Inflation—which is defined as rising costs for the items consumers purchase—is a scary phenomenon both because of what consumers see now as well as the uncertainty it symbolized in the past. High levels of inflation persisting over a long period of time can cause real damage to people’s lives, in particular the lower-income elderly and those living on a fixed income.
For a horrific example, in the early 1920s, hyperinflation in Germany led to widespread panic. After getting paid, people ran to the grocery store to buy whatever they could because they knew food would undoubtedly cost more tomorrow. The chaos led Adolf Hitler to think he could seize control of the government by force, which he attempted to do in November 1923. In the U.S., inflation has never reached anywhere near those levels, but we did see prices increase by 11% in 1974 and 9% in 1975, then jump again by 11% in 1979 followed by a whopping 13.5% climb in 1980.
Inflation has long been a politically potent issue. Right now, that’s more true due to media coverage—from traditional and especially right-wing media—that has been hyping the increase in prices while downplaying the positives of what can rightfully be called the Biden Jobs Boom. As Paul Krugman noted, “right-wing negativity right now is absurd, with Republicans assessing the current economy as worse than the economy in June 1980, when unemployment was almost twice as high and the inflation rate was 14 percent.” Thankfully, there are significant differences between the economic circumstances that led to inflation during the presidencies of Gerald Ford and Jimmy Carter, and those we face today.
Right now, inflation is higher than it’s been for a while, although at 7.5% over the most recent 12 months—with core inflation, which strips out the more volatile food and energy costs, a bit lower at 6.0%—it’s well below the worst levels of decades past.
Plus, although inflation is high, the rate of growth has begun to shrink, which lead Mark Zandi, the lead economist at the financial research firm Moody’s, to tell Jeff Sommer of The New York Times that “inflation has already peaked. It peaked in October.” Look at the monthly rate of increase from the Bureau of Labor Statistics:
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0.9 percent in October.
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0.7 percent in November.
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0.6 percent in December.
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0.6 percent in January.
The fact is, inflation is elevated right now just about everywhere, not just in the U.S. It’s also important to note that what’s happening here is not at all like some of the other relatively recent examples of hyperinflation you might have heard of, such as Argentina or Venezuela, which occurred in countries that faced, as Vox explained, “unique economic and political challenges that aren’t really analogous to the U.S.”
As The New York Times pointed out, “Hardly any economists or policymakers expect today’s inflation to last.” Bond markets—in other words, people who are putting their money where their mouths are—agree. Additionally, consumers' expectations on both short- and medium-term inflation have been coming down as well. That matters because fears of prices rising uncontrollably can fuel panic buying, thus increasing prices further in a vicious cycle as supplies dwindle. Nothing remotely resembling that is happening in the U.S. Nevertheless, Republican critics of the Biden-Harris administration like Rep. Kevin McCarthy are sounding the alarm that inflation is going to be just like it was under Carter all over again.
Never mind that inflation started getting out of control in the early 1970s, long before Carter took office. Furthermore, his appointee to the Federal Reserve chair position, Paul Volcker, helped bring inflation under control by raising interest rates. Unfortunately, that pushed the country into a severe recession that did as much as anything else to elect Ronald Reagan president in 1980. In other words, Carter put the country’s long-term economic health above his electoral prospects. I’m sure McCarthy and the rest of the Trumpist party would be happy if Biden’s presidency resembled Carter’s—one whose sacrifices ultimately rebounded to the benefit of the person who ran against him.
Below is a graph showing inflation in the U.S. over time. Note the two relatively recent spikes above 10%, one in the mid-1970s and the other peaking in 1980 (there were also earlier periods of high inflation that were related to World War II and the Korean War).
The overall rate of inflation in the U.S. by year, going back to the early 1920s.
One of the most important differences between those times and now is that economic growth was much stronger in 2021 than during the 1970s. Gross Domestic Product (it’s a far from perfect measure, but works well enough to give us an apples-to-apples comparison) in 1974 and 1975 actually shrank both years after accounting for inflation, and also dropped in 1980 after growing 3.2% the previous year.
During those years the American economy experienced a crisis of “stagflation”—in other words, stagnant or nonexistent growth as well as relatively high unemployment, combined with high inflation. If high inflation occurs, it’s much better if it does so as a result of overheated growth that can potentially be cooled without causing a deep recession—what economists refer to as a “soft landing.” But during the stagflation of the 1970s, growth was already relatively weak, and the unemployment rate, hovering around 6% when Volcker started hiking rates, stood at a level that meant many people who wanted a job couldn’t find one. That’s why the economy fell into a double-dip recession, one with the highest unemployment rate—at 10.8% in late 1983—at any point since the 1930s. Until the pandemic, that is.
This past year, the equivalent figure of real, or inflation-adjusted, GDP is 5.7% growth—and the pace of growth in the fourth quarter of 2021 was stronger than that at 6.9% if the quarter were a whole year. This is not a repeat of the stagflation of the Ford-Carter era. If economic growth has to slow in order for inflation to be tamed, there is room to make it happen without pushing us into recession or “threatening the labor market,” as Federal Reserve Chair Jerome Powell stated on Jan. 26. Powell believes that we can achieve the aforementioned soft landing.
