights the importance of staying curious and open to new ideas.
