[Democrats don’t lose elections because of rising prices. They
lose when they cut spending and raise interest rates, sacrificing
other goals at the altar of price stability.] [[link removed]]

THE SPECTER OF INFLATION  
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Andrew Elrod
August 19, 2021
Boston Review
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_ Democrats don’t lose elections because of rising prices. They
lose when they cut spending and raise interest rates, sacrificing
other goals at the altar of price stability. _

President Jimmy Carter shakes hands with Paul Volcker, left, sworn in
as Chairman of the Federal Reserve Board, August 6, 1979., AP
Photo/Stf

 

As the national economy reopens, prices have been rising. Year over
year, the consumer price index (CPI) increased 5.4 percent in both
June and July—the largest annual increases observed since the summer
of 2008, a few months before Lehman Brothers failed.

What are we to make of the jump? Thirteen years ago the bulge in
prices was concentrated in petroleum products and food; today the
spike is driven by used cars, airfare, and restaurants—sectors
acutely impacted by the pandemic. But unlike 2008, there is little
reason to suspect today’s rising prices are evidence of an
overactive economy. The U-6 rate of total unemployment,
[[link removed]] which includes those working
part-time involuntarily and those who have quit looking for work,
remains 9.2 percent. Total capacity utilization, meanwhile, remains
sharply depressed at 76 percent.

Inflation fearmongering has bred a Democratic Party all too willing to
concede to Republican fears and demands.

Nevertheless, some venerable liberal journalists are concerned that,
when it comes to inflation, younger readers are not practicing proper
deference to their political forebears. “I don’t care to be
condescended to by a bunch of Gen Xers and Millennials about my
’70s-bred fear of inflation,” wrote
[[link removed]] Timothy
Noah—former editor of the labor desk at Politico, contributing
writer to MSNBC, and senior editor at the _New Republic_—in July.
Rising prices, he argues, are responsible for delivering forty years
of Republican hegemony. As Noah put it, “Inflation is death to
progressive governance because it makes people feel that the
government is spinning madly out of control, and when that
happens—fairly or unfairly—voters always blame Democrats and elect
Republicans instead.” In a similar vein, _New York_ political
columnist Ed Kilgore warns
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“I am beginning to hear echoes of the inflation panics of the
not-so-distant past, which make me tremble.” There is cause for
alarm, Kilgore says, in “the abiding fact that the left has no clear
prescription for dealing with [inflation] . . . other than by denying
its existence or significance.”

But the history of inflation politics has a very different lesson than
what these writers suggest. It is true that the liberal ascendancy of
the 1960s ended with both rising prices and a decisive defeat of
liberals at the polls. It was not inflation that caused these losses,
however, so much as a particular way of responding to it: with tighter
budgets and higher interest rates. This approach has dominated
anti-inflationary policy ever since. Because rising prices are
fundamentally a problem of excess demand, the argument goes, the
solution must involve a contraction in spending. And since governments
should always keep spending low enough to prevent rising prices, any
inflation at all is a sign of political failure.

There are a variety of mistakes in this argument. Inflation is not
always a problem of excess demand; it can also be caused by mismatch
between existing demand and existing supply—a problem of shifting
supply to changing demands. (Arguably this is what we are seeing now.)
Moreover, reducing the level of spending in the economy can prevent us
from achieving other, higher goals, such as raising total employment
and incomes or expanding public services. Indeed, managed economies
across the globe have often resorted to a variety of other
tools—temporary price freezes, selective price controls, national
wage policies, and targeted investments to expand supply-chain
bottlenecks—to respond to rising prices while preserving commitments
to more important economic goals. Both Harry Truman and Franklin
Roosevelt confronted inflation without hiking rates and tightening
budgets, and there is no reason governments can’t manage their
economies similarly today.