Also, the reasons why we have elevated inflation right now differ sharply from the reasons we had inflation in the 1970s. The primary difference is a not-so-little thing known as COVID-19. In the spring of 2020, the pandemic struck. I want to use precise, academic language from the field of economics here—the economy “went into the crapper.” (It’s either laugh or cry, right?)
In all seriousness, in addition to killing hundreds of thousands of people and causing widespread suffering in myriad ways in 2020 alone, COVID-19 took a wrecking ball to our economy. Sticking to the statistics we’ve been using thus far, real GDP in the U.S. fell by an annualized rate of over 5% in the first quarter of 2020, and another 31% in the second. There had never been a drop of that magnitude in such a short period of time before in our history.
The unemployment rate had been 3.5% in February 2020—having dropped slowly but steadily from its peak in the first year of Barack Obama’s presidency, thanks in large part to policies he implemented. (We’ll come back to this period.) By April 2020, it had skyrocketed to 14.7%. More than 22 million people lost their jobs as the economy largely shut down, and a good chunk of them needed cash to pay their bills and buy food. Countless lives were at stake.
That shutdown also wreaked havoc with the supply chain here and around the world, leading to bottlenecks in manufacturing and distribution that eventually fueled inflation. As this report from the St. Louis Fed explained, lockdowns led to an “overall shift away from consumption of services and toward consumption of durable goods.” As people bought more of these large products—ones with lots of complex machinery and parts like semiconductors—at the same time worker shortages and closures meant fewer of those parts could be produced, supplies couldn’t keep up with demand. When that happens, Economics 101 tells us that prices rise.
The St. Louis Fed report found “global supply chain disruptions played a significant role” in sparking inflation throughout 2021. A bill to address supply chain issues going forward has already passed the Senate and the House, and once the differences are reconciled it will hopefully be heading to Biden’s desk soon.
It also did appear possible in spring 2020 that the entire financial system was going to collapse. Shockingly, the market for U.S. Treasury bonds, one of the safest investments in the world, saw panicked selling. The proverbial shit was hitting the fan.
In response, the U.S. government—under both President Biden and the former guy—pumped around $5 trillion’s worth of relief into the economy. The Federal Reserve also reduced interest rates to essentially zero and began a massive program of buying bonds to stimulate growth. It worked. I won’t even say it worked too well in light of the inflation we have now, because hindsight is 20/20. Those measures were absolutely necessary—all of them—to prevent the kind of long-lasting economic collapse that would have caused far greater human suffering across this country.
After bottoming out in the second quarter of 2020, the economy began to recover, growing sharply in the second half of the year. However, the overall growth number for 2020—minus 3.4%—was the single worst since 1946. At the end of 2020, the unemployment rate was still 6.7%, with a large proportion of the 22 million jobs lost during the shutdown still not recovered. At that time, Moody’s was predicting we wouldn’t get all those jobs back until 2024.
When President Biden took office, the shape of our economy’s future was far from certain given the continued impact of COVID-19 and questions about how quickly we could ramp up production of the vaccines—not to mention right-wingers doing their damnedest to sow doubts about their effectiveness.
Democrats pushed through the American Rescue Plan in early 2021, and look what happened. Not only did we see the aforementioned historic growth in the overall economy, but we also saw people in the middle and below make it through the pandemic in much better shape than just about anyone expected. Biden pointed out that “even after accounting for rising prices, the typical American family has more money in their pockets than they did last year.” Politifact said Joe was right:
“It's honestly quite surprising to look at the personal income data and not see a deep gash in income," said George Washington University economist Tara Sinclair. "To continue a long-term trend of growing personal income when the economy was getting hammered is a pretty impressive feat of policy."
To see a decline in gross domestic product of more than 30% between the first and second quarters of 2020 is akin to "a Great Depression in one quarter," said Douglas Holtz-Eakin, president of the American Action Forum, a center-right think tank. "But there was enough cash coming out of the government that you don’t see it in the personal disposable income data. It’s stunning."
The economy has not only rebounded, it has exceeded expectations. A survey of economists conducted during the worst of the pandemic found them predicting that the unemployment rate would remain stubbornly elevated throughout 2022—above 6%. As late as fall 2020, when the recovery was underway, economists were still predicting unemployment would be as high as 5.8% at the start of 2022. Where did it end up on New Year’s Day? At 3.9%—almost back down to the pre-pandemic low point. By the end of January 2022, the economy had recovered about 90% of the jobs lost since February 2020. (Fox News hosts were excitedly hyping what they clearly expected to be a disappointing jobs report on the morning of Feb. 4, just before it came out.)
Plus, the labor force participation rate—defined as the percentage of those over the age of 16 either working or actively looking for work—rose to a level not seen since March 2020. This means more people are coming back into the job market. Not a lot to criticize there—for anyone looking at the situation honestly, that is.
