Combating Stagflation: an outlook

Hayeon Kim

How did President Jimmy Carter respond the environmental situation of the 70s? Stagflation is the condition that gloomed over this time, when the nation experienced a staggering rise in inflation, low business activity, and increasing unemployment rate. Faced with an economic disaster, President Carter performed well under intense pressure though he has been commonly misrepresented.

The economic situation in the 70s was a domino-effect with Carter at the end of it. Inflation increased the general prices of good, and as the expectations of higher prices in the future drove consumers to purchase more goods, this demand shift was misunderstood. The market responded by increasing supply and driving up prices even further. As prices increased, so did the demand for increased wages until a stagflation regressed the previous economic confidence within the American people. The problem can be accredited to the wage-price spiral. Fault can be blamed on the Federal Reserve’s monetary policy during the late 1950s and early 1960s. As Keynesian economists, they believed kn the inverse relationship between inflation and unemployment as shown by the Philips Curve. The Fed wrongly believed this theory and directed its monetary policies to increase demand for goods in the market and keep low unemployment. Thus, the low unemployment was magnified by this national dilemma. Many of the problems the times called for was also not in the control of Jimmy Carter. For instance, the low unemployment was brought about by the large influx of workers from 1964 to 1980, caused by the postwar baby-boom. Furthermore, low employment rates would be challenging to maintain as the world around the United States was faced with an energy crisis by which the Americans faced high energy prices in its economy.

President Carter was faced with these problems when he took office in 1977.  Despite contrary belief, Carter is responsible for strong economic growth of the nation. Though the unemployment rate in the 70s proved to be far above those listed in the 50s or 60s, the rate during Carter’s administration was lower than in either the administrations of Ford or Reagan. Inflation during Carter’s year averaged 8 percent, but the average was 9 percent for one year in the Carter administration and two consecutive years for Ford. Also, Carter showed the strongest growth in real GNP out of Reagan, Eisenhower, Nixon, or Ford with a 3.1 percent.

As a conservative Democrat in the context of fiscal policy, president Carter focused on creating a balanced budget and warned the hazards of unnatural price increases. In fact, the budget deficit can be used the measure the successfulness of fiscal policy. In the postwar era, increasing budget deficit is inevitable though proved to be held at a moderate rate during the Carter administration. While during Ford’s presidency the deficit averaged $103.3 billion and during Carter’s, $153.1 billion, the average was $74.7 billion in the Carter years.

Carter may not have had extreme fiscal policies directed at combatting the growing inflation, though he was completely cognizant of the inflation situation. He did his best to bring back the confidence in to the American dollar—which, after all, has no value and is only backed by faith.

Much of the failures to strengthen the economy can be credited to the already bad times that Carter was placed in when he first started office. The poor economic state was caused by the postwar baby-boom, which brought an influx of eager workers. Low unemployment was the incentive for Keynesian economists to increase a healthy rate of inflation, but the improper model of the Phillips Curve hid the truth about wage-price spiral. By increasing government spending in the 60s, prices rose rapidly. With price increases, workers expected more pay, purchasing more goods in the short term. Stagflation arrived just in time for Carter’s first day in office by the 70s. A situation he was faced with created a negative view of Carter that has wrongfully been illustrated. Carter was not at fault for the stagflation experienced in the 70s

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