Real Fiscal Responsibility 3; Carter: Inflation and Health Care

By Joe Firestone

Here’s the third post in my series evaluating the fiscal responsibility/irresponsibility of the Governments of the United States (mostly the Congress, the Executive Branch, and the Federal Reserve) by Administration periods beginning in 1977 with the Jimmy Carter period. My first post explained why I chose to start my evaluation with the Carter period, and also laid out my related definitions of fiscal sustainability, and fiscal responsibility.

It explained why fiscal responsibility is closely connected to the idea of public purpose, which I’ve laid out here. I also claimed that the Government of the United States has been fiscally irresponsible in every Administration period since 1977.

In my second post, I began by examining the problems of ending economic stagnation, and providing full employment at a living wage, and, I hope, by showing that the Government, during the Carter period, failed to solve either problem because of its commitment to deficit reduction, and budget balancing, in the service of hoped for inflation moderation. The remaining posts in this series will continue to document the claim that all the US Governments since 1977 have been fiscally irresponsible. This, one, the third in the series, will examine how the US Government failed in its efforts to create and maintain price stability, and also failed to provide a solution to the problem of providing the right of receiving health care to every American in need.

Creating and Maintaining Price stability

The Carter Administration sought price stability, and was convinced, mistakenly, that reducing the deficit and eventually balancing the budget would also bring the cost-push inflation in oil prices under control. In the pursuit of price stability, the President used his veto power (p. 40) on a heavily Democratic Congress of supposed allies when he vetoed a public works bill providing for $5 Billion in water projects in 1978, because be thought it was inflationary and full of pork. In addition, he vetoed or pocket vetoed a number of other bills passed by the Democratic Congress in pursuit of smaller Federal deficits and Government frugality.

Not that the Government ran very large deficits in those days in light of current ideas about large deficit spending. In fact, Congress, the President, and the Federal Reserve combined to reduce deficits very quickly after the Ford Administration. After 8 quarters when the Federal Government deficit ranged from 2.88%* of GDP to 6.50%, with 7 quarters exceeding 3% of GDP, the deficit was reduced during the Carter Administration to under 3% of GDP in the first quarter of 1977 and remained in the 0% to less than 3% range, with a low of 0.47%, for the rest of President Carter’s term.

These small Federal deficits were accompanied by small trade deficits by contemporary standards, ranging from a high of 1.21% of GDP to a low of 0.10%. In addition, there were five quarters of small trade surpluses during the Carter Administration, as well. In spite of this generally favorable context, the Government could not achieve price stability because its leaders in all branches were ideologically biased against using the right methods to control the cost-push oil inflation being caused by the spike in oil prices due to Saudi policy during these years. In fact, the Government mostly executed a textbook case of what not to do.

Cost-push inflation cannot be eliminated without killing the economy if one relies on increased taxes, reduced Government spending and high interest rates, which is the deficit hawk prescription. All that will and did do is to move toward macroeconomic and microeconomic austerity. The way cost-push inflation has to be fixed is through bringing alternative sources of supply, wage and price controls, and rationing online.

We know these last two measures are hard to take for Americans and hard to enforce. But they worked during WWII (pp. 95 – 120) even in a time of full employment, and would have worked again if the Congress and the Carter Administration would have employed them sufficiently vigorously. But even though the Administration and Congress did implement wage and price “guidelines” in 1978, and then moved on to tighter controls later, implemented by a Council of Wage and Price Stability, the prices affected were limited in scope, amounting to about half the prices in the economy, and the enforcement of standards wasn’t thoroughgoing, in part because the regulatory staff implementing the program was only 10% of the size of a comparable staff during the Nixon Administration.

As for bringing new supplies online, that is the best cure for cost-push inflation, but the problem with it is that it can take a good deal of time to work. Ironically, Jimmy Carter did initiate this cure for Saudi-induced oil inflation during his Administration, when he de-regulated natural gas production. The problem was that the new supplies did not begin to have an impact for some time. Eventually they did, but only after President Carter was defeated by Ronald Reagan, and only after the availability of more natural gas created an international oil glut, the primary reason for the fall of inflation in the Reagan Administration.

The secondary reason for the fall of inflation was Volcker backing off the Federal Funds rate. The Reagan recovery couldn’t have occurred without that; but, on the other hand, Volcker’s move wouldn’t have been effective if the oil price hadn’t already fallen.

So, the bottom line here, is that the Government did mostly fiscally irresponsible things in seeking price stability during the Carter Administration, while wrapping itself in the moral sanctimony of preaching the necessity for sacrifice. The one clearly good thing it did was to de-regulate natural gas. That eventually worked, and if Congress and the President had combined that with oil rationing and strict enforcement of price controls on domestic supplies, export controls on domestic oil, application of price controls on oil imports, and perhaps limited wage controls, then the economy could have survived without Paul Volcker’s Fed drying up the credit flow and producing a prolonged recession.

