Stagflation: What Really Happened in the 70’s
by Benjamin Studebaker
If you argue long enough about economics, you are bound to run into the stagflation argument. The stagflation argument claims that the big state and stimulus caused high inflation, high unemployment, and poor growth during the seventies. Usually this argument is not fully argued by those who believe in it–it is merely asserted, and the rest of us are expected to accept that it is simply the case that the seventies happened that way. Today I’d like to endeavour to illustrate what actually happened in the seventies, what the real causes of stagflation were, and what sort of lessons might be pulled from it.
The stagflation problem is a complex one, and we will need to refer to several Trading Economics graphs:
Inflation:
Unemployment:
Oil Prices, adjusted for inflation:
The Interest Rate:
The US Growth Rate:
By taking these four elements together, we can explain the stagflation phenomenon. As I describe what happens, follow my reasoning in the charts to confirm the validity of my analysis:
We see that the problem begins in 1973 with the 73-75 recession–that’s when growth first dives. In October of 1973, the Organisation of Petroleum Exporting Countries declared an oil embargo upon the supporters of Israel–western nations. The 73-75 recession begins in November of 1973, immediately after. During normal recessions, inflation does not rise–it shrinks, as people spend less and prices fall. So why does inflation rise from 73-75? Because this recession is not a normal recession–it is sparked by an oil shortage. The price of oil more than doubles in the space of a mere few months from 73-74. Oil is involved in the manufacturing of plastics, in gasoline, in sneakers, it’s everywhere. When the price of oil goes up, the price of most things go up. The spike in the oil price is so large that drives up the costs of consumer goods throughout the rest of the economy so fast that wages fail to keep up with it. As a result, you get both inflation and a recession at once.
So how does the government react? Upon seeing the poor growth figures, the Federal Reserve drops the interest rate in 1973 from around 11% to around 9%–a full 2% drop. Rather than buoying growth, however, this sends the inflation into overdrive. Wages cannot keep up with the subsequent spike, so purchasing power falls and growth does not return. Terrified by the double-digit inflation rate in 1974, the Federal Reserve switches gears and jacks the interest rate up to near 14%. This snuffs out a nascent economic recovery in 1974–the high rate of inflation was being factored into salaries, and consumers were regaining their spending footing. By raising rates again, the Federal Reserve begins to starve inflation back down, but does so at a cost of a very contractionary, very high interest rate. The economy slips back into the throws of the recession for another year or so, and the unemployment rate takes off, rising to around 9% by 1975.
While the economy gets out of the recession in 75′, the high unemployment hangs around. Seeking to fend off the high unemployment, the Federal Reserve drops the interest rate from 75-76, bottoming out at 5% from its double digit peak and remaining quite low through 78′. This succeeds in pulling unemployment back down to 6%, but inflation starts to trend back upwards.
Then, in 1979, the economy gets another oil price shock (this time caused by the Revolution in Iran in January of that year) in which the price of oil again more than doubles. The result is a fall in growth and inflation knocked all the way up into the teens. The Federal Reserve tries to fight the oil-driven inflation by raising interest rates high into the teens, peaking out at 20% in 1980. Inflation responds, sagging back to around 10%. But these high interest rates again drive the economy back into recession through the first half of that year and meanwhile, unemployment jumps up to just under 8%. The Federal Reserve responds by backing off substantially on rates in mid to late 1980, and the result is a brief return to growth in 1981. But when inflation again begins rising from 10%, the Federal Reserve returns to high rates in 1981, keeping rates above 15% into 1982.
This, combined with oil prices sagging back down from their peak, breaks the back of inflation, which, by 1982, has slid down to acceptable levels. Meanwhile, however, the economy is back in recession and, by 1983, the unemployment rate has peaked at nearly 11%. To fight this, the Federal Reserve knocks the interest rate back below 10%, and meanwhile, alongside all of this, Ronald Reagan spends lots of money and expands the state in 82/83 (a nice graph of this data conveniently puts Obama’s spending numbers alongside Reagan’s–this is extraneous to our point, but the reader may nonetheless find it interesting):
Why does inflation not respond by returning? Because oil prices are falling throughout this period, and, by the end of most of our graphs (1985), it has collapsed utterly.
