There is real concern that we are reliving the 1970s, a vexing time for the American economy. Despite the tumultuous economy we have been living through the past two years, which, in part, was imposed upon us by the COVID-19 pandemic, but also is due to a long tradition of increasing the size and scope of government, we are materially far better off. That is not to downplay the real concerns about a return to the 1970s: an era marked by stagflation, gas queues, unemployment lines, and the peak of the Misery Index. But are we really on the same path the American economy took during the 1970s? And if so, can we stop it?
While today there are similarities to conditions and political responses of the 1970s, we are actually much better off than you might think, despite COVID and statist/nationalist overreach. The takeaway? Yes, there are real concerns, including yet another Russian invasion of a neighboring country, but do not be afraid.
It is an amazing time to be alive. The past 250 years have witnessed a remarkable and unprecedented level of economic growth. Most countries today are richer than they were 50 years ago, and in the U.S. we are far richer. Economic growth is not the only relevant factor for human flourishing, but we cannot experience flourishing without it. Economic growth is sustained by open markets that provide ordinary people with the incentives they need to discover better ways of doing things. This learning and discovery are rooted in the constant refining of the division of labor and ensuing specialization. Adam Smith knew this was possible and witnessed it as early as the mid-18th century. The optimism he had for the extension of opulence to the most destitute has come to fruition. Yet we seem afraid to embrace it. Pundits on both the right and the left decry the opulence they rely upon daily. Adam Smith, too, worried about the spiritual and ethical effects of opulence. Money can’t save our souls, after all. But what is lost on both sides of the political aisle is a recognition that unfettered markets have brought universally increased standards of living.
What’s more curious is how these pundits suggest we fix the wealthy society we enjoy. On the left you hear arguments for extreme progressive taxation and indictments of corporate greed as the source of inflation. This leads some, including Elizabeth Warren and Janet Yellen, to demand a global corporate tax. There are also calls for price controls as a mechanism for mitigating inflation and more universal government programs in healthcare, daycare, and higher education. On the right we hear rants against globalism and among some a call to return to an economic nationalism that is just modern mercantilism, another idea as old as the sun.
Markets are not simply stylized supply-and-demand abstractions. They are neither robotic nor removed from human action—they reflect individual choices. Thus, the sociological context of an economy matters greatly. The 1970s were a time of great change in family dynamics. The divorce rate began to increase rapidly starting in 1964, a trend that increased after 1974 but at a decreasing rate. Approximately 1,077,000 divorces were granted in 1976, bringing the divorce rate to 5.0 per 1,000. The divorce rate per 1,000 married women increased 94% between 1962 and 1973 (from 9.4 to 18.2).
Today, however, divorce rates are far lower. Both marriage and divorce rates declined from 2009 to 2019. In 2019 there were 16.3 new marriages for every 1,000 women aged 15 and over, down from 17.6 in 2009. Simultaneously, the U.S. divorce rates fell from 9.7 new divorces per 1,000 women aged 15 and over in 2009 to 7.6 in 2019.
Divorce rates are declining but, alas, so are marriage and birth rates. Wealthy countries whose birth rates fall too low risk falling short of the creation mandate to be fruitful and multiply, and so put their economic growth at risk. People are good for the planet. Human flourishing requires humans, and we need an economic and political environment that supports work.
Workers had a much tougher time in the 1970s. Unemployment reached a high of 9% in 1975. Any occasion in an economy when there are large numbers of employees who cannot find work brings social and political pressure for solutions. Looking to the 1970s and today, we often see that these policy solutions often harm the very people they intend to support and grow the size of the government at all levels, which is a promise for a less dynamic economy both now and in the future. In February 2020, prior to COVID-19 lockdowns, U.S. unemployment was the lowest it had been, particularly for African Americans and Latinos, in 40 years. The pandemic erased that success, with a 14.7% unemployment level in April of 2020 during the worst part of the lockdowns. But U.S. unemployment has rebounded as the economy has reopened. The 1970s represented persistent levels of higher unemployment, something to keep in mind.
Julian Simon explained human capital the best—people are not just mouths to feed but hands to work. Human capital is the most essential type of capital because it’s the source of ideas and innovation. When we see an economy with people willing to work but who cannot find jobs, there is cause for concern. But that is not what we are seeing now.
The Misery Index, aptly named, combines levels of unemployment with inflation that gives us some sense of the quality of life for ordinary people. Inflation represents the decline in the dollar’s purchasing power, and growing levels of inflation hurt those toward the bottom of the income distribution the most. The Misery Index experienced a large increase over the 1970s, reaching its all-time peak of 21.9% in 1980, an significant jump from 11.67% in 1970.
