January 8, 2007
Reflections on Our Economic Past
The death of a former president is still a pretty big deal in this country. We can probably still thank our first president, one of the most beloved men in the country in his time, for the reverence and respect we still hold for those who have sat in the Oval Office. But as the media pundits remark on the political decisions and world events that helped define the Ford administration, I am struck by a retrospective of a different type.
There is now a generation of adult Americans who have never lived in an era of high inflation. If you told them that they should buy something today, because the price might go up tomorrow, they would probably laugh, for their experience is just the opposite. They are waiting to buy items like flat screen televisions and new fangled cellular phones because they expect the prices to go down, and they are usually right.
They have never seen a newspaper story in August announcing how much higher the prices on Fords and Chevrolets will be for the new model year, or a report on the outcome of the latest wage agreement in the steel industry. They have never seen interest rates of 5 or 6 percent paid on savings accounts, if they even know what a savings account is.
President Ford is rightly credited with bringing a sense of normalcy back to a country rocked by unprecedented events, but what seemed normal in 1974 is less familiar today, at least as far as the economy is concerned. One of his first acts was to kick off a public anti-inflation campaign, dubbed Whip Inflation Now, in what proved to be a fruitless effort to get Americans to voluntarily slow down their spending to defuse an inflationary spiral that showed no signs of abating.
The President asked for a wartime-like sacrifice, which wasn’t entirely inappropriate, as the legacy of 1960’s Vietnam War spending – added to ambitious expansions in Federal entitlements – was at the root of the problem. Yet 1974 was a year that the economy sank into recession at the same time as consumer prices went up by 10.3 percent. It also kicked off a period of malaise that did not end until then Fed Chairman Paul Volker got inflation under control in the early 1980’s.
The point of this reminisce is not to tarnish our recently departed President’s reputation. President Ford inherited a failed fiscal and monetary policy regime and passed it on to his successor, just as his predecessor had done to him. Rather it is to remind a population more removed from inflationary experiences why economists and policymakers work so hard to avoid another one.
There has been a remarkable moderation in inflation since that time, throughout the industrialized world, both due to policy and happenstance. In 1998, consumer prices edged up in the U.S. economy by an imperceptible 0.8 percent, and economists began to discuss the risks of disinflation in discussions of economic policy. Not coincidentally, the average span of time between recessions in the U.S. economy – periods of uninterrupted economic growth – has grown to almost 9 years, while the post war average expansion prior to the mid 1980’s lasted just over three and a half years.
Why the big turnaround? Better management of the economy by the Federal Reserve, and by central banks in other countries, is part of the answer. The intensified competition brought about by foreign trade, which both holds prices in check and spurs productivity-enhancing investment, is another.
But ultimately the answer lies within all of us. That’s because inflation can be driven by inflationary expectations as much as anything. If we all rush to buy goods in the morning because we expect them to cost more at mid-day, our collective actions will ensure that result. Those expectations are minimal today, thankfully. But given their destructive impact, we can’t worry enough about keeping them at bay in the future.
About the Author
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