So what we see here really is not any kind of complicated challenge to the notion that expansionary Keynesian policy is expansionary and contractionary Keynesian policy is contractionary. What we instead see is a crisis in the price of a very necessary good, namely oil, which creates an unacceptably high basic inflation rate and makes doing all kinds of business prohibitively more expensive.
All the normal Keynesian rules applied during the seventies–higher interest rates meant less inflation and more unemployment, lower rates meant less unemployment and more inflation. The only difference was that the baseline for inflation was much higher–the choice was between insane inflation and high inflation, not between high inflation and some kind of normal or acceptable level. Ultimately in both the mid-seventies case and the early eighties case, inflation only comes down permanently from its high baseline when the economy has adjusted to the higher oil price as a new normal and/or when the oil price itself comes down.
What would have prevented us from enduring the misery of the seventies? Less economic dependence on oil, both in terms of energy and throughout the wider economy. Jimmy Carter made a pitch for it, though the country declined to take him up on it at the time.
The issue was never one of needing to switch from stimulus spending to tax cuts for the rich, or of needing to care exclusively about inflation and ignore unemployment. People who interpreted the seventies in that fashion misunderstood fatally what was going on. That misunderstanding fuels and feeds their misunderstanding of the present problems.
There is not going to be hyperinflation or stagflation or any of the various seventies style horrors the economic right likes to conjure in its criticisms of stimulus and Keynesianism, because there is no giant spike in any ubiquitous, necessary thing like oil. Ronald Reagan dropped the interest rate and increased state spending in 82/83, and that, in tandem with falling oil prices, is what brought about “morning in America”. Those are Keynesian tactics; there’s no paradigm shift here. The conventional wisdom about this period in our history is just wrong–to the extent that Reagan did good economically, he did good not because of some new conservative economic agenda, but because he followed Keynesian orthodoxy and had the good fortune to see oil prices fall during his presidency.
The only lesson that can be taken from the seventies is that it is a very foolish thing for a state to become dependent on a particular resource or product that it cannot make for itself and must import, because that puts the economic welfare of that state at the mercy of the exporting nations. No matter how powerful a country is, if it is dependent in this way, otherwise small, powerless nations can bring it to its knees.
This analysis misses the point. Yes, the world economy suffered supply-side inflation shocks. But the point is that – under Keynesian regimes – these shocks triggered persistent inflation due to inflationary expectations incorporating policy accommodation. This led to a bad equilibrium of high unemployment/high inflation – i.e. stagflation.
It was only when Volcker committed the Federal Reserve to a hawkish stance that inflation came under control as markets reduced their inflation expectations to incorporate the expectation of future policy. In contrast, Keynesian policy neglected the supply side in favour of the demand side, so it was more vulnerable to inflation shocks and weak with dealing with them.
The Federal Reserve was active in its efforts to reduce inflation long before Volcker, as we can see in the 73-75 period. It only moved from those high rates because the rate of inflation was on its way down (to under 6% in 77′) and because in the meantime, the unemployment rate was climbing and growth was poor. It was the Iranian Revolution’s second shock to oil prices, not a Keynesian indifference to inflation, that sent inflation back up so very high again in 79′.
Again, missing the point: the point is that inflation became persistent as markets believed the oil shocks would become accommodated. This accommodation can be seen in the 1970s through the extent to which interest rates were reduced after reaching their early peak. Given that this accommodation was expected (and realised) workers bargained for higher wage increases and firms increased prices – turning a temporary shock into persistent inflation. Contrast this the Fed policy in the early 80s where interest rates were kept high for a prolonged period. As workers believed this hawkishness was credible, they bargained for lower wage increases accordingly.
If your argument were correct, we would see a spike in the labour share of GDP during the seventies over and above that of the fifties and sixties. No such spike exists in the BLS data:

You’d see a spike in the labor share of income, which can be seen here:
Whose data is this? I used the impartial Bureau of Labour Statistics; this provides no source.
