The 1970s Weren’t What You Think

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Yes, fiscal and monetary policy seemed stuck for too long in expansionary mode. But the era also saw the rebalancing of the world economy.

Some historical analogies are playful. Some require elaborate academic justification. Others are native to our world. The lessons learned from them are so ubiquitous as to be part of our intellectual furniture. They are built into our very institutions. The European Union, for instance, repeatedly invokes the need to avoid anything that resembles the violent European politics of the first half of the 20th century. NATO abides as an organization dedicated to, in the words of its first secretary-general, keeping “the Russians out, the Americans in, and the Germans down”—all three imperatives learned from the experience of the early 20th century.

For economic policy, there are two such formative moments. One is the Great Depression of the 1930s, from which we learned the lesson not to allow aggregate demand, the money supply, or global trade to implode. Those lessons informed economic policy in response to the crises of 2008 and 2020.

The other formative moment for economic policy is the 1970s. It is barely an exaggeration to say that today’s repertoire of day-to-day economic policy is a distillation of the traumatic experience of that decade. Between 1971 and the early 1980s, the postwar monetary order anchored on Bretton Woods fell apart, currencies gyrated, inflation surged, and so too did unemployment. The disorder was brought to an end after 1979 by the application of an unprecedentedly severe dose of high interest rates, which precipitated a major recession both in the United States and much of Europe.

In the subsequent decades, avoiding a return to the 1970s was the idée fixe of economic policy. And it seemed to have succeeded, so much so that in the aftermath of the unprecedented economic shock of the COVID-19 pandemic in early 2021 we seemed finally to be escaping the grip of this historical analogy. But history is moving fast. Since last summer, inflation has been back with a vengeance. And once again references to the 1970s are everywhere. Policymakers and pundits fret that having left it too late central banks may now have to hike interest rates so high that we will tumble into a recession.

At a superficial level, the analogy is striking. As in the 1970s, commodity markets are disrupted by a war. In early 2022, prices in the United States were rising by more than 8 percent per year. As in the 1970s, fiscal policy and monetary policy seemed stuck for too long in expansionary mode. But these similarities hide huge differences below the surface. To view the 1970s as a data set from which to draw technical lessons is to mistake for a laboratory experiment what was, in fact, a historic power struggle. That power struggle ended with the conclusive victory of the forces of disinflation. It could perhaps have gone another way. But, for better and for worse, there is no way back.

Read the full article at Foreign Policy

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