During my time in the Carter administration White House on the Council of Economic Advisers (CEA), the U.S. was coming out of the Nixon-era wage and price controls. President Nixon put in these controls in 1971 primarily for political reasons as opposed to reasons based on sound economic theory. The Arab-Israeli War in 1973 and […]
Get Instant Access to This Article
Subscribe to Hartford Business Journal and get immediate access to all of our subscriber-only content and much more.
- Critical Hartford and Connecticut business news updated daily.
- Immediate access to all subscriber-only content on our website.
- Bi-weekly print or digital editions of our award-winning publication.
- Special bonus issues like the Hartford Book of Lists.
- Exclusive ticket prize draws for our in-person events.
Click here to purchase a paywall bypass link for this article.
During my time in the Carter administration White House on the Council of Economic Advisers (CEA), the U.S. was coming out of the Nixon-era wage and price controls.
President Nixon put in these controls in 1971 primarily for political reasons as opposed to reasons based on sound economic theory.
The Arab-Israeli War in 1973 and subsequent oil embargo by the OPEC countries in response to the United States support for Israel led to gas lines and high energy and other prices throughout the economy. The 1974-75 recession had been one of the deepest economic declines since the Great Depression.
Nixon resigned in August 1974. Gerald Ford became president and ran unsuccessfully for president in 1976. Jimmy Carter became president in 1977. I joined the CEA in 1978 under the leadership of Yale Nobel Laureate William Nordhaus and Washington icon Charles Schultze.
Schultze had served as President Lyndon Johnson’s budget director.
There were several policies newly-elected President Carter had agreed to. One of the most important was the gradual elimination of wage and price controls.
Carter appointed Cornell University’s Alfred Kahn to become chairman of the Council on Wage and Price Stability, an organization created by President Ford.
During wage and price controls, no firm was allowed to raise its prices without the federal government’s permission. Who said the Republican Party has always been the party of free markets?
Additionally, no union or group of workers were permitted to increase their wages without federal permission.
Wage and price controls were a massive failure and a bureaucratic nightmare. Prices are market signals. When you prevent them from moving, you distort economic incentives and the allocation of resources.
Wage and price controls caused shortages for some goods and services and surpluses for others. Not surprisingly, these interventions also led to the creation of black markets and other actions to compensate for the inability to raise prices, wages or interest rates.
Do you remember when banks gave out toasters instead of higher interest rates on your savings?
The Carter administration eliminated the wage and price controls by 1978. By 1980, inflation had risen 18% — it was not surprising given that companies and workers had been denied price and wage increases, respectively, for years. They were making up for lost profits and income.
Carter turned to monetary policy and the Federal Reserve board to fight record-high inflation. Paul Volker was appointed Fed chair in 1979 with the expressed goal of taming inflation. He did this by dramatically increasing interest rates.
By the time I purchased my first home in Stamford, Connecticut in 1983, my mortgage rate was 14 percent!
Volker succeeded on inflation, but Carter failed to get reelected in 1980. Americans had enough of paying more for goods and services and the recession that started in 1980.
Looking back with 20-20 hindsight, Carter hired Volker too late. Had Volker been hired earlier, and the subsequent recession also occurred earlier in the Carter term, the notoriously short memory of American voters could have helped him beat Ronald Reagan in 1980.
I go through this history because it is important to understand what is going on in today’s economy. There is no way that President Biden will consider wage and price controls. We have all learned that lesson — I hope.
But the tool that has worked and will most likely work again to curb inflation is the Federal Reserve policy to raise interest rates and push the economy into recession.
The Fed does not want a recession. It would prefer what is known as a “soft landing.”
But a look at economic history since 1970 shows that increases in prices have been followed by economic recessions. Each of the recessions in 1970, 1974-75, 1980 and 2001 were immediately preceded by inflationary spikes.
The Great Recession of 2008-2010 was a different affair. But even the Great Recession was preceded by unrealistically high and increasing housing prices. And in late April it was announced that U.S. GDP in the first quarter declined. It takes two consecutive declines in real GDP to make a recession.
Seeing this history leads me to conclude that we are headed for a recession caused by the Federal Reserve’s response to inflation. This current episode is different in many respects from previous periods; we have a global pandemic, war in Europe, and supply chain disruptions caused by both shocks.
There is no doubt that the Fed can get inflation under control, but it will come with a price.
Consumers, firms, banks, and businesses will all be facing a new economic reality if the Fed successfully controls inflation, but this will initiate our next recession.
You should plan accordingly.
Fred McKinney is the co-founder of BJM Solutions, an economic consulting firm. He is emeritus director of the People’s United Center for Innovation & Entrepreneurship at Quinnipiac University.