National Income and Product Accounts (NIPA). Labour share obtained by dividing total compensation in the nonfinancial corporate sector by nominal nonfinancial corporate output.
Do we have a reason to take NIPA’s word over that of the BLS? Is their methodology demonstrably better?
If NIPA and the BLS are equally credible, then we average their data sets and come up with a negligible small rise in labour share during the seventies, with periods of the seventies still resembling the fifties and sixties.
Most importantly, even if NIPA is more credible, it is just as reasonable, if not moreso, to argue that changes in the labour share reflect the other changes I discuss as it is to say that they caused them. The NIPA figure for labour share rises with high inflation and low unemployment and falls with low inflation and high unemployment during the seventies. That is intuitively sensible–when oil prices deliver a shock to supply, driving up inflation and cutting into the profits derived from capital, labour is left to gain. When the Federal Reserve reacts to reduce inflation, unemployment is generated, and the labour share falls back off, even under the NIPA data. The two huge hikes in labour share under the NIPA data match the two oil price spikes (and subsequent inflation spikes) in 73 and 79 and the two huge plunges in labour share under the NIPA data match the two periods of high unemployment, in the mid to late seventies and early eighties. It is perfectly possible–indeed I would argue, even probable–that the labour share was responding to the macroeconomic forces of the period, not the reverse.
Interesting post! What was happening with wages growth and the labour/capital share of the pie over this period? From what I’ve gathered from my limited understanding of the period its not just Keynesian statism that was blamed by Conservatives but also the intransigence of organized labor.
A fantastic question! I found some Federal Reserve statistics that include the period:

We see the labour share declining during the 73-75 recession, recovering in the late seventies, and then diving back down during the early eighties recession, never again to achieve as high a percentage as that posted during the turn of the decade. The labour share is much lower now than during the seventies, but it should be noted that the share in the seventies was no greater than it was during 40’s and 50’s, the apex of the post-war boom, if you trust the BLS over the NIPA, as I am inclined to do.
Thanks! Looks as though the “wage inflation” angle can only be defended in the leadup to the 69/70 recession, and even then only on the basis of the NIPA data. The only significant pattern is that labor’s share of income stagnated after the 70s and then precipitously dropped during the 00’s.
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[…] cut passed by Johnson appears not to have boosted long-term growth. Of course, this period contains the infamous 70′s, in which global oil prices knocked the US economy about. We need more data. In 1982, Ronald Reagan […]
[…] Stagflation: What Really Happened in the 70′s (Dec 30, 2012, 855 hits) […]
great post !
I’m curious to know whether stagflation only happened in the 1970s alone? or whether there are recent trends of this phenomenon especially in the USA/UK?
Thank you! In answer to your question:
In terms of what’s happening right now, US inflation is currently at 1.2%, which is below target. UK inflation is a bit higher, at 2.7%. Both figures are well below the levels we would see with stagflation, and these low inflation figures accompany weak growth rates in both. Looking back at the historical record, I don’t see any significant mismatch in inflation’s relationship with growth beyond the early 80’s.
Inflation figures for the US:
http://www.tradingeconomics.com/charts/united-states-inflation-cpi.png?s=cpi+yoy&d1=19800101&d2=20131231
Inflation figures for the UK:
http://www.tradingeconomics.com/charts/united-kingdom-inflation-cpi.png?s=ukrpcjyr&d1=19890101&d2=20131231
Interesting analysis. One problem, though, is your characterization of the tax cuts as “tax cuts for the rich”. The tax cuts in the early 2000’s were tax cuts for EVERYONE, a vast majority of them (85% ?) going to those who were not high-income earners. Had you said “The issue was never one of needing to switch from stimulus spending to tax cuts, or of needing to care exclusively about inflation and ignore unemployment.”, a little less bias might have shone through in your analysis.
