By Arnold Kling
I’m too young to remember much about the politics and economics of the Seventies. From books, though, I get the impression that American political economy was in complete disarray
The first thing that I would say is that the economy was never the central issue that it is today. Until 1973, the war in Vietnam and the divisions that the war created at home were the dominant issues. In May 1970, it was tin soldiers and Nixon’s comin’. By early 1973, Watergate had taken over the front page, and it stayed that way until Nixon’s resignation, which I’m remembering as August 1974.
In between Kent State and Watergate, there was August 1971, when Nixon ended Bretton Woods and imposed wage and price controls. These policies were very popular, and the combination of controls with rapid money growth produced low inflation and low unemployment in 1972, helping propel Nixon to a landslide victory in his quest for re-election.
By late 1973, the wage and price controls were failing, and the Arab oil embargo (starting in October of 1973) generated a run-up in oil prices. The economy foundered in 1974-75, falling into what was at that time the worst post-war recession. A school of thought emerged to say that there were “limits to growth” because of resource constraints. Robert Solow was on the right side of that issue, arguing against the models used by the “limits to growth” theorists, which assumed zero substitutability and zero technological progress.
But in 1976, Jimmy Carter’s victory probably owed as much to residual disgust with Watergate (Gerald Ford’s pardon of Nixon was thought by many pundits to have cost him the election) as anything going on in the economy.
In 1978-79, the Iran-Iraq war caused another run-up in oil prices [oops–it was the Iranian revolution of 1979, the war started in 1980], and this in turn coincided with another upward ratchet of inflation while unemployment rose. Hence, the “misery index” (the sum of unemployment and inflation). But the big news story was not the economy–it was the interminable Iran hostage crisis. That humiliation, including the botched rescue attempt, is what made Carter unpopular and propelled Reagan to victory. Ironically, Carter undertook some pretty good economic policies late in his Administration, including deregulation of trucking and airlines and the appointment of Paul Volcker as Chairman of the Fed.
In short, I remember the early 1970’s as dominated by unrest over the Vietnam, the mid-1970’s as dominated by Watergate, and the late 1970’s as dominated by the Iran hostage crisis and tensions with the Soviets, primarily over Afghanistan.
There was a lot of pessimism about the ability to control inflation. By the end of the 1970’s, the stock market was in the toilet. But economic woes were not the dominant news story the way they have been the past two years. From a libertarian perspective, the experiment with wage and price controls would have seemed scary, but then within a couple of years it was abandoned (except for residual controls on oil prices) and discredited. Notwithstanding the poor economic performance under Carter, his deregulation policies meant that the decade ended with a more market-oriented economy than it began.
If you compare right now with, say, 1979, we can say that inflation is lower, the misery index is lower, and the stock market is doing better. But unemployment is higher, and government policy looks to me to be moving in a much less market-friendly direction.