The index was turbulent during the 1970s, rising to 19.90 percent in 1975 then dropping and rising again around 1978. Even the Great Recession did not have the impact on the Misery Index that the decade of the 1970s did. In 2006 it sat at 5.71%, and by 2011 was 12.73%. From 2015 to 2019, it hovered near 5%, and then the COVID-19 pandemic and its accompanying policy responses were unleashed on the economy. In April 2020, the Misery Index reached 15% and now sits around 11.48%—half its 1970s peak. Even a global pandemic that induced politicians on both the right and left to usher in unprecedented levels of tyranny, including lockdowns of businesses, churches, and schools, did not raise unemployment and inflation to 1970s levels.
What the COVID-19 pandemic, the Great Recession, 9/11, or any other crisis, whether natural or manmade, reveals is that the more things change, the more they stay the same. Tyranny waits for a crisis; it always has. Economic freedom and economic growth insulate us from the unmitigated growth of power. That is the largest difference between today and the 1970s—we are all richer.
Yet there are still real comparisons to be made between what the U.S. economy is now facing and what it faced in the 1970s, including inflation concerns, rising oil and natural gas prices, and of course the dreaded policy responses that are predictable and usually economically incoherent. The policies being touted today do, in fact, echo the 1970s.
In the winter of 1977, President Jimmy Carter implored Americans to keep their thermostats at 65 degrees or cooler. His administration asked for voluntary sharing among natural gas markets in the United States to help solve the energy crisis. It should be noted that the Nixon administration also called for lowering home thermostats, reducing driving speeds, and reducing unnecessary lighting amid calls for energy independence. The mantra of “energy independence” is nothing new and it’s repeated today. If the supply of something is reduced, ceteris paribus, prices will increase. Richard Nixon ushered in price controls to deal with the upward pressure on prices that occurred amid shortages. Yet the sound economic answer to shortages is to ascertain the supply constraints rather than to impose price controls, which will only serve to exacerbate the shortages and can create black markets.
The consequence of Nixonian price controls were gas queues and rationing that continued under the Carter administration. Economic realities are ubiquitous, and policy cannot change them. Policy at best can alleviate supply-and-demand problems by getting out of the way, but distorting market prices by subsidizing one thing over another or outlawing certain products always yields unintended consequences. This was as true in 1970 as it is today. Government price controls are arbitrary, and they don’t solve the underlying problem of scarcity; they worsen it.
Today gasoline is not being rationed according to our license plate numbers, but we do see a time of growing inflation and concerns over its duration. In 2021 we were told by the experts that this inflation was “transitory” and we shouldn’t worry too much about it. After all, the pandemic wreaked havoc on the economy. Gross domestic product, a measure of output, declined by almost 33% in the second quarter of 2020. That’s what happens when you shut the doors, literally in this case, on commerce. This precipitous drop in GDP is the worst we have seen in two centuries—far worse than in the Great Depression or the Great Recession. Simultaneously, the federal government responded with massive stimulus spending programs. To date, $3.9 trillion has been spent on COVID-19 relief while the Federal Reserve pursued an unorthodox monetary policy. Moreover, the recent Russian invasion of Ukraine prompts fears as did the Russian invasion of Afghanistan in 1979, bringing grim reminders of how war and oil are ugly bedfellows generating severe economic consequences. We do not yet know how current events will develop, but we can predict some troubling economic times ahead as a result.
Among the problems already on display before Ukraine was unanticipated inflation, which is particularly pernicious because, when you don’t see it coming, it can’t be accounted for in purchases and contracts. As economist Alexander Salter pointed out throughout the pandemic, we have witnessed changes in the practices of the Federal Reserve that go beyond its dual mandate to maintain maximum employment and stable prices. The Fed typically works to achieve this by buying and selling assets and sometimes making loans, but it has reached beyond those typical and expected measures and engaged in unexpected and overreaching activities, including giving loans to small and medium-sized businesses and municipal and state governments. Salter rightly shows that this allows the Fed to participate in fiscal, not just monetary, policy. The precedent for the Fed to engage in discretion over stable rules dates to the Nixon administration, which removed the U.S. dollar from the gold standard.