I am correct in saying that the Bush tax cuts benefited higher-income Americans vastly more than they benefited middle or low-income Americans. No bias:
PS- That can be said of the Tax Cuts in the 80s as well, as Everyone had their taxes cut.
ahh, not really. I was lower income back then. My wage taxes increased significantly. Also, the top Income tax rate went from 50% to 28% and the bottom rate went UP from 11% to 15%. Home mortgage Interest deduction favoring wealthier individuals went up, but deductions on auto loans lower income people needed were cut.
[…] Stagflation: What Really Happened in the 70’s (Dec 30, 2012, 2,600 hits) […]
You stated that “All the normal Keynesian rules applied during the seventies–higher interest rates meant less inflation and more unemployment, lower rates meant less unemployment and more inflation.”
I thought Keynesian at that time (contrary to revised neo Keynesian) did not regard monetary policy, external supply shock, or behavioral science as anticipating inflation as important factors so it had to change its position??
Keynesian theory back then insisted that more employment lead to inflation and vice versa. I could be wrong but that’s what I thought at least.
You’re correct that the Keynesians did adjust their models, replacing the traditional Phillips Curve with an accelerated one that accounted for the role the extant rate of change in the inflation rate plays in creating inflation expectations that become inflation reality. I should have been clearer–by “all the normal Keynesian rules”, I really meant just the rules regarding expansionary and contractionary monetary & fiscal policy. Among laypeople, the 70’s are often thought to have refuted Keynes or made Keynes irrelevant, when all the 70’s really showed was that inflation inertia could be generated by supply shocks (e.g. an oil price spike). The decade’s history cannot be used the way it often is by inflation & austerity hawks–to dismiss Keynesian business cycle theory in its entirety.
[…] have to. In some cases, it can be hard to tell which one of these things is going on. During the 1970’s in the United States, there was much debate over whether rising inflation was being driven […]
[…] to a couple of oil shocks, growth was more anemic, struggling to stay above 4% […]
A thought-provoking analysis and a fresh look at history, not just conventional wisdom with inconvenient truths omitted.
I’ve been searching for an economic theory that recognises the inflationary impact of raising interest rates and a theory that places interest rates at the fountainhead, not inflation.
High interest rates in the 70’s played a significant part in driving up prices. This is generally ignored in economic debate. When Greenspan cut rates, it greased the wheels and everything changed. Inflation targeting seems to be a blunt instrument with an inordinate time lag that, itself, adversely impacts stability. By contrast, interest rates are a powerful tool with an immediate impact.
The game between the Fed and interest rates set by secondary bond markets that are driven by all sorts of forces also seems spurious and as having the potential to distort monetary policy. With so much ‘not working as it should’ both in the 70’s and now, it seems that we should radically review the model right down to the weighting and prioritising of all input elements.
It appears that, historically, economies work best when interest rates are around 5%. Spenders, savers and investors all get a reasonably fair go. Would this simple and clear goal not be more direct and more sound as a target than Bernanke’s indirect target of2 % inflation (especially as inclusions in measures of inflation must frequently be changed to make the model work)?
The ideal interest rate is going to vary depending on the way the economy is performing. In a weak economy, a lower rate might be necessary to stabilize growth, and in an economy with excess debt and borrowing, higher rates may be necessary to head off bubbles.
Yes, 5% would only be a target. The range could easily be 3-7%.
By targeting inflation, the range it has given us of 0-20% has taken us into unchartered extremes in the last 40 years and leaves us now with the problem that ‘normalising’ interest rates (whatever that really means under inflation targeting) could cause a 1929 re-run.
There are times when the rate needs to be lower than 3% and times when it needs to be higher than 7%. A 7% rate would not have been sufficient to curb inflation in the 70’s and 80’s and a 3% rate would be much too high today. Our economic problems have much deeper causes than the interest rate–oil shocks, wage stagnation, excess leveraging, etc. The rate is primarily a means of responding to these problems.
My question, essentially, is: if we are seeking to ‘normalise’ rates why not do this directly rather than indirectly?
Inflation is a grey area that is difficult to measure and has a long lag time. It seems to be unsuitable as a focus for monetary policy.
