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Veterans of Carter-Era Inflation Warn That Biden Has Few Tools to Tame Prices


WASHINGTON — When inflation surged within the late Nineteen Seventies, President Jimmy Carter convened his top economic advisers for weekly lunch meetings wherein they tended to supply overly optimistic forecasts of how high prices would rise.

However the political consequences of rising prices couldn’t be escaped: By 1978, Democrats had lost seats within the House and Senate. A yr later, Mr. Carter’s Treasury secretary, W. Michael Blumenthal, was ousted in a cupboard shake-up. In 1980, Mr. Carter lost his re-election bid in a landslide because the Federal Reserve, intent on bringing inflation down, raised rates of interest so aggressively that it tipped the economy right into a painful recession.

President Biden and the Democrats in power now face the same predicament as they scramble to tame inflation after a yr of telling Americans that price gains can be short-lived. In recent weeks, Mr. Biden has pressed oil refineries to ramp up production, proposed a three-month gas tax holiday and called on the Federal Reserve to do what is required to chill an overheating economy. But to veterans of the Carter administration, the echoes of the past call for a greater sense of urgency from Mr. Biden despite his limited power to bring prices down.

“The fundamental problem that this president faces is admittedly not too dissimilar from the one which confronted Carter,” said Mr. Blumenthal, who’s 96 and divides his time between Princeton, N.J., and Germany, where he was born. “President Biden faces this dilemma, and it’s actually my hope that he’ll select clearly, select decisively and be very clear not only in regards to the undeniable fact that he recognizes that inflation needs to be handled, but that he is admittedly willing to support painful steps to try this.”

That pain might be severe if the Fed, as economists increasingly expect, is forced to tip the economy into recession as a way to bring inflation to heel. The central bank has already begun raising rates of interest quickly and signaled it should do whatever it takes to revive “price stability” because it tries to avoid the mistakes of the Nineteen Seventies.

Veterans of the Carter administration say Mr. Biden can be sensible to also learn from the past and avoid half-measures which have popular appeal but do little to resolve the underlying problem, in addition to forgoing large spending initiatives.

The USA has been buffeted by soaring prices this yr as supply chain disruptions that emerged in the course of the pandemic coincided with a surge in food and energy prices spurred by Russia’s war in Ukraine. The Consumer Price Index picked up by 8.6 percent in May from a yr earlier, as price increases climbed on the fastest pace in greater than 40 years. Gas hit $5 per gallon in June and is now averaging around $4.80.

The dynamic has parallels to the Nineteen Seventies, when the Arab oil embargo of 1973-74 and the Iranian revolution of 1979 curtailed oil supply so severely that it fueled shortages, sending gas prices soaring. Inflation peaked at 14.6 percent in 1980 before easing as Paul A. Volcker, who was the Fed chair, aggressively raised rates of interest to just about 20 percent and triggered a recession that eventually tamed inflation.

In an impassioned “fireside chat” to the nation in February 1977, Mr. Carter urged Americans to embrace conservation to address energy shortages and rising fuel costs.

“All of us must learn to waste less energy,” Mr. Carter said. “Just by keeping our thermostats, for example, at 65 degrees within the daytime and 55 degrees at night, we could save half the present shortage of natural gas.”

Mr. Blumenthal said Mr. Biden should heed the teachings of Mr. Carter’s failed attempts to curb inflation by avoiding measures which are counterproductive. He urged Mr. Biden to support a considerable rate of interest increase and to desert his sweeping legislative package in favor of deficit reduction, which some economists argue could dampen prices by slowing growth depending on the way it is approached.

“Inflation fighting comes first,” said Mr. Blumenthal, who escaped Nazi Germany and lived in Shanghai during a period of hyperinflation within the Nineteen Forties. “He has to indicate the popularity to the general public that inflation has lasting deleterious effects on the economy and that by attempting to take half measures now, you merely delay the pain of those effects.”

Mr. Biden has acknowledged that inflation might be persistent and has said his administration is doing what it may well to ease price pressures. He has primarily blamed President Vladimir V. Putin and his invasion of Ukraine for price increases but has also faulted American oil refineries and even gas stations. As travelers set out for the July Fourth holiday weekend, Mr. Biden accused gas station owners of profiteering and urged them to lower their prices.

“Bring down the value you might be charging on the pump to reflect the associated fee you’re paying for the product,” Mr. Biden said on Twitter.

The Biden administration has been searching for ways to lower oil prices globally. Treasury Secretary Janet L. Yellen has been pressing her European counterparts to impose a price cap on Russian oil exports, and the Group of seven industrialized nations agreed last week to explore the concept.

