If you want to understand the inflation of the 1970s, watch the opening montages of two very different popular TV shows of the time: “The Mary Tyler Moore Show” and “The Rockford Files.” Both feature the main character shopping for meat at the grocery store and putting it in the cart with a pained expression. That was a common shopping experience at the time.
Today, inflation is all over the news again, with the Consumer Price Index at its highest level in 40 years. The latest NFIB survey finds inflation the top concern for small business owners. (See “Inflation Puts Pressure on Contractors as Costs Rise for Materials, Labor” in this issue.)
The place where most people see inflation clearest is at the pump. Gas today is more than 30% higher than it was in 2012. Forty years ago, gas was $1.31 a gallon (about $4 in today’s money). Of course, that price was more than three times what it was in 1972.
So the era of what economists call The Great Inflation was worse in many ways than what we are experiencing today, at least so far. So what were the causes of inflation in the ‘70s and how do they compare to what’s happening today? Let’s take a look.
MONETARY POLICY: Milton Friedman famously said, “Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output.” Two events took place between January 1970 and August 1971 that impacted U.S. monetary policy for the next decade. First, William McChesney Martin Jr. retired on January 30, 1970, as chairman of the Federal Reserve, a role he filled since 1951. An inflation hawk, Martin was known for saying his job was to take away the punch bowl just when the party was getting started. Then, on Aug, 15, 1971, President Nixon took the U.S. off the gold standard. The two big hurdles to inflationary monetary policy were removed.
Today, the Federal Reserve is already trying to get a handle on inflation and may even risk a recession to do so. Economists still view monetary policy as a large contributor to inflation, but not the only one. So what else is there?
GOVERNMENT POLICY: The late ‘60s through the mid-‘70s were the golden age of government regulation. That added costs for businesses. For example, in 1970 the federal government took away an hour of prime time from the networks and outright banned one of TV’s biggest advertisers (cigarette companies). That’s a lot of revenue to lose all at once. By the late ‘70s, the trend started to reverse as a movement toward deregulation gained momentum.
The tax code also drove a lot of decision making, adding to costs. Tax codes changed in the late ‘70s, first at the state level and then at the federal level.
Today, federal taxes remain low in comparison to the inflation era, although there are always pushes to increase them. Some government officials are trying to revive a more active regulatory body, but as the recent Supreme Court decision showed, it’s a difficult task without actual legislation.
A RESTIVE POPULATION: Baby Boomers were a large, unruly cohort during the period of the Great Inflation. This went beyond campus protests. A labor dispute at GM’s Lordstown plant was so bad that it nearly ruined the launch of the Chevy Vega.
Today, Millennials are a large cohort and, along with Gen Z, seem much less willing to accept “the way things have always been.” Work from home provides a great example. Apple tried to bring much of its workforce back into the office before about 1,000 employees threatened to quit. In Virginia, 300 government employees did quit when told they had to come back into the office. While this is happening, Baby Boomers are leaving the workforce, creating a huge amount of openings. So, demographic pressure today is high.
UNCOMPETIVE MARKETS: Speaking of the auto industry, when inflation started rising in the 1960s, General Motors controlled about half of the domestic car market. Other companies, such as AT&T, were dominant in their fields. But the world started to change. In the mid-'60s, President Johnson opened up the U.S. auto market to win Japanese support for the war in Vietnam, just when Honda started building cars and Toyota introduced its revolutionary Corolla. A federal judge broke up AT&T in 1982.
Today, it seems like Google and Amazon are just as dominant as the old-time industrials. But they really aren’t. Consumers have more of an advantage when it comes to pricing than they did forty years ago.
SUPPLY SHOCKS: As mentioned, gasoline prices skyrocketed in the ‘70s. This was due to a combination of factors, including OPEC price pressure and the transition to unleaded gasoline.
Today, we again face supply pressures from the war in Ukraine and environmental initiatives. Other aspects of the supply chain remain stressed due to the pandemic. This leads to higher prices and shortages of good. These issues work themselves out, but it can take quite some time.So, is inflation going to be a long-term problem in the U.S.? It’s pretty obvious that the transitory talk from last fall was wishful thinking. That said, an exact repeat of the Great Inflation is unlikely because, to paraphrase Tolstoy, each economic crisis is unhappy in its own way.