‘A 7% rate would not have been sufficient to curb inflation in the 70’s and 80’s.’
‘Ronald Reagan dropped the interest rate and increased state spending in 82/83, and that, in tandem with falling oil prices, is what brought about “morning in America”.’
Chicken or egg?
By the time Reagan dropped the rate, inflation was back under 5%. Reagan dropped the rate to boost growth and curb unemployment. Inflation and growth/unemployment are two distinct problems with different solutions.
‘In any event, it is now clear that the simple theory of the relation between inflation and unemployment that economists have peddled for a quarter-century no longer works. If economists are to be of any use, they need to come up with a better — and in all likelihood more sophisticated — approach to understanding why inflation rises.’
NY Times March 9 2000 (http://www.nytimes.com/2000/03/09/business/economic-scene-relationship-between-inflation-unemployment-curve-more-economics.html )
Are the ‘different solutions’ we have relied upon to date adequate? NY Times thinks not. It seems that when they don’t work, we simply ascribe new names to ‘aberrant periods’ (stagflation, secular stagnation).
My question: Has the Keynesian view that high interest rates actually contribute to inflation been rejected before it was properly examined?
The Phillips Curve is definitely still relevant:
http://krugman.blogs.nytimes.com/2014/07/15/on-the-neo-paleo-keynesian-phillips-curve-wonkish/
In reference to: researchbriefings.files.parliament.uk/documents/SN03731/SN03731.pdf
From the graph on p.2, it’s not at all clear that inflation directs interest rates: inflation lags behind interest rates in the big drops of mid 98 and late 08.
That’s because the interest rates influence the inflation rate, not the other way around.
So doesn’t the chart show that dropping interest rates is followed soon after by lower inflation?
No, rising interest rates result in lower inflation.
That’s not what the graph shows. In mid ’98 and late ’08, interest rates fell first and this was followed by lower inflation.
My thesis is that conventional wisdom (and economic teaching) ignores this inconvenient truth. Time for new thinking.
In 2008 we were going to experience massive deflation if the government did not lower rates. The low rates reduced the severity and duration of deflation. This is exactly what macroeconomic theory predicts. Governments lower interest rates because the economy is weakening and they want to prop it up. When the economy is weakening, inflation almost always falls. So a rate reduction will reduce or reverse a fall in the inflation rate. Because it sometimes reduces the severity or duration of the fall rather than completely reverse the fall, it can sometimes look like the relationship isn’t there to an untrained person. But I assure you there is no controversy in macroeconomics on this point, and for good reason. The relationship between the interest rate and the inflation rate is uniformly recognized and has never been disproven.
Sometimes only see the direction of inflation is noted and not the change in slope.
But let’s question the conventional wisdom in the light of BIS’s latest report following years of warning of the dangers of ultra-low interest rates (the very rates that conventional monetary policy supports but are clearly not working as they ‘should’).
Consider another scenario: Inflation rose up to 2008 as irrational exuberance and the wealth effect buoyed the stock market. Prices went up because they could. Come the crash, Lehman Brothers etc., consumer confidence took a beating and interest rates had to be lowered to start the real economy moving again. The policy never really worked due to over-indebtedness and the end of any ‘wealth effect’. Economists began to debate whether this was secular stagnation or headwinds. The debate is academic; ultimately, conventional monetary policy failed…
Some Keynesians and those of the Austrian School (e.g. Shostak) who define inflation as it was originally (i.e. an increase in money supply which causes a general rise in prices) do dispute macroeconomic theory on this point. Having read your excellent blog, I am still hoping you will re-examine conventional wisdom, not simply defend it.
The 08 crash was caused by excess borrowing, and excess borrowing was caused by stagnant US wages. Without wage growth, additional consumer demand could only be funded by borrowing, which in large quantities is destabilizing. This puts the fed in a bad situation–if it raises rates, the economy grinds to a halt, so it must continue easy money policies to create enough lending to sustain growth. A simple increase in the interest rate will just wipe out growth. What is needed is a sustainable redistribution of wealth from the top to the bottom so that consumers can support additional spending without having to borrow so much.
