by Randolph T. Holhut
American Reporter Correspondent
January 24, 2008
THAT 7O'S SHOW, STAGFLATION, MAY BE MAKING A COMEBACK
DUMMERSTON, Vt. -- Shag carpets. Avocado-colored appliances. Leisure suits. Cars called the Pinto, the Vega and the Gremlin.
There are many things from the 1970s that we'd rather not see again. But one thing is coming back from that era that nobody wants to see - stagflation.
Stagflation happens when you have rising prices and stagnant economic growth. It is not easy to cure. When prices rise, it's usually due to rapid economic growth. The normal reaction of the Federal Reserve is to tighten the money supply and raise interest rates in the hope of cooling things down.
If you tighten things too much, you get a recession. The Fed's usual cure for a recession is to pump more money into the economy and cut interest rates.
With stagflation, however, neither cure works. Pump up demand, and you pump up prices. Try to put a damper on inflation, and you make the recession worse.
Stagflation persisted from the start of the first Arab oil embargo in the fall of 1973 to the end of the 1981-82 recession. Sharp increases in the price of oil due to supply disruptions by OPEC caused much of the problem.
The huge runup in oil prices over the past year or so is reminiscent of that period. And when something on which the economy is totally dependent rises in price, everything else rises in price too. To the rising price of oil we can add the continued drain of our wars in Iraq and Afghanistan - more than $600 billion and counting.
You don't need the U.S. Labor Department to tell you that your paycheck isn't going as far as it used to, but its annual statistics confirm what we all know - wages are not keeping up with the cost of living.
The Labor Department reported last week that consumer prices rose by 4.1 percent in 2007, but wages only rose 0.9 percent. Food and energy prices soared in 2007, but few saw their wages rise to keep up. Fortunately, inflation is nowhere near the levels we saw in the 1970s.
Through much of the 1970s, the annual rate of inflation hovered around 10 percent. It took a punishing round of interest rate hikes and contraction of the money supply by the Federal Reserve in the early 1980s to bring inflation down to the 2-4 percent norm that we've been used to for the past 20 years.
Interest rates rose to their highest levels since the Civil War. In June 1982, the prime rate - the benchmark for mortgages and consumer loans - was 21.5 percent.
The Fed's decision to raise interest rates helped kill inflation, but at a cost of massive unemployment and bankruptcies on a scale that hadn't been seen since the Great Depression five decades earlier.
Anyone who lived through the 1981-82 recession remembers how painful that era was. They remember how many factories closed down and how many homes and business were foreclosed upon. They remember when 12 million Americans were unemployed. The country eventually rebounded from that recession, but there were sectors of the American economy - particularly in manufacturing - that never recovered.
The Federal Reserve's decision on Tuesday to cut the benchmark federal funds rate to 3.5 percent - a cut that was bigger than many expected - is a sign that recession, rather than inflation, is the fear right now. But it's going to take a lot more than interest rate cuts to solve the painful economic crunch that we're in.
For the past two decades, we've seen economic growth and low unemployment rates without a corresponding growth in wages. The spread between the winners and losers in the U.S. economy has never been greater. Many Americans are deep in debt without any cushion to fall back on.
Even with two-income families and home equity loans, the income of most Americans has been stagnant for the past three decades. Now that housing prices are falling, the home equity tap has been shut off. Credit card, auto loan and mortgage delinquencies are rising rapidly. Consumer spending is falling because people are paying so much more for the basics of life that they have little discretionary income.
What we have now is a lethal combination of the end of cheap energy, the end of cheap credit and the end of using our homes as ATM machines. What's ahead may be worse than a mere cyclical economic decline like past recessions. This could be a sign of deeper economic problems, problems that the usual Republican remedy of tax cuts and the usual Democratic remedy of government spending won't fix.
The economic stimulus plan proposed by the Bush Administration is too little and too late. It's hard to say if the interest rate cuts and additional increases to the money supply will make a difference either. And relying on foreign capital to shore up our financial institutions is not desirable.
Given the memories of recessions past and the lack of any sort of cushion for most Americans if we see times as bad as the 1970s and early 1980s, it is no wonder that the economy has jumped to the top of the list of voters' concerns in this election year. What will happen next is anyone's guess.
Randolph T. Holhut has been a journalist in New England for more than 25 years. He edited "The George Seldes Reader" (Barricade Books). He can be reached at firstname.lastname@example.org.