Implementing the right of health care for everyone

Carter promised passage of a national health insurance plan during his campaign, but when he was elected he backed off that idea as soon he was warned about the perceived likely inflationary impact of such legislation. This fear dogged his Administration and was a major factor in his inability to come to agreement with Teddy Kennedy and Russell Long on a bill that all three could support.

As his term passed, hesitation and delay resulted in his chance of passing a Medicare for All or other national health insurance bill slipping away, even though he had enormous Democratic majorities in both Houses during his first two years, and healthy majorities in his last two. His fear of inflation and concerns for fiscal responsibility as he defined it, prevented him from making a deal with Democrats supporting a single-payer system. He also insisted that any health reform bill had to safeguard a role for the private insurers.

At the time spending on health care amounted to 9% of GDP. Now that figure is at 18%. In retrospect, it is clear that the same beliefs about fiscal responsibility bothered him in this area as in the economic stagnation, full employment, and price stability issue areas. And also that his insistence on his mistaken fiscal responsibility notion, led to fiscally irresponsible policies, that, in turn, eventually led to the health care sector doubling the proportion of GDP it consumes on an annual basis, and also to many years of unnecessary fatalities, bankruptcies, foreclosures, and family breakups due to lack of universal health insurance.

In retrospect, this is one of areas of the Government’s biggest failures during the Carter Administration. The President was reluctant to make changes that excluded private interests, and to use the Government’s recently acquired greater policy space existing because the Government was now a sovereign fiat currency issuer to spend for the public purpose. His lack of faith in the ability of the Government to do things well, and his ideological faith in the superiority of the private sector to the Government as an agent of change, undermined his effectiveness in this as well as the other areas discussed thus far. It also has bestowed a very high cost on most Americans since 1981.

The Government, led by Carter during this period, could not even conceive of just letting the twin deficits (Trade and Budget) float, and accommodating the trade and import desires of the private sector. Had he been able to do so, he might have been been able to overcome stagflation, create prosperity, and produce low-cost universal health insurance for everyone.

Watch for my next post on the Government’s failure to legislate enduring educational reform during the period 1977 – 1981.

*My thanks to Professors Scott Fullwiler and Stephanie Kelton for kindly providing me with their quarterly time series data on Sectoral Financial Balances which I’ve drawn upon for the deficit, and GDP numbers I’ve used in this post.

14 Responses to Real Fiscal Responsibility 3; Carter: Inflation and Health Care

  1. So do you believe that the deregulation pused the excess gas on the market causing the drop in oil prices or did volker’s high interest kill the economy which inturn led to the fall in oil prices which did not recover for nearly 2 decades? Or some combination of the two?

    • I think the natural gas de-regulation led to an end to the initial driving force in back of the cost-push. Volcker’s role was almost entirely negative. First, he drove the inflation up even further by raising interest rates, which for a time businesses just passed onto consumers by raising prices. Second, when that proved impossible to sustain, the now sky-high interest rates caused business to pull back, drove down consumer demand, killed the economy, drove up unemployment, and persuaded Volcker that he could back off the high interest rates during the Reagan Administration. At that point, his backing off really did end the inflation and finally lead to recovery, because he wasn’t doing anything either to cause prices to rise, or stop demand from recovering. In short, he made the crisis worse and then got the credit backing enough on his own negative actions. In my view, the Volcker appointment was a disaster and he was the worst Fed Chair in history with the possible exception of Alan Greenspan.

      • What I was trying to say was that the rapid decrease in demand for OPEC petroleum was less likely to be caused by deregulation of natural gas. The transportation infrastructure had no way to rapidly switch to natural gas, nor did the power companies. All the people who no longer had to commute to work because they had no jobs put quite a crimp in the demand for oil. I remember friends in silicon valley, CA telling me how much easier the commute became for the people who still had jobs.

        • Earlier I linked Warren Mosler’s argument on this. Did you read it? If not, then please do. To deny it, you have to deny certain factual assertions he makes which contradict yours. So, what contradictory facts can you bring to bear?

          • Mosler said in his article “I didn’t look anything up, with the idea that memories matter.”

            I said about the same thing in my explanation for why the oil prices fell.

            For what it is worth, Wikipedia has an article at
            http://en.wikipedia.org/wiki/1980s_oil_glut

            This article starts with the summary:

            “The 1980s oil glut was a serious surplus of crude oil caused by falling demand following the 1970s Energy Crisis. The world price of oil, which had peaked in 1980 at over US$35 per barrel ($100 per barrel today), fell in 1986 from $27 to below $10 ($58 to $22 today).[2][3] The glut began in the early 1980s as a result of slowed economic activity in industrial countries (due to the crises of the 1970s, especially in 1973 and 1979) and the energy conservation spurred by high fuel prices.[”

            The source for their statement is “Oil Glut, Price Cuts: How Long Will They Last?” 89 (7). U.S. News & World Report. 1980-08-18. p. 44.