Inflation, in short, does not have to be a totalizing problem, and we
certainly have better prescriptions for dealing with it than those on
offer today. The far greater threat, history shows, is inflation
fearmongering. It is under the timorous banner of price stability that
liberals have acceded to conservative demands for austerity over the
last forty years of neoliberal consensus, delivering decades of
skyrocketing inequality, stagnant wages, and deteriorating public
services. If a progressive agenda is to stand any chance today, we
must reject these tired fears over rising prices and recover a more
ambitious program for managing the economy.

Since World War II, inflation has risen above 4 percent for a
sustained period during five different historical eras: (1) the
“reconversion” period immediately following the war and enduring
through the Korean War, (2) the later years of Vietnam War
(1968–1975), (3) the Carter administration and first Reagan term,
(4) the last two years of the Reagan administration and the first
half of the George H. W. Bush administration, and (5) the last year
of the George W. Bush administration. A close consideration
of these periods shows that inflation politics is hardly as simple
as writers like Noah suggest. 

In the era of massive federal spending at midcentury, rising prices
served as an equal opportunity political platform. When prices ticked
up following the end of the wartime mobilization program in 1946, both
conservatives and New Dealers lay the blame for inflation with the
Truman administration and its prevaricating business Democrats:
Treasury Secretary John Snyder, Labor Secretary Lewis Schewellenbach,
and Reconversion Director John Caskie Collet. The Democrats lost the
midterm elections in November 1946, just months after price controls
were lifted, at a moment when the year-over-year CPI increase was 16.6
percent. But to say that inflation _caused _this anti–New Deal
landslide is to ignore the politics of the campaign and the economics
of the postwar inflation.

Prices rose because the political opponents of the expanded wartime
New Deal—Southern Democrats and Republicans—refused to extend
authority for price control during the period of “reconversion” to
a peacetime economy. The Truman administration hardly gave them
reason to trust effective federal oversight: between April 1945 and
June 1946, the White House had failed to prevent corporations from
cutting wages amid the reduction of war orders and overtime pay and
allowed widespread lockouts and strikes to idle factories, causing
shortages of manufactured goods. The administration’s request for
statutory “fact-finding boards” in the mushrooming labor disputes
pleased neither the new unions—who wanted more than non-binding fact
finding—nor corporate executives, who blithely ignored the boards’
requests for information and refused to comply with the president’s
wishes.

Organized capital campaigned against the administration, primarily for
the paperwork required for price control. But because the cost of
living was rising, the new industrial unions also campaigned against
the White House, organizing a “dump Truman” campaign for the 1948
election. Henry Wallace, Secretary of Commerce and opponent of the
emerging Cold War, grabbed national attention as a third party
candidate. In response to rising prices, organized labor forced three
“rounds” of catch-up wage increases between 1946 and early 1948.
Located in the newly organized mass production industries, but
radiating out into the wider labor market, these wage increases failed
to restore real earnings to their wartime highs.

Instead, an agenda of public control of prices and federal economic
planning won elections in this period. As the public acquainted itself
with the beneficent possibilities of full employment and grew
apprehensive about proposals to stabilize prices at its expense,
workers came to see their bargaining power at the workplace was not
enough to advance their interests as a class.

Both Harry Truman and Franklin Roosevelt addressed inflation without
hiking rates and tightening budgets.

Only belatedly did the centrist Truman administration come to realize
the potential electoral gains of this political formula. When Truman
finally shifted his rhetoric on inflation, campaigning on reimposing
price controls
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he pulled an upset victory out of 1948. With the price level still
rising at an astounding 6 percent for the year, Truman not only won
reelection to the White House but brought the Democrats back into
control of both the House and Senate. Price control was a small part
of the broader Fair Deal program, which included
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construction of steel and electricity plants, co-determination in
industry, national health insurance, and civil rights for
African Americans. Looking closely, we can see that the key events in
the Truman era related as much to McCarthyism as to inflation, since
it was the anti–New Deal bloc of Southern, Jim Crow Democrats that
both led the charge against price control in 1946 and opposed the Fair
Deal agenda in 1949. 

