Welcome back Carter

By Michael Hall

I bought a new Toyota pickup truck in 1977 for $4,000. I totaled it four years later while on the way home from a friend’s wedding reception. The insurance adjuster gave me $4,000 to settle the claim. In four years, the purchase price of a new vehicle had doubled. Those were the Carter administration years. President Biden was a freshman senator at the time and seems intent on bringing the Carter years back.

The economist Milton Friedman said inflation, too many dollars chasing too few goods, is always a monetary issue. He was right. But there are differing reasons for those many dollars and for the inflation they bring.

The three types of inflation are “happy inflation,” “shortage inflation” and “paper inflation.”

“Happy inflation” is what they teach in Economics 101. People are working, spending, going on vacation and buying houses and cars. Everyone is confident the good times will last, and unemployment is low. People have money to spend, and they do. The solution to this type of inflation is to cool the economy gradually by raising interest rates to suck some of the money out of the economy and to lower government spending. Hopefully, policy makers do not go too far and push the economy into recession. 

“Shortage inflation” is usually man-made. Imagine only one factory in the world that makes computer chips. Everyone must buy them for smartphones, tablets, self-driving cars and satellites. Now imagine that factory burns down. The price of computer chips would skyrocket, and we would have many dollars chasing too few goods. But the solution to this cause of inflation is not to raise interest rates or quit spending. The solution is to build another factory and alleviate the shortage. 

The most famous example of shortage inflation is the 1974 and 1979 OPEC oil embargoes. Back then most of the world’s oil was controlled by Arab states that disapproved of our support for Israel in the Yom Kippur War and later our support for the Shah of Iran. Many dollars chasing too little oil and the price doubled. Oil or energy goes into everything our society needs, so prices jumped up dramatically. No reduction in spending or increase in interest rates will get you more oil. The solution is to have more energy, which is why Nixon and Carter launched programs to increase domestic energy production. They were not enough. 

Paper inflation was the rule in the late 1960s and early 1970s. President Johnson tried to do too many expensive things at once. He expanded an expensive war in Vietnam and kept President Kennedy’s commitment to go to the moon. He also tried to buy political power for the Democratic Party in perpetuity by pouring money into the inner cities to secure the black vote. He spent too much money.

By the Carter presidency all three types of inflation were in full force. Real prices were going up 25 percent a year even though the government would not admit it. Kraft mac and cheese, the staple of college students everywhere, went from five boxes for a dollar to 50 cents apiece. My truck went from an MSRP of $4,000 to $8,000. Anyone who saved money saw the value of their savings, what they could buy, destroyed. There seemed to be no end in sight. 

To rid the economy of inflation, President Reagan’s head of the Federal Reserve, Paul Volcker, decided to collapse the American economy and purposely drove the country into recession. In two years, he raised interest rates to 22 percent. Consumer spending stopped, housing sales and construction stopped, auto sales stopped and the unemployment rate shot up to almost 11 percent. With the economy in deep recession, we broke the back of the OPEC cartels, as no one was buying oil. 

America is now poised again to see all three types of inflation.

The latest economic data, March 25, 2021, shows employment rebounding sharply from coronavirus lockdown lows except for the hospitality industries. Federal Reserve data shows that anyone who kept their job during the last year has been paying off debt, investing in their 401k and saving. Personal savings rates are at historically high levels, as people working had nowhere to spend their money. No Disney, no cruises, no movies, no eating out, no trips, no vacations. Three choices, Amazon, work on the house and save. Once the COVID lockdowns are over, a lot of that money will flow into the economy. Here comes the “happy inflation.”

The Biden administration has made the short-sighted decision to cause “shortage inflation.” Energy prices are on the rise as the administration decides to roil energy markets in a misguided attempt to “save the planet.” I am a big believer in weaning the world off fossil fuels. But weaning is not pulling the teat out of the baby’s mouth before he can eat solid food. The planet will survive for another year or two while Congress empanels a consortium of scientists and businesses to plan a way forward. Maybe small modular reactors making hydrogen from seawater to be converted into natural gas. Maybe since a lot of the energy used in America goes into simply heating water for bathing, laundry, cooking and heating, solar hot water panels on every house without needing Chinese rare earth elements. But the Biden administration has instead decided to cause “shortage inflation.”

There can be no doubt “paper Inflation” will be with us as well. The Trump administration spent trillions last year to combat the effects of the COVID-19 lockdowns. The first Biden $2 trillion stimulus and their proposed $3 trillion “infrastructure” spending along with the money to be spent on the regular budget, defense, Medicare, parks and everything else will guarantee “paper inflation.”

Will a new Subaru Forester, advertised in today’s paper for $26,000 sell for $52,000 in four years? Will your savings be worth anything? Only time will tell.

Michael Hall lives in Trenton. He earned a degree in economics from the University of Maine at Orono. Between active service and the National Guard, he spent 24 years in the Army. 

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