Today\'s crunch feels like \'70s

Today's crunch feels like '70s

By Michael E. Kanell
The Atlanta Journal-Constitution
Published on: 07/13/08

High oil prices, a sluggish economy, persistent inflation, an unpopular president and the Eagles are out on tour.

Sounds like a rerun of the 1970s.

But it is also a snapshot from the summer of 2008 —- even if it does conjure images from the past.

"The similarities are there," said economist Gerald Lynch of Purdue University. "That was a miserable time for the economy. And the clothes were ugly, too."

Wide ties may not be making a comeback, but hints of the era's economics are in the air.

One of the stars of that original '70s show was stagflation, a term invented to describe a mix of rapid inflation and near-stagnant growth. The word has re-entered the economic vocabulary of late.

"As far as I can see, the wheels have fallen off the wagon," said Peter Miralles, president of Atlanta Wealth Consultants. "This is as close to the '70s as we have seen in the past couple of decades."

First, the sluggishness: Gross domestic product the past two quarters has expanded by less than 1 percent. The economy shed 438,000 jobs in the first six months of the year, while the official unemployment rate has climbed to 5.5 percent.

Meanwhile, the official measure of inflation has been running slightly higher than 4 percent per year —- while energy prices have more than doubled.

Yet comparing the current moment to the 1970s can offer some reassurance: Today's numbers pale beside the Hotel California Era.

In 1975, unemployment peaked at 9 percent, fell for a while and then climbed to 7.8 percent in 1980. Inflation hit double digits in 1974 and 1975, slipped back and then roared up, cresting at more than 13 percent in 1979 and 14 percent in 1980. It was a time, too, when the nightly news rattled the American psyche.

The first half of the decade saw the revolution-promoting Weathermen, Watergate, the bitter, bloody end to the Vietnam War and the Arab oil embargo. The second half of the '70s brought the Soviet invasion of Afghanistan and the Iranian Revolution.

"There was a kind of extremism in the air," said Herb London, president of the Hudson Institute, a conservative, Washington-based think tank. "Conditions now are also kind of frightening. But the situation is not as extreme."

Still, today's list of potential villains sounds like a cast from the past.

The most obvious repeat offender is oil. Oil prices quadrupled in the mid-1970s, then soared again after the Iranian Revolution in 1979.

Now, U.S. troops are fighting in Iraq and Afghanistan, there is renewed talk about a U.S. conflict with Iran, and oil prices are at it again. Crude has doubled in the past year, and the economy again is struggling.

"Oil was at the scene of the crime in both cases," said Jared Bernstein, senior economist at the liberal Economics Policy Institute in Washington. "If you have a police lineup, you really want to have oil in it."

And it's not just oil —- global demand has shoved prices higher on a range of commodities from rice to steel.

But inflation this time has some brand-new accomplices: the housing crash; the subprime meltdown that followed; and the crunch in credit that the meltdown triggered.

"This is a very different world," Bernstein said.

For starters, the sources of inflation are different. During the 1970s, workers —- often through powerful unions —- insisted on raises that matched higher consumer prices.

Those higher payroll costs were then added to the prices businesses charged, which were then used by workers to demand higher pay.

"You can't have a wage-price spiral without wage pressures, and we ain't got wage pressures," Bernstein said. "That is a huge difference."

It's not just that business costs don't rise as much. Companies are also less likely to pass them along.

Many are so afraid of losing customers, they don't dare raise prices as much as their costs. Instead, they slash their own costs or accept a smaller profit margin —- and potential inflation never gets to consumers.

What worries some economists is that, eventually, companies must pass along costs. Other economists argue that the official inflation numbers are wildly understating the pain consumers already feel.

"The part that concerns me the most is that the government numbers do not actually represent what's going on," said Miralles of Atlanta Wealth Consultants. "I just don't buy it."

If the plot of the rerun does mimic the original, then the pain is only getting started.

Led by then-Chairman Paul Volcker, the Federal Reserve decided that inflation was so dangerous it had to be stopped —- even if that meant choking off growth. So in 1979, interest rates were raised dramatically.

The economy spun into back-to-back recessions starting in January 1980.

As the economy stalled, the inflation rate leapt to a high of 14.6 percent. After the second recession, unemployment climbed to a peak of 10.8 percent.

But the Fed won its war: Inflation was dormant for the next two decades.

Even now, inflation —- at least the official measure of 4 percent —- seems modest enough to let the Fed keep rates low.

In the past two years, the Fed has cut the benchmark rate from 5.25 percent to 2 percent.

Any inflation-fighting would mean moving them upward again, which would likely slow the economy more.

At least some inflation may be coming from a "bubble" —- speculation that could pop if demand slackens.

"If oil is a bubble, and there's a good chance it is, then its bursting would lessen the inflationary threat a lot," said Doug Henwood, author of the book "Wall Street: How It Works and for Whom" and editor of the economics newsletter Left Business Observer.

Waiting for the scenario to play out, consumers and companies alike must do their best to plan, hoping to protect and nurture their assets.

"There are quite a few parallels to the '70s, and that is a concern," said Frank Butterfield, principal with Atlanta-based wealth managers Homrich & Berg. "The '70s were a bad time for financial assets. Stocks did poorly, bonds did poorly. That could happen again."

To navigate long term, Butterfield suggests diversifying portfolios, buying inflation-protected securities, using hedge funds and "rebalancing" investments as you go.

The economic trouble so far has been manageable, he said. "Things were worse in the '70s than they are now."

Most experts say the U.S. economy seems stronger than it was in the shaky '70s, more flexible and —- most important during an energy crisis —- more efficient.

The economy is about half as dependent on oil as it was at the time of the first oil shock in 1973, said Robert Whaples, chairman of the economics department at Wake Forest University.

"The '70s were a period of pretty slow productivity growth," he said. "There are important parallels between the two periods, but I don't think we will get double-digit unemployment or double-digit inflation rate."

Some things do return. The Eagles, after all, are playing summer concerts and promoting their latest album. But no amount of hindsight can truly tell the future.

As the Eagles themselves put it: "Who is gonna make it? We'll find out —- in the long run."

That was 1979.

GASOLINE

Now: Gas prices have doubled in a little more than three years. They are up a little more than one-third in the past year. Gas is costly but plentiful.

Then: Gas prices tripled during the decade, rising almost 50 percent from 1973 to 1975, and by 80 percent in 1979 and 1980. Shortages forced restrictions on sales.

PRESIDENTIAL APPROVAL

Now: 28 percent

Then: 29 percent

IRAN

Now: Tension between the United States and Iran over nuclear programs and U.S. involvement in Iraq has led to higher oil prices.

Then: Iranian Revolution in 1979 overthrew a U.S. ally, led to a long hostage crisis and sent oil prices skyrocketing.

UNEMPLOYMENT

Now: In the past year and a half, official unemployment has increased 25 percent. It remains historically modest: 5.5 percent.

Then: After the Arab oil embargo, unemployment rose by more than 80 percent.

INFLATION

Now: Consumer prices are up 4.1 percent in the past year, the government says, but critics say the data understates reality.

Then: Consumer costs were up an average of 8.12 percent a year through the decade, peaking at 13.3 percent in 1979.

PRODUCTIVITY GROWTH

Now: 2.58, average, 2000-07

Then: 1.73 percent, average 1971-80

Sources: Bureau of Labor Statistics, Energy Information Administration, Gallup Poll, PollingReport.com.