A few of the proposals for alleviating the pain of inflation on Americans, reminiscent of the gas tax holiday or student loan debt forgiveness, have been dismissed by economists who say they may make inflation worse. Others have been criticized, like Mr. Biden’s upcoming trip to Saudi Arabia, which some have called pandering to a state that the president once likened to a “pariah” over its role within the assassination of Jamal Khashoggi, a Washington Post columnist and a outstanding dissident. Mr. Biden said last week that he wouldn’t ask the Saudis to extend oil production.

C. Fred Bergsten, the assistant secretary for international affairs on the Treasury Department from 1977 to 1981, said the USA should avoid the sort of domestic oil price controls that were in place in the course of the Nineteen Seventies and that the Carter administration eventually abandoned in 1979. Describing them as an “abysmal failure,” Mr. Bergsten said they distorted energy markets.

“One lesson from the Carter administration is don’t do this,” Mr. Bergsten, 81, said. “Energy price controls discourage production and held down the provision side over time.”

Mr. Bergsten suggested that rolling back a few of the Trump-era tariffs on $360 billion price of Chinese goods that economists say have driven up costs for American consumers could offer some marginal relief from inflation. He also thinks Democrats should consider tax increases that will be targeted mostly at the rich to scale back the pent-up demand within the economy that continues to push prices higher. Proposals reminiscent of the gas tax holiday would probably just fuel more inflation, he predicted, by giving drivers more cash to spend, and would make the Biden administration look desperate by resorting to gimmicks.

“Even when Biden doesn’t have many alternatives to take care of it, the image is of a scarcity of decisive and effective management of the country and the economy,” said Mr. Bergsten, who made several trips to Saudi Arabia within the Nineteen Seventies to attempt to get Riyadh to spice up oil production.

The moment is politically perilous for Mr. Biden, with the November midterm elections approaching, and politics can be complicating the federal response.

Republicans have realized the political power of rising prices, seizing on inflation as a key talking point ahead of the midterms, often comparing Mr. Biden to Mr. Carter.

Inflation F.A.Q.

Card 1 of 5

What’s inflation? Inflation is a loss of buying power over time, meaning your dollar is not going to go as far tomorrow because it did today. It is usually expressed because the annual change in prices for on a regular basis goods and services reminiscent of food, furniture, apparel, transportation and toys.

What causes inflation? It could be the results of rising consumer demand. But inflation may also rise and fall based on developments which have little to do with economic conditions, reminiscent of limited oil production and provide chain problems.

Is inflation bad? It relies on the circumstances. Fast price increases spell trouble, but moderate price gains can result in higher wages and job growth.

Can inflation affect the stock market? Rapid inflation typically spells trouble for stocks. Financial assets generally have historically fared badly during inflation booms, while tangible assets like houses have held their value higher.

“Americans affected by rising prices and the best inflation in 40 years have to demand the outcomes Presidents Ronald Reagan and Donald Trump gave them,” Newt Gingrich, the previous Republican House speaker, wrote last week. “They should reject the policy failures of Presidents Jimmy Carter and Joe Biden.”

Barry P. Bosworth, who led the Carter administration’s “Wage‐Price Council” from 1977 to 1979, said that in an excellent world the federal government could enact policies to scale back or delay government spending on recent programs or public works initiatives. Nonetheless, it is way easier to search out bipartisan support to stimulate the economy than to take the air out of it.

It is obvious to Mr. Bosworth that the $1.9 trillion pandemic aid package that Democrats passed in 2021 has fueled inflation. Now, he said, it should be largely as much as the Federal Reserve to corral it.

“It clearly turned out to be excessive,” Mr. Bosworth said. “The quantity of transfer funds that we poured into the economy over a brief time period clearly added to inflation.”

For many who have lived through bouts of high inflation, projecting an endpoint is fraught with risk and uncertainty.

Mr. Blumenthal recalled that when he was Treasury secretary, he tried to supply anecdotal evidence from businesses that always contradicted the rosier economic forecasts of other White House economic advisers who had less frequent contact with corporate executives. They were sometimes reluctant to present the president with grim numerical projections.

Mr. Biden’s advisers even have misjudged the specter of inflation.

Within the early days of the Biden administration last yr, Mr. Blumenthal attended a gathering of Treasury secretaries past and present. Lawrence H. Summers, who has spent the past yr warning publicly that inflation was an even bigger problem than Biden administration officials understood, expressed alarm to the group that inflation could worsen. Others, including Ms. Yellen, maintained that prices were under control and would moderate.

“When you’re on this cycle, it’s very difficult to be precise,” said Mr. Blumenthal, who holds a Ph.D. in economics from Princeton. “The normal tools of study are of limited value in that situation.”

He added: “And hope springs everlasting.”

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