When the Korean War began in June 1950, the White House waited six
months before freezing prices to stabilize the economy, defensively
placating McCarthyite opponents of price control. Two waves of panic
buying ensued; in the months after the North Korean invasion of the
South, wholesale rubber prices doubled, and used cars were selling at
a 50 percent markup from factory prices. In September Congress granted
the White House price control authority, but not until Chinese
soldiers crossed the Yalu River in late October—signaling a
prolongation of the war—did the administration begin to prepare a
price freeze. The resulting Korean War stabilization program, aided by
three wartime tax increases, maintained price stability amid a moment
of unprecedented
[[link removed]] public and
private investment during the armaments build up. As a share of GDP,
government spending (consumption expenditures and gross investment)
reached its twentieth-century peak of 25 percent during the Korean
War. Annual increases in the CPI collapsed to 2 percent in 1952.

Success rested in part on the collaboration of organized labor. As in
World War II, wage controls worked because union leaders sat on the
stabilization boards and negotiated the terms of wage restraint. This
is the origin of private pensions and health insurance benefits in the
United States: compensation deferred in exchange for stabilized wages.
Securing workers’ consent did raise tension in Washington. The
United Steelworkers of America forced the abortive socialization of
the steel industry in 1952, when the Truman administration seized the
mills to enforce the orders of the Economic Stabilization Agency to
raise steelworker wages without raising the price of steel. The
Supreme Court ultimately prevented this expansion of the public sector
into a fundamental industry supplying basic materials to the rest of
the industrial economy.

During the Vietnam War, inflation peaked at 6 percent before the late
1974 recession. But whereas Truman waited six months to freeze prices
during Korea, the White House waited six years during Vietnam. The
Democrats lost the 1966 midterms in part because Lyndon Johnson’s
White House refused the recommendations of senior members of the
congressional Joint Economic Committee and the infamous counsel
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the “Wise Men
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impose wartime profit taxes and to freeze prices and wages. The unions
of the AFL-CIO had struck a national wage bargain with the White
House: restraint at the employers’ bargaining table in exchange for
raising the minimum wage and establishing Medicare. Once the massive
mobilization of troops Vietnam began in 1965 and war profits were left
untaxed, this wage bargain came apart and wages nationally began to
leapfrog in the uncoordinated economy. Then Richard Nixon defeated
Hubert Humphrey in 1968 on the promise of law and order: not only in
the cities, but against the unions eager to regain losses to
inflation. 

The Nixon White House eventually administered the Vietnam War controls
program. Simultaneously, Nixon’s reelection campaign implicated the
president in the illegal campaign financing and overt bribery revealed
during the Watergate hearings. This fact has come to shape popular
interpretations of federal price control ever since. Conservatives,
who had always hated federal price freezes or any economic guidance
beyond cutting taxes, felt vindicated by the inflation that
accompanied Watergate and that continued into the Carter era: if
controls brought corruption, then only a recession could bring
stability. Liberals, divided by the Vietnam War, also divided over
price controls to fight inflation. Did stabilizing the war economy
imply supporting the war? After Watergate, Northern and Western
liberals like Massachusetts’s Ted Kennedy and Washington’s Henry
Jackson continued to campaign on stabilizing prices through controls.
Senior Democratic Party advisers such as John Kenneth Galbraith,
Robert Lekachman, and James Tobin advised expanding controls into
broader “incomes policies” including taxes and transfers such as
those practiced by European governments.

Until we stop portraying “inflation” as a monolithic historical
experience, a serious discussion of rising prices will be impossible.

It didn’t matter what they argued: Carter instigated a recession,
and the public elected Ronald Reagan. Unlike Truman in 1948, Carter
broke to the right before his reelection campaign in 1980. Under the
influence
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Wall Street bankers such as David Rockefeller, as well as all those
who favored a strong dollar in the world economy, Carter moved to
reduce the federal budget deficit and pursued
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through austerity and deregulation of trucking, airlines, and banking.
In the summer 1979, he appointed Paul Volcker to head the Federal
Reserve. Thereafter, the central bank—rather than Congress or the
White House—would hold primary responsibility for fighting
inflation.

