Why this inflation is different

Commentators and politicians spooked Americans about inflation without understanding and explaining why it popped up last summer as COVID-19 receded. Inflation hawks increasingly agree that the surge in prices is the result of the Fed’s failure to raise interest rates and slow the economy sooner. To make matters worse, the hawks told Americans that the Fed must squeeze harder and that its “mistakes” could lead to a prolonged period of “stagflation” like the one the US experienced from 1974 to 1981. It’s important to deal with this stupidity.

Today’s inflation gossip is completely incapable of explaining two of the most important facts about the recent price boom. The first is that energy prices are the main driver of inflation here and in the rest of the world, and the U.S. does not control these prices. Even in Germany, where fighting inflation is a civic belief, Prices are rising at about the same rate as the U.S.The second, more important fact is that there is a huge difference between the tech-driven US economy of 2022 and the inflation-prone economy of the 1970s. The economy of the 1970s was built on post-World War II industries dominated by monopolies and oligopolies that could often raise prices without regard to supply and demand. Today’s U.S. economy is led by tech companies, who, no matter what their fault, compete with each other for markets, and often grow through innovation and lower prices.

First, it should be clear that energy prices tell the story of inflation in 2022, just as they did in the 1970s.Gasoline prices more than doubled from 1.94 gallons in April 2020 when COVID-19 restricted driving $4.60 the other dayThe sharp rise in gasoline prices means the OPEC oil cartel is again dominating, pushing oil prices from $41.47 a barrel in 2020 to around $113 in May 2022. It’s a painful reminder of what happened half a century ago when the OPEC cartel cut oil supply and pushed prices up 19-fold from $1.82 a barrel in 1972 to $35.50 a barrel in 1980. (There are 42 gallons per barrel.)

Rising oil prices have raised the cost of gasoline, of course, but also diesel, heating oil, propane and hydrocarbon “feedstocks” made from natural gas, oil and coal, which are often substitutes for oil. In turn, higher prices for oil and oil substitutes lead to higher inflationary prices across the entire spectrum of products and services. They drive up the cost of electricity, home and office heating and cooling, manufacturing, plastics, textiles, all kinds of transportation, farm prices (fertilizers, tractor fuel, the cost of shipping to market), restaurant meals, and more.

Still, the US economy has changed since the 1970s, and if we don’t let inflation hawks panic us, it will ease the pain of managing inflation. The U.S. economy of the 1950s, 1960s, and 1970s was dominated by post-World War II post-Great Depression industries that were protected by government-sanctioned price-fixing arrangements that raised prices year after year. The U.S. economy in 2022 will be different. The OPEC cartel’s ability to cut production and raise prices is still there, but pricing arrangements in many fields such as communications, transportation, manufacturing, finance, and retail no longer exist, so prices are now mixed.

In the 1950s, 1960s and 1970s, prices in large sectors of the economy were “managed” by business and labor monopolies and oligopolies, with prices rising year after year but rarely falling back. The most famous economist of the time, John Kenneth Galbraith, a brilliant writer and friend of President John F. Kennedy, wrote about it in his 1967 book The New Industrial State. Galbraith said economies fall into two broad categories: those in which prices and wages are “regulated,” and those in which competition dampens inflation. He is certainly right on this point, but he is wrong to think that the political power of entrenched industry and unions will prevent this from changing.

The economy did fundamentally change between 1973 and 1983-84. The administrations of Presidents Gerald Ford and Jimmy Carter, with bipartisan help in Congress, moved to break the inflation-pricing arrangement that was the heart of the post-World War II economy. When Americans think about inflation today, these details need to be recognized.

In the 1970s, Presidents Ford and Carter supported the courts and the Federal Communications Commission (FCC) that broke up AT&T (aka Ma Bell) telephone monopoly. The cost of communications plummeted in the 1980s—by 95 percent in some cases—and today businesses and individuals have low-cost options unimaginable in the 1970s. Ford and Carter also support the Securities and Exchange Commission (SEC) and various federal banking regulators that open up the stock market and the banking industry to increase competition and reduce funding costs. By the same token, under the direction of Ford and Carter appointees, the venerable Interstate Commerce Commission (ICC) opened up trucking, railroads and pipelines to price competition, breaking the power of existing interests to set prices. Backed by Ford and Carter, the Civil Aviation Board (CAB) also ended comfortable airline pricing and a policy that had kept out new airlines since 1938. These reforms are being made despite strong opposition from established companies and unions in each of these areas.

Manufacturing has also changed. The 3-2 decision, led by the Carter-appointed International Trade Commission (ITC), had the effect of opening up the U.S. auto market more fully to imports from Europe and Japan, as well as to Japanese, German and Korean companies that now manufacture cars in the United States. US This undercuts the pricing power of the Big Three US auto companies that have dominated US manufacturing since the 1920s. In 2022, there will be fierce price competition not only in new cars, but also in most of the machine building, metal forming and bending industries that cater to automakers. (Computer chip shortages are now cutting supplies and raising prices for cars and appliances, but that will pass as new chip-making capacity comes online.)

Natural gas is the toughest political puzzle to crack. Carter has fought for two years to open up gas and electricity to price competition, with partial success. As a result, gas prices have been staggeringly low for decades, reducing the country’s reliance on coal and oil.

All of these economic structural changes have contributed to 40 years of low inflation and make it unlikely that today’s inflation caused by oil, transportation and some bottlenecks will become entrenched. None of these structural changes have anything to do with the Fed’s monetary policy, which led to a recession in the early ’80s and is always credited with beating back inflation. What the country needs now is tackling inflation rather than another recession designed by the Fed, policies to rapidly develop new energy sources (more wind and solar would be good), further modernize transportation infrastructure, and reduce prices that make America healthy Fixed supplier arrangements care about being so expensive and increasing production of things like computer chips. Slowing the economy by raising interest rates and causing a recession would discourage investment in these areas and would cause working Americans more pain than today’s inflation.

Dr. Paul A. London, Senior Policy Advisor and Under Secretary of Commerce for Economics and Statistics in the 1990s, Deputy Assistant Administrator of the Federal Energy Administration and Department of Energy, Visiting Scholar at the American Enterprise Institute. He was Senator Walter Monde in the 1970s Legislative Assistant to D-Minn., a former diplomat in Paris and Vietnam, and author of two books, including Competitive Solutions: The Bipartisan Secrets Behind American Prosperity (2005).