Overreacting would be bad economics and bad politics.
President Jimmy Carter joined a meeting of business leaders in Washington on March 29, 1979, to ask for their help in controlling inflation.
Democrats are right to worry about inflation’s threat to Joe Biden’s presidency. But they need to learn the right lesson from our history: Overreaction can be fatal.
The last time inflation had a significant impact on U.S. politics was in 1979–1980, when Jimmy Carter’s mishandling of rising consumer prices elected Ronald Reagan president and ushered in 40 years of conservative dominance of American political life.
Prices were accelerating then because of supply constraints in specific markets. Gasoline rose in response to turmoil in the Middle East, including revolution in Iran. Food costs were driven up by a catastrophic failure of the Russian grain harvest.
But conservatives and centrist Democrats portrayed rising prices as a problem of overall “excess demand,” caused by government social spending and cheap money.
Ironically, when Republican Richard Nixon had been faced with spiking prices the year before his re-election in 1972, he imposed temporary wage and price controls to keep consumer panic-buying from infecting the entire economy. It worked economically; inflation abated. And it worked politically; Nixon’s approval rating rose from 48 percent to 62 percent [3] by Election Day.
Eight years later, Jimmy Carter, promoting himself as a small-government/fiscal conservative, rejected the Nixon precedent. One of his first acts as president was to turn down the Democratic Congress’s offer to authorize standby wage and price controls—a move that Stuart Eizenstat, his chief domestic policy adviser, later admitted was his biggest mistake [4].
So when oil and food prices shot up in the middle of his term, Carter pushed to “do something,” cut back government spending, and put Paul Volcker in charge of the Federal Reserve to raise interest rates.
Carter’s austerity strategy also eventually worked, but to the benefit of Ronald Reagan. It sealed the fate of Carter’s presidency by choking economic growth, piling joblessness on top of rising prices.
Predictably, the story of excess government spending is being pumped into the national consciousness by Republicans, who shamelessly supported Donald Trump’s bloated deficits.
As the unemployment rate, which had fallen during Carter’s first three years, jumped up, appeals from progressives for a jobs program to offset the contracting labor market were dismissed as “unrealistic.”
“Aren’t you worried about the president’s re-election?” I asked one of his economists at a White House meeting during the winter of 1979–1980.
“Do you really think that we could be beaten by Ronald Reagan?” he scoffed. “The star of Bedtime for Bonzo?”
Laughter all around.
On Election Day, 1980 exit polls showed that unemployment had been even more important to voters than rising prices.
Today’s inflation is also being driven from the supply side—in this case, the lagging response of production and distribution to recovery from the COVID recession. Suppliers of gas, rental cars, and airplane flights have not been able to ramp back up fast enough. Broken distribution chains from washing machines to microchips have been slow to reconnect. Many laid-off workers are reluctant to come back to service jobs that are low-paid, insecure, and come with lingering COVID risks. And consolidation of shipping, trucking, rail, and other logistics systems has ensured outsized profits, reducing the urgency to untangle the supply chain.
Predictably, the story of excess government spending is being pumped into the national consciousness by Republicans, who shamelessly supported Donald Trump’s bloated deficits, and compromised Democrats like Sens. Joe Manchin (D-WV) and Kyrsten Sinema (D-AZ).
This propaganda campaign is taking hold. Polls report that most Americans say they are personally doing fine, and holiday retail sales are on track to reach or exceed pre-COVID levels. But at the same time, a majority have been convinced that the economy as a whole is not good, and most blame Biden, pressuring him to “do something [5].”
Biden is trying to use federal authority to clear away bottlenecks in transportation. And he is bribing the Saudis with yet more high-tech weaponry to step up global oil production, which will further destabilize the Middle East. He is also considering releasing oil from the Strategic Petroleum Reserve, but in order to make sure that it stays here in a global market, he would have to slap back the ban on oil exports that Obama unwisely lifted in 2015. This would require the politically weak Biden to take on Big Oil, which is unlikely. And in any event, the immediate impact on oil prices would be modest at best.
With our economic ideology still stuck in the shadow of Ronald Reagan, more effective responses to inflation are even further beyond the pale. Temporary price controls like Nixon’s are unimaginable, as are efforts to use the presidency to shame corporations into restraining prices, as John F. Kennedy did with the steel industry in 1962.
This leaves Biden having to bet that by next November, supply-side shocks to price levels will have dissipated. This is actually the most likely scenario. So most of all, he needs to resist being panicked into “doing something” that will make things worse.
In the meantime, he and the Democrats should do what Jimmy Carter didn’t: launch an aggressive educational campaign to explain what is driving prices upward. The Democrats’ explanation of COVID bottlenecks, and more specifically a fragile supply chain damaged by 40 years of hollowed-out industrial policy and corporate profiteering, is more accurate and easier for voters to understand than the more abstract and ideologically driven tale of government overspending.
It has the added advantage of clarifying the importance of Biden’s Build Back Better plan, which in its specifics remains popular and includes programs that could make the economy more efficient and less vulnerable to future supply-side shocks.
Biden can legitimately argue that his fight against COVID, and yes, his government spending, are already restoring the economy’s health. Unplugging those life supports now will not only deflate demand and set back workers’ recent gains, but will also re-disconnect supply chains, making them much harder to repair the second time around.
That’s bad economics. And with the fascist Republican right—far more dangerous than Reagan was—waiting in ambush, it’s potentially catastrophic politics.