      • I understand what you are saying and I do agree that the fed policies of the early 80s were disasterous. But they seem to have been the driving factor to causing the recession which in turn caused the plummeting of demand for oil. Am I missing something else? Thanks for the post

  2. Thank you for saying what Carter should have done to reign in Cost Push Inflation.

    The explanation was not as overwhelmingly irrefutable as I had hoped. Perhaps that was a bit much to expect.

    Wage and price controls had been tried by Nixon and Ford as my faulty memory tells me. It did not work for them. You alluded to the enforcement by a Carter staff that was only 10% the size of what Nixon had. So how come it didn’t work for Nixon either? Admittedly the size of the staff doesn’t guarantee success of a poorly conceived program.

    Rationing of gasoline happened almost automatically with the long gas lines, alternate day purchasing, and more. Of course, I don’t remember any rationing of other pertroleum based products.

    Of course, in WWII there were many more far-reaching and effective programs to hold down inflation. I even have now come to understand how selling war bonds was not a way of financing the war, but was a way of controlling inflation.

    As for Reagan’s solution to the problem. I always attributed to the near depression he caused. This cut the demand for oil so much that it broke OPEC’s ability to control the prices. That was a very effective way of ending cost push inflation, although at the price of great pain to a lot of people. So, despite talk of supply side economics that was supposed to increase supply without the need to have increasing prices, it was actually demand side economics that worked – cut the demand for oil so prices would stop rising. I have not done any research on the myriad factors that could have been responsible for the end to inflation, so I could very well be wrong in my story, no matter how plausible it might sound.

  3. Steve, I think they did work for Nixon and certainly worked well in WWII and the immediate post-war period. See this post for further discussion and references.

    On rationing of gasoline, what you saw wasn’t rationing, it was non-rich people forced to use less gas because they couldn’t afford to pay prices imposed upon them by a monopoly supplier. A real rationing scheme would have given everyone a gas allocation, and also froze prices. If coupled with a prohibition against export during the crisis, we would then have had real “rationing.”

    I agree that it was increased demand that ended the recession during Reagan’s time, but I don’t understand what you mean by:

    As for Reagan’s solution to the problem. I always attributed to the near depression he caused.

    I don’t think Reagan had any solution to the problem. His “tax cuts” had little impact according to later studies on either inflation or unemployment. What he mostly did apart from that was to wait around for Volcker to do something, which he eventually did. However, people had to wait until 1988 for an unemployment rate lower than 6%. I still don’t know why people tolerated that.

    • “I agree that it was increased demand that ended the recession during Reagan’s time, ”

      If that’s what came across in my last comment, then it is no wonder you don’t understand my point

      “As for Reagan’s solution to the problem. I always attributed to the near depression he caused.”

      It was the DECREASE in demand for petroleum because of the near depression Reagan caused. That ended the hold that OPEC had on the world. You don’t curtail cost push inflation by increasing demand. I was not talking about Reagan’s ending the near depression when I talked about demand for petroleum. I was talking about using the near depression to end the inflation.

      • I think we disagree. I don’t think Reagan caused the depression. I think it was Carter with his low deficits and Tall Paul with his skyrocketing interest rates causing businesses to pull back and create unemployment. Reagan, inherited the recession from Carter and Volcker. UE increased from 5.8% to 7.1% from the 4th Quarter of 1979 to the 4th quarter of 1980. UE kept going up after that while the CPI was coming down as Volcker continued to crush the economy. But Reagan didn’t cause the downward spiral, he just maintained it by refusing to do anything about it with fiscal policy focused on the middle class and the poor.

        The relevant analogy is to Obama and his predecessors. The roots of the crash of 2008 are clearly in the Administrations of Clinton and Bush 43. Their policies coupled with the behavior of Congress and the Fed caused the crash and the depression following. Obama did not cause. But his policies, along with Congress’s and the Fed’s, while stopping the downward spiral have maintained high unemployment ever since.

        • I may be wrong about the cause of the recession, but I still say that the recession is what broke OPEC, not natural gas regulation. But we are only talking about which thing was the main cause. They both had a part to pay.

        • If you are right that the recession was caused by Carter, then he should get the “credit” for breaking the inflation spiral of cost push from the oil prices.

        • I think it was Nassim Nicholas Taleb who pointed out that it is one thing to note some historical behavior, but quite another to postulate that you know the reason why it happened.

          So we may both be equally wrong.

          I think Taleb used the ice cube example. If you see an ice cube on the table, you can predict that it will melt into a puddle. If you see a puddle, there is no way to determine that it started out as an ice cube. That’s a bit of a stretch, but I think that the real point is that there are so many things going on at the same time and there are so many delayed and non-linear reactions that it is extremely dangerous to say you know why an historical event happened.

  4. Of course I meant deregulation, not regulation. But there is no editing of mistakes in this discussion system.