By Jon Hilsenrath
In the fall of 1966, a wave of protests swept across the United States, drawing the attention of Washington politicians, corporate executives and newspaper editors. But these Americans were not expressing their anger at the Vietnam War or racial discrimination. The protests were against rising food prices, and the infantry in what has been described as a “housewives revolt” were largely middle-class women with children. Fed up with the rising cost of living, they marched past supermarkets with signs demanding lower prices, sometimes printed in lipstick.
The picketing began in Denver and spread to other cities, prompting Time magazine to report that the supermarket boycotts were spreading “like butter on a sizzling hotplate.” President Lyndon Johnson’s special assistant for consumption encouraged them, urging protesters to “vote with the dollar”.
Food price marches and boycotts will recur repeatedly over the next decade, targeting the prices of coffee, meat and other commodities. They became part of the social landscape, like the suburban gas lines stretching over blocks and union pickets for cost-of-living wage increases. A local women’s group, the FLP (“For Lower Prices”) from Long Island, New York, had about 1,500 members, according to “Politics of the Pantry,” a book by historian Emily Twarog that documents some of the demonstrations.
Today, after decades of almost invisible inflation in the United States, many Americans have no idea what that looks like. Almost half of America’s population was born after 1981, the last year of double-digit consumer price increases. But America’s long inflation vacation is showing signs of ending. Consumer prices are rising again: The Labor Department’s consumer price index rose 5% in May from a year earlier, the largest increase in more than a decade. History provides some useful lessons.
The stubborn inflation of the late 1960s and 1970s did not happen overnight. It took root over the years, developed through a cascade of political missteps and woes until it took root in the psychology of nearly every American. It would take two deep recessions and new ways of thinking about the economy to bring inflation in this period under control.
The current recovery in consumer prices may not lead to a similar long-term inflation problem. But it may take some political courage on the part of the country’s central bank and other policymakers to ensure that is not the case. Preventing the spread of inflation could also lead to economic hardship.
“The problem is when policymakers are too slow to react to their mistakes,” said Stephen Cecchetti, professor of economics at Brandeis University who worked on the White House Council of Economic Advisers in 1979- 80. His job was to redesign inflation measures that did not properly take into account the evolution of housing costs.
Inflation had happened before, mainly in times of war. Government spending increased to support the fighting. With excess money pouring into banks, businesses and households, and less goods to buy due to production shortages, prices have risen. When war efforts and spending to finance them declined, inflation declined.
In May 1917, just after the United States entered World War I, the Department of Labor’s consumer price index rose 20% from the previous year. After the end of the war, it stabilized during the 1920s. Likewise, the index increased by 13% in 1942, after the entry of the United States into World War II, stabilized thanks to price controls imposed by the government, then jumped 20% in 1947. The index fell in 1949 and then stabilized mostly during the 1950s, with the exception of the Korean War.
The mid-1960s began to look like the old model. Consumer prices began to rise as President Johnson sought to fund the Vietnam War and his Great Society social programs. But as the war unfolded so did creeping inflation. “They haven’t done anything about it,” Cecchetti said.
When Richard Nixon entered the White House in 1969, the annual inflation rate had already fallen to 5%, compared to less than 2% under the Kennedy administration. What followed was more than a decade of mismanagement by Republicans, Democrats and a supporting cast of the Federal Reserve, a critical institution that was meant to be apolitical.
President Nixon tried to deal with the problem by executive order. When meat prices soared in 1973, some compared the ensuing consumer boycott to the Boston Tea Party. The administration has imposed price caps on meat for the second time, and Treasury Secretary George Shultz has urged housewives to try to “shop wisely.” It did not work. Meat prices increased 37% in 1973, 22% in 1975, 24% in 1978 and 27% in 1979.
