The 1970's and the Current Economy

 

The current oil shock, and the COVID shock before, have drawn comparisons with the great stagflation of the 1970's.  Over the decade, inflation never fell below six percent and often went into the double digits, topping out at 14%.  At the same time, economic growth slowed and unemployment was persistently high.  What finally broke the inflationary spiral was that the Federal Reserve, led by Paul Volker, put a severe squeeze on the economy, running interest rates as high as 20%, with predictable results to the overall economy.  This tightening caused a severe recession, with unemployment rising to ten percent.  Once the inflationary spiral was broken, the Fed lightened up and the economy quickly bounced back.  It was in full swing recovery by the 1984 election and it was "morning in America" with people convinced that recessions were gone forever.  Inflation rate when we considered the spiral broken -- about four percent.

Compare that with the post-COVID inflation.  In that case, inflation topped out at nine percent and came down, being only slightly above target of two percent on Liberation Day.  Furthermore, the Fed achieved the storied "soft landing," i.e., it managed to tame inflation without inducing a recession.  Even now, when everyone is freaking out over rising inflation with rising oil prices, the latest rate reported was 3.8% -- at or below the rate when it was "morning in America."  Yet consumer sentiment is hitting an all time low, below the rate during the 1970's stagflation, because nominal prices have not fallen to pre-pandemic levels.

This has led some to conclude we have reached an absurd paradox.  Consumer sentiment is a victim of the Fed's own success.  If nine percent inflation has persisted for years, people would have gotten used to rapidly rising prices, stopped looking for a return to the good old days, and just been grateful to see prices stabilize.  Or if the Fed had induced a recession, people would have focused on the recession instead of inflation and been so happy when it ended that they would stop worrying about nominal prices.  It would seem by this analysis that what is really needed to restore consumer sentiment is a recap of the 1970's -- prolonged inflation, followed by a severe recession to wring it out.  

Alternately, maybe we have just become a nation of spoiled brats, unwilling to endure any hardship.