The last two moments of 4-plus percent inflation during the twentieth
century demonstrate inflation’s political indeterminacy. During both
the George H. W. Bush administration and the last years of the second
George W. Bush administration, relatively high inflation was driven by
rising global oil prices. From 1988 to1991, rising prices were also
driven by wage pressure: union power nationally, though declining,
still remained influential, with around 16.5 percent of the workforce
claiming membership in unions whose contracts set wages for 18.5
percent of the workforce. But both the elections of 1992 and 2008
turned on political issues considerably broader than rising prices.
Would anyone argue that inflation can be singled out for the defeat of
George H. W. Bush or John McCain?

Pundits often argue that a certain rate of inflation dooms incumbent
politicians in electoral campaigns. A journalistic rule of thumb
dating from the 1970s argues that this occurs when the price level
rises at an annual rate above 4 percent. Historians share much of the
blame for this perspective. Princeton Historian Meg Jacobs, for
example, has argued that inflation had always been the “Achilles
heel” of the “redistributive ideology” of the New Deal order,
while older economic historians such as Alan Matusow or Alan Metzler
never seriously considered the reasons for the failure of strategies
for combating inflation beyond having the Federal Reserve deliberately
instigate a depression. These arguments have continued to trickle down
to the present. As Janet Yellen argued in the 1990s and the 2010s, so
Larry Summers argues today
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it is time to raise interest rates, depress spending, and slow down
price increases.

Yet a close look at history belies this contention. The interpretation
of the past that government management of the economy once
“worked” only to be undermined by inflation misdiagnoses the
problem of stabilization policy, which in a democratic economy means
winning the support of the public. It was not tolerance for inflation,
but rather political failure to administer controls, that fueled the
great transformation of U.S. politics in the final third of the
twentieth century.

The true political error has been a bipartisan embrace of fiscal
austerity and monetary contraction as the first weapons in the pursuit
of price stability.

It is to the credit of many a liberal inflation hawk that they do not
explicitly call for a smaller spending package from Congress or
tighter money from the Fed, only going so far as to caution about the
mysterious dark forces thereby unleashed. But arguing that we can
“blame inflation” in the past for plutocratic control of the
economy in the present is not a serious way to discuss what happened
during the 1970s or since. It simply does not follow that, because
contingent political arrangements failed to control inflation for
fifteen years between 1965 and 1980, liberals should curtail their
spending program today after six months of rising prices in a
profoundly dislocated economy. So long as journalists and thinkers
continue to imagine “inflation” as a monolithic historical
experience, such a serious discussion of how to think about inflation
will be impossible.

In fact, it is arguably the prevalence of this interpretation among
liberal elites that better explains the past forty years of Republican
Party power than anything that occurred when inflation was actually
out of control. This attitude has bred a Democratic Party all too
willing to concede to Republican fears and demands. Decades of
high-end tax cuts punctuated by congressional gridlock and a narrowing
legislative program—all this has been a product of
a _bipartisan _insistence on Fed-managed price stability and fiscal
“discipline” above all else.

Confronting a period of instability and rising
aspirations—historically accompanied by rising prices—requires
nothing less than making history. Given the sheer size and influence
of the politically managed public sector of our mixed economy, there
is no way to pursue economic change without risking some degree of
inflation. The true culprit in the winnowing of our political
imaginations over the last forty years has been a bipartisan embrace
of fiscal austerity and monetary contraction as the first weapons in
the pursuit of price stability.

The results are all too familiar: a stubborn increase in unemployment,
a sharp decrease in labor force participation, a stark deterioration
in public services, and spiraling inequality. It is the insistence on
depressing activity to stabilize prices before all else that has
helped to disfigure our society and political life, diminishing our
capacity for shaping and guiding our society’s historical
development. Until we seriously consider the record of methods for
controlling inflation, a future out from under these trends will be
foreclosed.

_ANDREW ELROD recently completed a dissertation on the history of wage
and price controls in the United States between 1945 and 1980. His
writing has also appeared in Phenomenal World, Jacobin, Dissent,
and New Labor Forum._

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