“I thought a voluntary restraint program might work,” says Barry Bosworth, a senior researcher at the Brookings Institution who was director of Jimmy Carter’s Council on Wage and Price Stability from 1977 to August 1979. “I have to admit that it wasn’t. was a total failure. . ”
Beneath the surface, a more powerful economic force was exerted on the Fed, which controls the country’s money supply. When the central bank injects money into the financial system, two things tend to happen. First, the cost of borrowing – the interest rate – goes down, because the banks have a lot of money and are willing to lend it cheaply. Second, the purchasing power of that money decreases.
Imagine an economy where people only produce and consume oranges; each person earns on average a dollar a day and buys an orange a day. On a typical day, the orange will cost around a dollar. If you keep the production and consumption of oranges stable but put an extra dollar in everyone’s bank account, the only thing that will change is that people will bid on the price of oranges. The purchasing power of a dollar decreases as you increase its supply. It’s inflation.
President Johnson, then President Nixon, harassed the Fed to keep pumping money into the economy and lowering interest rates, believing it would lower unemployment and help their programs economic and electoral prospects. The Fed complied often, but the main effect was to push prices up.
In 1971, for example, the annual inflation rate was still over 4%. Although it showed signs of slowing down, the money supply in household bank accounts and bank loans continued to grow rapidly. The Fed raised interest rates at the start of the year, then abruptly reversed and began cutting them in late summer. Re-election was on President Nixon’s mind, and he was close to Fed Chairman Arthur Burns. “I would never bring that beyond this room: I think I would prefer him to move a little slower now, so he can go up and have a really big wit later,” Mr. Nixon to Mr. Burns about his desire for economic growth in a taped conversation in March 1971.
After the reunion, Burns wrote that his friendship with Nixon was one of the three most important of his life and that he wanted to keep it that way. He also wrote that he wanted the president to know “that there was never the slightest conflict between what was good for the economy and what served the political interests of the RN.”
Ahead of that year’s rate cuts, Nixon’s lieutenants threatened Burns by sowing newspaper articles that the president was considering stacking the central bank with White House supporters and also falsely accusing Mr. Burns to ask for a raise. In addition to threats, they tried to seduce him with gifts, like sunglasses and a Camp David jacket.
“He really played Burns like a yo-yo,” said Jeffrey Garten, a business executive in the Clinton administration whose upcoming book, “Three Days at Camp David,” discusses Mr. Nixon’s decision this year. This is to let the value of the dollar float in world markets, another move that has helped propel inflation.
The value of a dollar against other world currencies had been set at the price of gold after World War II. This meant that other central banks could come to the Federal Reserve and trade their growing dollar reserves – accumulated through their trading gains – for gold at a fixed price. But America’s gold reserves were shrinking as trade surpluses disappeared and dollars went abroad. Fearing the United States might run out of gold, Nixon severed the link in August, pushing the dollar’s exchange rate down.
As a result, the price of imported goods doubled over the next four years. In addition, as world trade in many products was denominated in dollars, exporters of commodities like oil were also under pressure. In October 1973, members of the Organization of the Petroleum Exporting Countries, or OPEC, cut supplies in an oil embargo targeting the West. It was intended to punish countries that supported Israel but also had the economic objective of driving up the price of oil as its dollar value fell.
Relentless inflation has sent the US economy into a leapfrogging game. Workers demanded wage increases to cope with the rising cost of living. Many of them got increases thanks to cost of living adjustments in union contracts. To cope with the rising costs, companies in turn have raised their prices even more. Thus has developed a relatively new concept in the economic lexicon, the “wage-price spiral”.
Economic relations have come out of their old patterns. Some economists believed that when unemployment rose, inflation would fall. Instead, both increased, giving rise to another new term, “stagflation.”
To complicate matters, worker productivity inexplicably slowed, making it harder for the Fed to read where the economy would go next. An influx of women into the labor market has also made it more difficult to decipher a stable unemployment rate. “Technical errors have turned into a disaster,” said Athanasios Orphanides, a professor at MIT Sloan School of Management, who began his career as an economist at the Fed studying what it has done wrong over the years. 1970.
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June 11, 2021 08:14 ET (12:14 GMT)
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