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A Rerun From the 1970s? This Economic Episode Has Different Risks

A Rerun From the 1970s? This Economic Episode Has Different Risks


A Rerun From the 1970s? This Economic Episode Has Different Risks

History doesn’t repeat, they say, but it often rhymes. And the latest economic headlines feature an uncanny tonal resemblance to those of the early 1970s.General Motors workers are on strike, seeking more of the spoils of their employer’s successes. The president of the United States is pressuring the Federal Reserve to lower interest rates, hoping for a booming economy as he seeks re-election. And now, violence in the Middle East is pushing up global oil prices.At first glance, at least, it seems similar to an era of gas lines and “stagflation.”In each of these situations, though, there are big underlying differences between the early 1970s and now. Understanding those differences is important in properly understanding the world economy in 2019 and the risks posed by this combination of events.The G.M. strike, which began late Sunday with about 50,000 autoworkers walking off the job, could turn out to be the most important clash between labor and management in years.The early 1970s was also a period of labor strife: G.M. workers went on a major strike in 1970, demanding higher pay. But the context was different, and so were the economic implications.That was an era of rapid inflation, and labor unions were at the height of their power — two phenomena that were connected. The G.M. workers demanded pay increases that would outpace the already high rate of inflation, and with the strike, they got it. Over the three-year contract from September 1970 to September 1973, autoworkers’ pay rose 6.5 percent a year, comfortably above the 4.5 percent annual inflation rate.Autoworkers and other powerful unions in that era fueled higher inflation economywide by demanding — and getting — ever-escalating pay increases, which fed into consumer prices.That’s not what is happening in 2019. It’s not just that union membership has fallen to 10.5 percent of the work force in 2018 from about 25 percent in the early 1970s.The autoworkers striking today are essentially trying to claw back some of the compensation they have lost over a brutal decade. Average wages in the motor vehicle industry have fallen 2 percent since 2010, according to the Center for Automotive Research, amid an 18 percent rise in consumer prices over the same period.Instead of workers’ salary demands fueling too-high inflation, as in 1970, this time the low pay of autoworkers has been a factor in too-low inflation, which the unionized workers are hoping to reverse.Similarly, the upside-down world of low inflation affects the unusual politics around the Federal Reserve.President Nixon and his aides blatantly pressured Arthur Burns of the Federal Reserve to increase the money supply, despite rising inflation, viewing a strong economy as the key to Mr. Nixon’s 1972 re-election campaign. They used both public and private pressure, and some underhanded moves like leaking false information that Mr. Burns had sought a large pay raise.Mr. Nixon didn’t have Twitter.President Trump has taken to assailing the Fed chair, Jerome Powell, by tweet and calling for steep interest rate cuts. In recent weeks, he called Fed leaders “boneheads” and suggested that Mr. Powell is an enemy of the United States.But the economic environment in which the Fed is operating means that the attacks have different implications than Mr. Nixon’s did. In the 12 months ended in August, the Consumer Price Index rose only 1.8 percent; in the equivalent 12-month period ending in August 1971, it was up 4.4 percent.The Nixon-era pressure, in other words, came at a time when the downsides of excessively easy money were apparent. In 2019, the Fed is dealing with a different struggle. It has failed to get inflation consistently up to the 2 percent level it targets, and there is evidence that Fed interest rate increases in 2018 have slowed the global economy in 2019 in ways that are reinforcing these deflationary forces.Mr. Trump’s methods and tone are unconventional, and the scale of the interest rate cuts he seeks is out of line with what most mainstream economists think would make sense. But his general idea — that interest rates need to be adjusted downward to keep the economic expansion on track — is relatively mainstream.And Mr. Powell and the Fed are likely to act on that logic Wednesday afternoon, delivering a second rate cut in two months. The latest tumult in the Middle East delivers further complexity for the Fed and other economic policymakers. An attack over the weekend that incapacitated much of Saudi Arabia’s oil production infrastructure caused a 13 percent spike in the price of West Texas Intermediate crude oil to start the week (prices fell some on Tuesday, reflecting optimism that Saudi output would return to normal quickly).The stagflation — stagnant growth combined with inflation — of the 1970s was caused in large part by repeated disruptions to global oil supplies, which led to soaring prices and gasoline shortages in the United States.If a major conflict were to break out in the Middle East, such as between Iran and Saudi Arabia, the impact on the world economy would be severe. But the United States is well insulated from more moderate swings in energy prices like those evident so far, and could even benefit from them.First, on the demand side, the “energy intensity” of the American economy has declined precipitously since the 1970s, meaning that each dollar of economic output takes less energy to create.Second, American oil and natural gas production has risen, especially in the last few years. That means that while higher energy prices may hurt consumers, they have a countervailing positive impact on oil-producing parts of the United States and the industries that serve it, like those that sell equipment for energy exploration.Third, the dynamics around inflation that also affect the G.M. negotiations and the Fed’s options have a side effect: There is less reason now to think that a shock to energy prices would flow through to rapid inflation for all goods. Fewer workers have union contracts containing automatic cost of living raises, for example, and the Fed has become more savvy about disentangling the short-term effect of more expensive oil from a broader wave of inflation.None of this means that the economy is free from risks. The trade wars could bubble over into a broader slump. The Fed could miscalculate as it sets policy. Or the geopolitical situation could break down more quickly than now looks likely.But a changing world means a different set of risks, no matter the superficial similarities to the past.

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