As for wages, they have risen a great deal, but by the usual metrics didn’t quite keep up with inflation overall in 2021—although in December wages did go up by 0.6%, just ahead of the inflation rate for the month. Plus a study by the Dallas Federal Reserve Bank that dug deeper and accounted for changes in the composition of the workforce found that wages did in fact grow in 2021 faster than inflation.
Furthermore, the picture is brighter still for workers in the bottom half and especially the bottom quarter in terms of income. Based on the most recent available data, wages for those in the bottom 25% have not only increased significantly, they have outpaced inflation—which means those folks’ purchasing power got stronger during the pandemic. Essential workers had enough of being put in constant danger for subpar wages, so they organized. Some went as far as to quit when they had to in order to win those raises. Businesses had no choice but to raise wages, offer signing bonuses, and increase benefits to recruit for positions that remained unfilled.
Additionally, something happened in 2021 that hasn’t happened for decades: Hourly pay and overall wages went up more for American workers without a college degree than for those with a degree. As President Biden noted in early January, we’ve seen “record wage gains, especially for workers in some of America’s toughest jobs, women and men who work in the frontline jobs in restaurants, hotels, travel, tourism, desk clerks, line cooks, waitstaff, bellmen. They all saw their wages at a historic high, the highest in history.” John Nichols, writing at The New Yorker (behind paywall), stated that “the facts … back up Biden.” The economy under Joe Biden and Kamala Harris really is working for everyone, not just those at the top.
For more on just how successful our economic recovery from COVID-19 has been, Krugman shouted from the rooftops about “America’s extraordinary success in limiting the damage from a horrifying pandemic.” He added: “In fact, there’s a good chance that in retrospect we’ll view economic management over the past two years as a policy triumph, despite the inflation spike.” The tremendous good more than outweighed the bad. Democrats have a good story to tell, they just need to get out there and tell it.
Krugman also compared the swiftness of the post-COVID recovery to the comparably sluggish recoveries that followed economic slowdowns in the relatively recent past: 1990-91, 2001, and 2008. In each of those cases, job growth took much longer to return to their pre-slowdown levels—years longer, in fact. In 2009 in particular, overwrought conservative pundits issued stern warnings that the Obama stimulus package—passed in response to the worst economic crash since the Great Depression, mind you—would lead to runaway inflation. Progressives on the other hand worried that the package wasn’t large enough to deal with the problem, and harshly criticized the austerity measures Republicans imposed in 2011. Who was right? The progressives. Inflation never rose to dangerous levels after the stimulus passed, and the nascent recovery was stalled by austerity, which caused serious harm to working people.
Statues of unemployed men standing in an unemployment line during the Great Depression at the Franklin Delano Roosevelt memorial in Washington, D.C.
Speaking of the Great Depression, even during Franklin Delano Roosevelt’s presidency—the time we associate with the New Deal—the fear of inflation led Democrats to overreact in a conservative direction. This brought about a severe recession in 1937-38 that saw a 18.2% contraction in real GDP and a jump in unemployment back up to 20%. Incredibly, industrial production dropped by one-third in just 12 months.
What happened? Well, after four years of economic recovery that had finally started to undo the worst of the Depression’s effects, Federal Reserve Chairman Marriner Eccles (don’t you dare make fun of his name) started warning about a "dangerous inflation" on the horizon. Unfortunately, Roosevelt and his advisers listened, and incorrectly thought that the recovery was so solid that inflation had become the greater concern. Long story short, they moved away from the stimulative policies of the New Deal, took steps to fight inflation, and caused a downturn almost as bad as the one that started in 1929—arguably it was worse in some ways, because the aforementioned contraction in GDP happened much more quickly. Thankfully they corrected course in 1938, enacting spending increases to stimulate growth—as well as help people in need—which put the recovery back on track. In 2021, Democrats avoided making that same mistake.
When critics attack Biden on inflation today, remember that history shows us what can happen when leaders worry too much about inflation and not enough about ensuring a strong, broadly based recovery after a crisis. Yes, we have to get inflation under control now, although please keep in mind that much of the inflation resulted from factors beyond the power of any president—not just the pandemic, but also rising oil prices (oh, and thanks Vladimir Putin for invading Ukraine and driving them up that much more). Furthermore, as Daily Kos’ Kerry Eleveld has rightly argued, Democrats should be hammering the point that corporate greed has made inflation worse than it otherwise would be. It’s both true and resonates powerfully with voters.
But if the question is whether some inflation over the past year was worth making sure that millions of people could get jobs and not starve during the worst public health disaster of our lifetimes, the answer is undoubtedly yes. Anyone who says different is just talking malarkey.
Ian Reifowitz is the author of The Tribalization of Politics: How Rush Limbaugh's Race-Baiting Rhetoric on the Obama Presidency Paved the Way for Trump (Foreword by Markos Moulitsas)
