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Why is this inflation different?

Commentators and politicians scare Americans about inflation, without understanding and explaining why it exploded as COVID-19 subsided last summer. A growing consensus among inflation hawks says that the rise in prices is a result of the Federal Reserve not raising interest rates and slowing the economy soon enough. Worse, hawks are telling Americans that the Fed should press harder and that its “mistake” could lead to a long period of “stagflation” like the US experienced from 1974 to 1981. It is important to respond to this stupidity.

Today’s inflation bullshit fails to fully explain the two most important facts about the recent boom in prices. First, energy prices are the main driver of inflation here and in the rest of the world, and the US does not control these prices. Even in Germany, where the fight against inflation is a civil religion, prices are rising roughly at the rate in the US. A second fact, even more important, is that there is a large gap between the technology-driven US economy in 2022 and the inflation-prone economy of the 1970s. The economy of the 70s was dominated by monopolies and oligopolies, which could generally raise prices regardless of supply and demand. It was built around post-World War II industries. The U.S. economy today is dominated by tech companies that fight each other for markets no matter their faults, often growing by innovating and lowering prices.

To begin with, it should be clear that energy prices tell the story of inflation in 2022 just as they did in the 1970s. Gasoline more than doubled from $1.94 a gallon in April 2020, when COVID-19 restricted driving. $4.60 the other day. Sudden rising gasoline prices mean the OPEC oil cartel is back in the driver’s seat, pushing oil from $41.47 in 2020 to roughly $113 in May 2022. This is a bitter reminder of what happened half a century ago when the OPEC cartel cut the cut. increased oil supply and drove prices from $1.82 a barrel in 1972 to $35.50 a barrel in 1980, 19 times higher. (There are 42 gallons in a barrel.)

Rising oil prices are of course increasing the cost of gasoline, but also the cost of diesel, heating oil, propane, and hydrocarbon “raw materials” made from natural gas, oil, and coal, which are often petroleum substitutes. Higher prices for oil and oil substitutes, in turn, result in inflationary price increases for all products and services. They drive up the costs of electricity, home and office heating and cooling, manufacturing, plastics, textiles, all kinds of shipping, farm prices (fertilizer, tractor fuel, shipping costs to markets), restaurant meals, and much more.

But the US economy has changed since the 1970s, and that will make managing inflation less troublesome if we don’t let inflation hawks panic us. The US economy of the 1950s, ’60s, and ’70s was dominated by post-World War II post-Depression industries, protected by government-approved price-fixing regulations that increased prices each year. The US economy in 2022 is different. The OPEC cartel still has the ability to cut supply and raise prices, but price-fixing regulations in communications, transportation, manufacturing, finance, retailing and many other areas have disappeared, so prices are now both falling and rising.

In the 1950s, 60s and 70s, prices in large sectors of the economy were “managed” by job and labor monopolies and oligopolies, so that prices rose from year to year, but rarely fell. John Kenneth Galbraith, the most well-known economist of the time, a great writer and friend of President John F. Kennedy, wrote this in his 1967 book “The New Industrial State.” Galbraith said the economy falls into two broad categories: categories where prices and wages are “managed” and competition keeps inflation low. He was certainly right about this, but he was wrong to believe that the political power of established industries and unions would prevent this situation from changing.

The economy changed radically between 1973 and 1983-84. The administrations of Presidents Gerald Ford and Jimmy Carter, with the bilateral assistance of Congress, It took action to break the inflationary price-fixing regulations that were the heart of the post-World War II economy. As Americans think about inflation today, the details need to be acknowledged.

In the 1970s, Presidents Ford and Carter supported the courts and the Federal Communications Commission (FCC), which broke AT&T’s (aka Ma Bell’s) telephone monopoly. In the 1980s, communication costs fell—in some cases by 95 percent—and businesses and individuals today have low-cost options that were unimaginable in the 1970s. Ford and Carter also supported the Securities and Exchange Commission (SEC) and several federal banking regulators that opened stock markets and banking to more competition and lowered financing costs. Likewise, and under the guidance of those appointed by Ford and Carter, the former Interstate Commerce Commission (ICC) opened up trucking, railroads, and pipelines to price competition, which undermined the established interests’ power to set prices. With Ford and Carter’s backing, the Civil Aviation Board (CAB) also put an end to relaxed airline price-fixing and policies that had locked down new air carriers since 1938. These reforms were carried out despite fierce opposition from established companies and unions in each of these areas. .

Manufacturing has also changed. A 3-2 decision by Carter at the International Trade Commission (ITC) made the U.S. auto market more fully focused on imports from Europe and Japan, and firms from Japan, Germany, and Korea that currently manufacture cars in the United States. had an opening effect. USA This weakened the pricing power of the Big 3 US auto companies that have dominated US manufacturing since the 1920s. In 2022, there is significant price competition not only in new cars, but in most of the machine building, metal forming and bending industries that appeal to automakers. (Computer chip shortages reduce supply and drive up car and device prices, but that will pass as new chip-making capacity rolls in.)

Natural gas was the hardest nut to crack politically. Carter struggled for two years to open both gas and electricity to price competition and was partially successful. As a result, natural gas prices have remained surprisingly low for decades, reducing the country’s reliance on coal and oil.

All these structural changes in the economy led to low inflation for 40 years, making today’s inflation from oil, transportation and a few bottlenecks less likely to become entrenched. None of these structural changes had anything to do with the monetary policy of the Federal Reserve, which caused a recession in the early ’80s and always took credit to repel that inflation. What the country now needs to combat inflation rather than another Fed-designed recession are policies to rapidly develop new energy sources (more wind and solar would be nice), further modernize transportation infrastructure, and reduce price-fixing supplier regulations that improve American health. maintenance is very costly and increases production of things like computer chips. Slowing the economy by raising interest rates and causing a recession would hamper investment in these areas and cause much more pain to working Americans than today’s inflation.

Paul A. London, Ph.D., was a senior policy adviser and assistant secretary in Economics and Statistics Business in the 1990s, assistant director in the Federal Energy Administration and Department of Energy, and visiting professor at the American Enterprise Institute. . He was the legislative assistant to Senator Walter Mondale (D-Minn.) in the 1970s, a foreign service officer in Paris and Vietnam, and is the author of two books, including “Competition Resolution: The Two-sided Secret to American Prosperity” (2005).

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