WASHINGTON — When inflation went up in the late 1970s, President Jimmy Carter’s top economic advisers met every week for lunch. During these meetings, they often gave overly optimistic predictions about how much prices would go up.
But it was impossible to avoid the political effects of rising prices: By 1978, both the House and the Senate had less Democrats. In a cabinet shake-up a year later, W. Michael Blumenthal, who had been Mr. Carter’s Treasury secretary, was fired. In 1980, Mr. Carter lost his bid for re-election by a huge margin. This was because the Federal Reserve, which was trying to stop inflation, raised interest rates so quickly that the economy went into a painful recession.
After telling Americans for a year that price increases would be temporary, President Biden and the Democrats in power are now in a similar situation as they try to stop inflation. In the past few weeks, Mr. Biden has pushed oil refineries to increase production, suggested a three-month gas tax holiday, and asked the Federal Reserve to do what it takes to cool down an economy that is getting too hot. But people who lived through the Carter administration say that the echoes of the past show that Mr. Biden needs to act more quickly, even though he can’t do much to bring prices down.
Mr. Blumenthal, who is 96 and lives in Princeton, N.J., and Germany, where he was born, said, “The main problem this president faces is not that different from the one Carter faced.” “President Biden is in this tough spot, and I hope he makes a clear, decisive choice and makes it clear that he is not only aware that inflation needs to be dealt with, but is also willing to support painful steps to do so.”
That pain could be very bad if, as economists expect more and more, the Fed has to push the economy into a recession to stop inflation. The central bank has already started raising interest rates quickly and said it will do whatever it takes to restore “price stability” as a way to avoid making the same mistakes it did in the 1970s.
Veterans of the Carter administration say that Mr. Biden would do well to learn from the past as well. They say that he should avoid half-measures that are popular but don’t solve the real problem and also avoid big spending projects.
This year, the United States has been hit hard by rising prices. This is because the pandemic messed up the supply chain at the same time that Russia’s war in Ukraine drove up food and energy prices. In May, prices went up at the fastest rate in more than 40 years. This meant that the Consumer Price Index went up by 8.6% compared to the same month last year. In June, a gallon of gas cost $5, and it now costs around $4.80 on average.
The situation is similar to what happened in the 1970s, when the Arab oil embargo of 1973–74 and the Iranian revolution of 1979 cut oil supplies so much that it caused shortages and drove up gas prices. Inflation peaked at 14.6% in 1980, but it started to go down when Paul A. Volcker, who was in charge of the Fed at the time, aggressively raised interest rates to almost 20%. This caused a recession, which in turn tamed inflation.
In a passionate “fireside chat” with the whole country in February 1977, President Carter urged people to use less energy and save money on fuel.
Figure out what inflation is and how it affects you.
Mr. Carter said, “We all need to learn to waste less energy.” “For example, we could save half of the natural gas we need by setting our thermostats to 65 degrees during the day and 55 degrees at night.”
Mr. Blumenthal said that Mr. Biden should learn from Mr. Carter’s failed efforts to stop inflation by not taking actions that make things worse. He told Mr. Biden to back a big increase in interest rates and drop his big legislative plan in favor of cutting the deficit, which some economists say could lower prices by slowing growth, depending on how it’s done.
Mr. Blumenthal, who fled Nazi Germany and lived in Shanghai during a time of very high inflation in the 1940s, said, “Fighting inflation comes first.” “He needs to show the public that he understands that inflation is bad for the economy in the long run and that trying to take half measures now will only make things worse.”
Mr. Biden has said that inflation could last for a long time and that his government is doing everything it can to ease price pressures. He has mostly blamed President Vladimir V. Putin and his invasion of Ukraine for rising prices, but he has also said that American oil refineries and even gas stations are to blame. As people headed out for the Fourth of July holiday weekend, Mr. Biden said that gas station owners were trying to make too much money and told them to lower their prices.
Mr. Biden said on Twitter, “Bring down the price you charge at the pump to match what you pay for the product.”
The Biden administration has been trying to find ways to bring down the price of oil around the world. Janet L. Yellen, the secretary of the Treasury, has been pushing her European colleagues to put a price cap on Russian oil exports. Last week, the Group of 7 industrialized nations agreed to look into the idea.
