The Past Is Never Very Far From The Present…In The Economy
The past is never very far from the present and can often help predict the future.
In 1973, I was in college and recently married. I was working full time and my bride, who was also a student, was searching for a job. Inflation was recognized as a serious problem. The seeds of inflation started with increased government spending in the 1960s due to the Great Society programs and the Vietnam War.
Late in his term, President Johnson finally enacted a “wartime” tax surcharge (maximum of 10%) on higher income taxpayers. Earlier President Kennedy had proposed a 20% reduction in federal tax rates that eventually was passed by Congress and signed by Johnson in the “Revenue Act of 1964”. This reduced the highest marginal rate from 90% to 71%.
In the 1960s the Fed was not willing to raise interest rates to dampen borrowing. Neither the tax rate decrease or the surcharge did little to depress consumer spending and reign in inflation. The decade was known as the “Go-Go Years” on Wall Street for the tremendous growth of stock ownership. Washington did not want the bubble to beak…it finally did in the 1970s
For two college students collectively making $250 a week, we weren’t concerned with tax rates, but we saw what the ravishes of inflation were doing to us by the early 1970s. The decade became known for stagflation. That is persistent high inflation, high unemployment, and low growth. Stagflation is brought on usually by high commodity prices. This became the hallmark of that decade
The middle east embargo led to the oil crisis of 1974 that brought a decade of high inflation as petroleum costs rose significantly. The world was used to cheap and plentiful oil. Almost every car was a gas guzzler. Industry used energy inefficiently. Without cheap oil everything rose in price.
What could have been a short-term problem like what happened at the end of WWII and Korea turned into expectations of a continued inflationary cycle. During the 1970s the government did not want to do what was necessary to fight inflation. The Fed finally acted at the end of the decade and beginning of the 1980s. We may be at a crossroads again.
There are many struggling young people today. They are trying to establish homes, families, and careers. Prolonged inflation that was seen in the 1970s and that continued into the 1980s was the price that was paid by society because of government monetary policies. It wasn’t till Fed Chair Paul Volcker raised the fed fund rate to nearly 20% after a decade of inflation and poor economic performance that the U.S. finally curtailed it.
Worldwide COVID has produced shortages caused by supply chain and manufacturing issues. These should be short term issues as the economy becomes COVID adjusted. We learned that a shutdown of our economy does little to stop the spread of a virus. We should not succumb to panic and shutdown once again because of Omicron and devastate the economy.
Inflation should begin to subside sometime between the middle and end of 2022 if we do not go off the deep end as a nation. As products become more readily available, shortages will go away along with inflation.
Schools must remain predictably open for parents to work. The government should have consistent policies in place to assure Americans that inflation will not become permanent.
The new CDC guidelines treats COVID as an endemic virus and not the bubonic plague. That is a good first step. We have seen people that are fully vaccinated and have a booster who get Omicron suffer much less than those who are not. Society cannot shutdown to protect those that refuse to be responsible for themselves.
We need to adjust the money supply, have the economy remain open, and have government programs that target individuals and families. Policies such as a childcare tax credit, universal pre-k, and healthcare are anything but inflationary. Those policies keep parents working and children healthy and educated.
The past can provide a model for present policy options so that the U.S. can have a more sustainable economic future.