Veterans of Carter-Era Inflation Warn That Biden Has Few Tools to Tame Prices

Washington — When inflation surged in the late 1970s, President Jimmy Earl Carter tends to convene the best economic advisers at weekly luncheons to provide overly optimistic forecasts of how highs will rise. was.

However, the political impact of rising prices was unavoidable. By 1978, the Democratic Party had lost seats in the House of Representatives and the Senate. A year later, Carter’s Treasury Secretary, W. Michael Blumenthal, was banished in a cabinet turmoil. In 1980, Carter lost his re-election bid due to a landslide as the Federal Reserve, which aimed to lower inflation, raised interest rates so aggressively that he lost his economy. Painful recession..

President Biden and powerful Democrats face the same predicament as scrambling to curb inflation a year after telling Americans that rising prices are short-lived. In recent weeks, Biden has pressured oil refineries to increase production, proposed a three-month gas tax holiday, and urged the Federal Reserve to do what it takes to cool the overheating economy. rice field. But for veterans of the Carter administration, past repercussions demand greater urgency from Mr Biden, despite his limited power to lower prices.

“The basic problems faced by this president are not so different from those faced by Carter,” said Brumenthal, who is spending time between Princeton, NJ and Germany, where he was born, at the age of 96. Stated. “President Biden is facing this dilemma. Not only is he aware that he has to make clear choices, decisive choices and deal with inflation, but he is a really painful step. It is certainly my hope to be very clear that we are ready to help. To do that. “

As economists increasingly expect, the pain can be exacerbated if the Fed is forced into a recession to curb inflation. Central banks have already begun to raise interest rates rapidly, suggesting that they will do whatever it takes to restore “price stability” as they try to avoid the mistakes of the 1970s.

Veterans of the Carter administration are wise to learn from the past, avoiding half-hearted steps that are popular and attractive but use little to solve the underlying problem, and abandon large spending initiatives. Is called.

The United States has been plagued by soaring prices this year as the supply chain turmoil that occurred during the pandemic coincided with the soaring food and energy prices caused by the Russian war in Ukraine. The consumer price index rose 8.6% year-on-year in May as prices rose at the fastest pace in more than 40 years. Gas reached $ 5 per gallon in June and is now on average about $ 4.80.

It is similar to the 1970s, when gas prices soared, fueled by shortages caused by the Arab oil embargo in 1973-74 and the Iranian Revolution in 1979, which drastically reduced oil supplies. Inflation peaked at 14.6% in 1980 as Paul A. Volcker, chairman of the Federal Reserve Board, aggressively raised interest rates to nearly 20%, causing a recession and ultimately curbing inflation. Reached.

Feverishly “Fireside chats” to the whole country In February 1977, Carter urged Americans to embrace nature maintenance to deal with energy shortages and rising fuel costs.

“We all have to learn to waste less energy,” Carter said. “For example, keeping the thermostat at 65 degrees during the day and 55 degrees at night will save half of the current natural gas shortage.”

Mr Biden said Biden should keep in mind the lesson that Carter’s attempt to curb inflation failed by avoiding counterproductive measures. He supported Mr. Biden’s significant interest rate hike and urged him to abandon his radical legislative package in support of deficit reduction.

“The fight for inflation comes first,” said Brumenthal, who lived in Shanghai after escaping Nazi Germany during the hyperinflationary period of the 1940s. “He must show the public that inflation has a lasting negative impact on the economy, and that taking half the measures will only prolong the pain of these effects. . “

Mr Biden acknowledged that inflation could persist and said his administration was doing what it could to ease price pressures. He blamed President Vladimir Putin and his invasion of Ukraine for price increases, but even blamed American oil refineries and gas stations. When travelers departed on the weekend of the holiday on July 4, Mr. Biden accused gas station owners of making a profit and urged them to lower prices.

“Lower the price you are charging for your pump to reflect the cost you are paying for your product.” Biden said on Twitter..

The Biden administration has sought ways to lower oil prices globally. Treasury Secretary Janet Yellen is pressing European counterparts to impose a price cap on Russia’s oil exports, and last week a group of seven developed countries agreed to consider the idea.

Some of the proposals to relieve the pain of inflation in Americans, such as gas tax holidays and student loan debt relief, were rejected by economists who said they could exacerbate inflation. Others have been criticized, such as Mr. Biden’s next trip to Saudi Arabia. Dissidents. Mr Biden said last week he would not ask Saudi Arabia to increase oil production.

From 1977 to 1981, C. Fred Bergsten, Assistant Secretary of International Affairs for the Ministry of Finance, said the United States should avoid domestic oil price controls as it did in the 1970s, and the Carter administration said. He said it was finally abandoned in 1979. Described them as “worst failures,” Bergsten said they distorted the energy markets.

“One lesson from the Carter administration is not to do that,” said 81-year-old Bergsten. “Energy price controls have curtailed production and curtailed the supply side over time.”

Bergsten suggests that economists can provide a small relief from inflation by rolling back some of the Trump-era tariffs on $ 360 billion worth of Chinese goods that have pushed up costs for American consumers. did. He also believes that the Democratic Party should consider raising taxes primarily for the wealthy to reduce stagnant demand in the economy, which continues to push up prices. Proposals such as petrol tax holidays are likely to encourage inflation by spending more money on drivers, and the Biden administration will look desperate by relying on gimmicks, he predicted.

“Even if you don’t have many options to deal with Biden, it’s an image of a lack of decisive and effective control of the country and economy,” said Bergsten, who traveled to Saudi Arabia several times in the 1970s. .. Ask Riyadh to increase oil production.

This moment is politically dangerous to Mr. Biden, with the November midterm elections approaching and politics complicating the federal response.

Republicans see inflation as an important issue prior to the midterm elections, often comparing Mr. Biden and Mr. Carter to recognize the political power of rising prices.

“Americans suffering from rising prices and the highest inflation in 40 years need to demand the results that Presidents Ronald Reagan and Donald Trump have given them.” Former Republican Speaker Newt Gingrich wrote last week.. “They need to reject the policy failures of President Jimmy Carter and President Joe Biden.”

Barry P. Bosworth, who headed the Carter administration’s Wage Price Council from 1977 to 1979, said that in an ideal world, the government could enact policies to reduce or delay government spending on new programs and public enterprises. Stated. But finding bipartisan support to stimulate the economy is much easier than removing the air from the economy.

It’s clear to Bosworth that the $ 1.9 trillion pandemic aid package that the Democrats passed in 2021 helped inflation. Now he said it was largely up to the Federal Reserve to enclose it.

“It turned out to be clearly overkill,” Bosworth said. “The amount of transfer money we put into the economy in a short period of time was clearly added to inflation.”

For those who have had a bout of high inflation, predicting endpoints is full of risks and uncertainties.

Blumental recalled when he was Treasury Secretary, he sought to provide anecdotal evidence from companies that often conflicted with the more rosy economic forecasts of other White House economic advisers who had less contact with business executives. .. They were sometimes reluctant to present the president with harsh numerical forecasts.

Biden’s adviser also misunderstands the threat of inflation.

Early in the Biden administration last year, Mr. Blumenthal attended a gathering of past and present Treasury Secretaries. Last year, Lawrence H. Summers, who publicly warned that inflation was a bigger problem than the Biden administration officials understood, warned the group that inflation could worsen. Others, including Mr Yellen, argued that prices were controlled and would be eased.

“Once in this cycle, it’s very difficult to be accurate,” he said. PhD Department of Economics at Princeton University.. “Traditional analytical tools have limited value in such situations.”

“And hope springs up forever,” he added.