That stagnant US wages caused excess borrowing and the global financial crisis is surely simplistic. Did low interest rates play no role in the excess borrowing?
Let me, finally, try asking my question from a different angle: do you think that contemporary monetary policy that has brought us to zero bound interest rates is flawless, uncontroversial and capable of instigating and sustaining the redistribution of wealth in a consumer-driven economy as you describe?
I do not think my account is simplistic–indeed, I think my account takes into consideration quite a few more variables than the reductive monetarist argument.
I don’t think the zero rate is sufficient, but I do think it is necessary in the absence of fiscal policies that would put money in the hands of consumers by more sustainable means. The bank cannot simply raise rates without regard to the unemployment and demand consequences of that choice.
Thanks for your patience. I enjoyed the discussion.
[…] Stagflation: What Really Happened in the 70’s (December 30, 2012, 7,616 hits) […]
[…] what they are really referencing is the stagflation we saw during that period. I wrote a full post on how that came about. To summarize, the OPEC oil embargo and the Iranian Revolution caused oil […]
[…] written about what happened in the 1970’s in detail elsewhere–the short version is that in the 70’s there were two oil shocks, in […]
[…] written about what happened in the 1970’s in detail elsewhere–the short version is that in the 70’s there were two oil shocks, in […]
[…] written about what happened in the 1970s in detail elsewhere — the short version is that in the ’70s there were two oil shocks, […]
[…] written about what happened in the 1970s in detail elsewhere — the short version is that in the ’70s there were two oil shocks, […]
[…] written about what happened in the 1970s in detail elsewhere — the short version is that in the ’70s there were two oil shocks, […]
[…] written about what happened in the 1970s in detail elsewhere — the short version is that in the ’70s there were two oil shocks, […]
[…] written about what happened in the 1970s in detail elsewhere — the short version is that in the ’70s there were two oil shocks, […]
[…] written about what happened in the 1970s in detail elsewhere — the short version is that in the ’70s there were two oil shocks, […]
[…] written about what happened in the 1970s in detail elsewhere — the short version is that in the ’70s there were two oil shocks, […]
[…] written about what happened in the 1970s in detail elsewhere — the short version is that in the ‘70s there were two oil shocks, in which […]
[…] due to measures largely beyond our control in the late ’80s under Carter, the American people wanted a change. The prevailing economic philosophy was thrown out the window and we shifted from creating an […]
RE: “Stagflation: What Really Happened in the 70’s”
Thank you for your article Benjamin. Its clear to me that oil prices can have a substantive impact on inflation with a short-term view.
I admit I’m still learning, but with a long-term view, to say that changes in the oil price (make up only 5-10% of total CPI) have more to do with US inflation than, say, something like a substantive addition to US money supply (falling value of our USD, say a 4x increase in the US monetary base from $1 trillion to $4 trillion since ’09/Obama) seems unreasonable.
The next step in your ‘lesson’ above as I see it, then would be to believe that by the US making material gains toward energy independence (i.e. our shale revolution) since 2009, the risk of stagflation (or hyperinflation) is curbed (even modestly). It’s dangerous to me to hold this view and seems to deflect/de-emphasize a fundamental problem — the cost of the US spending/borrowing beyond its means. That’s what this article is really about right, applying the stagflation that occurred in the 70’s to today/the future?
Your statement “There is not going to be hyperinflation or stagflation […because there is no giant spike in any ubiquitous, necessary thing like oil.]” again seems to put too much emphasis on price flux of critical foreign good imports and ignores the possibility of a significant loss of international confidence in USD and US Fed paying its debt (potentially leading to hyperinflation). For instance, do you think there is no level of US money supply growth that couldn’t lead to hyperinflation that an increase in interest rates couldn’t fix? How about 100% annual growth in US money supply? 200%? …1,000%? Admittedly, I’m no economist and I could be missing something here. It would be very helpful if you could clarify.
Thanks again for your article.