Some ideas to help Americans deal with inflation, like a gas tax holiday or getting rid of student loan debt, have been shot down by economists who say they could make inflation worse. Some people have said that Mr. Biden’s upcoming trip to Saudi Arabia is pandering to a country that the president once called a “pariah” because of its role in the killing of Jamal Khashoggi, a columnist for the Washington Post and a well-known dissident. Last week, Mr. Biden said that he would not ask the Saudis to make more oil.
C. Fred Bergsten, who was the assistant secretary for international affairs at the Treasury Department from 1977 to 1981, said that the United States should not have oil price controls like the ones that were in place in the 1970s and that the Carter administration finally got rid of in 1979. Mr. Bergsten called them a “abysmal failure” and said they messed up the energy markets.
Mr. Bergsten, who is 81, said that the Carter administration taught him not to do that. “Controls on energy prices make people less likely to make things, which has kept the supply side down over time.”
Mr. Bergsten said that rolling back some of the tariffs that President Trump put on $360 billion worth of Chinese goods, which economists say have made prices go up for American consumers, might help a little bit with inflation. He also thinks that the Democrats should think about raising taxes, especially on the rich, to reduce the pent-up demand in the economy that keeps pushing prices up. He said that ideas like the gas tax holiday would probably make inflation worse by giving drivers more money to spend. It would also make the Biden administration look desperate for coming up with these kinds of ideas.
Mr. Bergsten, who went to Saudi Arabia several times in the 1970s to try to get Riyadh to increase oil production, said, “Even if Biden doesn’t have many options for dealing with it, the image is of a lack of decisive and effective management of the country and economy.”
With the midterm elections coming up in November, this is a bad time for Mr. Biden politically, and politics are also making it harder for the government to help.
Republicans have realized that rising prices can be used as a political tool, so they are using inflation as a major talking point in the run-up to the midterm elections. They often compare Mr. Biden to Mr. Carter.
How does inflation work? Inflation is a loss of purchasing power over time, which means that your dollar won’t go as far tomorrow as it did today. It is usually shown as the change in prices from one year to the next for things like food, clothing, transportation, and toys.
What causes prices to go up? It could be because people are buying more. But inflation can also go up and down for reasons that have nothing to do with the economy, such as a lack of oil or problems in the supply chain.
Is price growth bad? It depends on what’s going on. When prices go up quickly, it can be bad, but when prices go up slowly, wages can go up and more jobs can be made.
Does inflation have any effect on the stock market? Stocks tend to do badly when inflation is high. Historically, financial assets have done poorly during periods of high inflation, while tangible assets like houses have held their value better.
“Americans who are suffering from rising prices and the highest inflation in 40 years need to demand the results that Presidents Ronald Reagan and Donald Trump gave them,” former Republican House Speaker Newt Gingrich wrote last week. “They need to reject the bad decisions that Jimmy Carter and Joe Biden made as presidents.”
Barry P. Bosworth, who was in charge of the Carter administration’s “Wage-Price Council” from 1977 to 1979, said that in an ideal world, the government could make rules to cut spending on new programs or public works projects or put them off for a while. But it is much easier to get support from both sides of the aisle to boost the economy than to slow it down.
Mr. Bosworth can see that the Democrats’ $1.9 trillion pandemic aid package passed in 2021 has made inflation worse. Now, he said, the Federal Reserve will have to do most of the work to bring it under control.
Mr. Bosworth said, “It turned out to be way too much.” “It’s clear that the amount of transfer money we put into the economy in a short amount of time made inflation worse.”
Those who have lived through times of high inflation know how hard and risky it is to guess when it will end.
Mr. Blumenthal said that when he was Treasury secretary, he tried to give examples from businesses that contradicted the more optimistic economic predictions of other White House economic advisers who didn’t talk to business leaders as often as he did. They sometimes didn’t want to give the president numbers that showed things were going to get worse.
Also, Mr. Biden’s advisors have been wrong about how dangerous inflation is.
Last year, when Biden first took office, Mr. Blumenthal went to a meeting of past and present Treasury secretaries. Lawrence H. Summers, who has been warning the public for the past year that inflation was a bigger problem than people in the Biden administration thought, told the group that he was worried that inflation could get worse. Others, like Ms. Yellen, said that prices were in check and would go down.
Mr. Blumenthal, who has a Ph.D. in economics from Princeton, said, “Once you’re in this cycle, it’s hard to be exact.” “The usual ways of analyzing aren’t very useful in that situation.”
He added: “And hope springs eternal.”
