Inflation and the Historical Challenge

A protest against inflation in Chicago, 1972. Photo by National Archives at College Park, Public domain, via Wikimedia Commons

Inflation is one of the most stubborn and challenging problems of the Joe Biden administration. It is an issue which is healthy and helpful to an economy right up to the point where it becomes a burden that can tank a president’s political future. Economists believe that the current round of inflation can be tied to the COVID-19 pandemic, which shows no signs of disappearing anytime soon. Supply chain issues have combined with a labor shortage and earlier government benefits to push prices higher in most sectors. Joe Biden and the Democratic Party seem unable to completely end inflation as a political problem, while the opposing party has little to no competence on the topic either.

Most commentators turn to economists and political scientists to learn more about how to overcome inflation both as an economic problem as well as a salient political issue. But inflation is one of those areas where historical narratives can help shape current political arguments. A rewriting of economic history can be essential to gaining a hold on economic issues and finding a way forward for the Democratic Party.

There are two key reasons why the political media is so worried about inflation. One is, of course, the effect that it has on purchasing power for everyday Americans. The purchasing power of American wages decreases when inflation is high. Americans on a fixed income suffer as well. Due to the reduced power of unions, wages do not increase at the same rate as prices and American take-home pay and demand for goods and services decrease. Inflation also fuels anti-government arguments from conservatives who decry spending on government services whenever a Democrat is in office.

While contemporary issues play a role, the historical narrative is also essential. The fear from inflation is connected both to events today and over time. Inflation hawks warn that prolonged inflation can lead to a wage and price spiral which can lead to a severe recession, one that is resistant to the demand-boosting efforts that governments use to combat most recessions. As their main piece of evidence for this theory, proponents point to the 1970s. According to the standard narrative, inflation in the United States began following the ending of the gold standard by Richard Nixon and the oil embargo of 1973. Inflation continued out of control for the next eight years until Federal Reserve Chairman Paul Volcker raised interest rates, caused a brief recession, and brought prices back under control.

Crucially, the Volcker approach is presented as the only way a society can successfully combat long-term inflation. Richard Nixon’s wage and price controls did not work. Neither did Gerald Ford’s plan to Whip Inflation Now through tough talk and individual action or Jimmy Carter’s voluntary programs to control wages and government spending. The traditional Keynesian approach to end recessions through government spending in the economy was also ineffective. Republicans are positing this historical example as an underlying element of their political rhetoric: keep with Democrats and the Fed will have to tank the economy once again to fix their mistakes.

The problem is that liberals usually try to ignore or explain away inflation in the 1970s. Howard Zinn’s famous leftist history of the United States barely even mentioned inflation, let alone provide another solution for the problem. Even today, liberal economists such as Paul Krugman are more focused on arguing about how this period is different from the past rather than saying another approach in the 1970s would have been warranted. In his latest piece on inflation, Krugman’s calming argument is thus: “But 2022 isn’t 1980: Inflation hasn’t become entrenched. So while there will surely be some bumps along the way, there’s a pretty good chance that the Fed can let us down easy.” This belief may be comforting, but it does not change the historical narrative around runaway inflation.

In order to refute the power of this historical analogy, liberals must push an alternative view of the 1970s and the inflation crisis. They must coalesce around a plan that they believe would have reversed the declines of stagflation. Do they believe it would have been resolved on its own and that an additional, government-imposed recession was unnecessary? Do they think an early green transition or foreign policy changes would have blunted the impact of oil embargoes and reduced supply-related price hikes? Or do they think tax and regulatory changes would have shifted the economic situation and led to both lower prices and more economic activity? This plan would not only be suited for the 1970s but would also be applicable for today, since liberals want to return to some aspects of a 1970s-era economy (most notably powerful labor unions).

Democrats must not diminish the importance of inflation or its salience as a political issue. Even if every economist believed inflation was not a concern (which they do not), it is still at the top of the list of concerns for a large percentage of Americans in all parties, income brackets, and minority groups. The Democratic Party needs to settle on their alternative solution to the inflation problem. Then, they need to mobilize their array of politicians, social media influencers, and policy wonks to further this new argument about today and its relevance to the 1970s. This interpretation would go a long way towards reducing the impact of inflation as a political weapon and its salience against Democrats in 2022 and beyond.