Determining impact of oil price on inflation: https://research.stlouisfed.org/publications/economic-synopses/2015/05/11/how-much-do-oil-prices-affect-inflation/
St Louis Fed calculation of inflation: http://www.bls.gov/cpi/cpiriar.htm
Montary base chart: http://www.wnd.com/2016/03/obamas-economic-recovery-in-just-9-charts/
Different views of hyperinflation: http://howfiatdies.blogspot.com/2013/09/hyperinflation-explained-in-many.html
Increasing money supply generates inflation only when the money filters down to consumers and produces an increase in demand that surpasses supply. As your chart shows, the money supply has increased more than 400% since 2008, but hyperinflation has not followed because the newly created money has not filtered down to consumers. Instead the banks (who received the money via QE) have chosen to sit on the money or throw it into emerging market and commodities bubbles that have been deflating. Without an increase in consumption, an increase in the money supply does not necessarily make any difference at all to the inflation rate. It is only the tendency for increasing the money supply to increase demand that creates any relationship at all between the money supply and inflation. This is why so many people have predicted hyperinflation in recent years and been wrong–they have falsely assumed that increasing the money supply directly contributes to inflation, when it only leads to inflation insofar as it generates overconsumption. If we were to get overconsumption, there are many ways to put the brakes on it–one way is to raise the interest rate, another is to increase taxes. This can be done well before hyperinflation sets in, and this is why the Fed watches the inflation rate to ensure that the economy is not about to surpass capacity. In recent years inflation has been very, very low:
https://fred.stlouisfed.org/series/T10YIE
As far as oil prices are concerned, the reason they could have such a huge impact on inflation in the 70s is that they dramatically reduced the supply of an essential resource to the point of mass shortage. Moderate changes to the oil price are not that big a deal, but a shock that introduces widespread shortages creates a price spiral, with strong inflationary momentum well after the initial shock has passed.
[…] and work rights of the average American increased steadily through this time. However, during the late 70s the enormous fluctuations in the oil price which was caused by the OPEC embargo and the Iranian revolution along the Federal […]
[…] Stagflation: What Really Happened in the 70s (December 30, 2012, 18,028 hits) […]
I got my BA in Economics in the early 80’s – near an ocean, so I never drank that “fresh-water” kool-aid – and I agree heartily with your analysis.
One quibble: in the following sentence:
“People who interpreted the seventies in that fashion misunderstood fatally what was going on.”
…the word “fatally” should be replaced by “very profitably”, because the “economists” who invented the “trickle-down” bilge got paid well for their services (and souls).
Hahaha, fatally for the collective, profitably for the individual–as is so often sadly the case.
Nice article! But i can’t see the graphs of inflation, unemployment and interest rate.
Yeah, at some point Trading Economics changed the way their graphs are shared and many of the graphs on my old posts suddenly disappeared. If you go to their website you can still find the data.
Three points:
a) it would be nice to put the inflation amount in relation to the economic dependency on oil.
b) did someone actually check unions’ demands in this context?
c) Is the methodology that was used to calculate the inflation in the 70s useful *at all*? One of Buffett’s comments is that insurers had to cope with demands that weren’t originally part of the insurance contracts, but (probably due to societal changes) they were then required to cover those nonetheless…
[…] Stagflation: What Really Happened in the 70s (December 30, 2012, 25,590 hits) […]
[…] https://benjaminstudebaker.com/2012/12/30/stagflation-what-really-happened-in-the-70s/ […]
[…] written about what happened in the 1970’s in detail elsewhere–the short version is that in the 70’s there were two oil shocks, in which […]
[…] How the inflation rate directly followed the price of oil was tracked by Benjamin Studebaker in a 2012 article titled “Stagflation: What Really Happened in the 70’s”: […]
[…] How the inflation rate directly followed the price of oil was tracked by Benjamin Studebaker in a 2012 article titled “Stagflation: What Really Happened in the 70’s”: […]
[…] How the inflation rate directly followed the price of oil was tracked by Benjamin Studebaker in a 2012 article titled “Stagflation: What Really Happened in the 70’s”: […]