It should be noted that there will always be episodes of inflation and the purchasing power of currency is relative to what it could be and what it has been. And there will always be a crisis. In the 1970s we faced infighting and angst over the Vietnam War, which finally came to an end in 1975. Carter inherited the Organization of Oil Exporting Countries (OPEC), a cartel, which controlled 56% of the oil supply in 1973. The Yom Kippur War (1973) and the Iranian Revolution of 1979 exacerbated the world oil crisis. Put your economic thinking cap on and it’s not difficult to see why. OPEC is a cartel whose creation was oddly celebrated. It represented a trend toward the nationalization of natural resources and a complete politicization of oil as a commodity. Cartels raise prices, and the nationalization of resources creates disincentives for innovation and the growing of supply.
Today we face global supply chain issues, inflation, and volatility in output and employment due to the pandemic. Gasoline prices are up 60% over past year, and natural gas prices are up 30%. From 2020 to 2021, inflation increased at its fastest pace in 30 years. The Consumer Price Index rose 7.5% over the past year, reminiscent of the fears Americans had in the 1970s. It is true that the Biden administration faces problems today that bear striking similarities to what the Carter administration faced in the early 1970s: inflation, unemployment, the less-than-satisfactory end of long wars (Vietnam and Afghanistan), and worries about international economic foes. In the 1970s, Americans worried that Japan would take over as the industrial leader of the world, a worry many have of China today. The 1970s boasted a “collapse of U.S. manufacturing,” a siren’s call for the demise of the middle class.
But should this be a cause for panic? Political overreach is more accepted when people are worried about their standard of living. A crisis always exacerbates both our fear and our willingness to cede power to centralized authority. And the fearmongers take their role seriously. If we are afraid, terrified even, we are more likely to surrender more power so they can “fix it.” But with all the similarities to the bad old ’70s, we must look at all the facts.
In the 1970s, unemployment was a serious economic issue and people could not find jobs. Today “Help Wanted” signs are everywhere we look—a different kind of problem. We continue, even after shuttering businesses and schools, to add jobs to the economy. So much so that Amazon is offering $3,000 sign-on bonuses, and businesses like Dollywood and Walmart are offering to pay full college tuition for their employees. The picture of the labor market today is quite different from that of the 1970s.
U.S. manufacturing has not collapsed, despite repeated claims to the contrary. U.S. manufacturing has tripled over the past three decades and accounts for almost 11% of overall output and 82% of U.S. exports, and boasts an average annual worker compensation of more than $83,000 per year. The number of workers employed in manufacturing has greatly declined, however, a significant change. But as productivity increases, workers naturally move into the service sector. Manufacturing employs fewer people because machines have effectively replaced human labor, and so people move on to more specialized jobs—all due to economic growth and improved living standards.
More inspiring news: U.S. per capita GDP in 1975 was $7,800 annually, and the U.S. GDP in that year was $1.7 trillion. In 2019, before the pandemic, U.S. per capita GDP was just over $65,000 annually and the U.S. GDP in that year was $21.4 trillion. Moreover, in 1975 the U.S. population was almost 216 million; in 2019 it was over 328 million. Life expectancy in 1975 was just over 72 years, while in 2019 it was 79 years. Growth is everywhere.
In 1979, President Jimmy Carter spoke to the American people in what is referred to as the “Malaise Speech,” and while he didn’t use that specific word, it was dour, just like the economy. Carter critiqued materialism as an effort to get people to see the problems as much deeper than queues for gasoline. He suggested, as all American presidents do, that the United States was the leader of the world, and as such we had to get our internal house in order to protect that position. He warned about war and deplored energy dependence. His was a mercantilist response of increasing domestic oil production and import quotas. These were not economically literate responses but were certainly predictable. Carter’s favorability increased by 11% in the polls after this speech—proving that politics makes us feel good even when it harms us.
Vice President Kamala Harris in a January 2022 interview recognized what she deemed “a level of malaise” reached by Americans in the context of how life had changed during the pandemic. She talked about the desire to return to normal and how the government was what made the recovery possible. She suggested that the government was the fixer and claimed it created 6 million jobs. She failed to say that by closing the economy, the government destroyed jobs and livelihoods. Economist Frédéric Bastiat warned of the broken window fallacy, which argued that destruction is good for the economy because rebuilding ultimately boosts it. Such thinking about the lockdown and its ultimate effect on the economy is a clear example of this fallacy. Politics and politicians remain the same due to the incentives they face. Crises are great opportunities for the seizure of power—we saw this in the 1970s and see it today. We can also see that markets and commerce are resilient in the face of the sometimes-extreme beatings they suffer.
The economy will always go through periods of recession, relatively higher inflation, and unemployment. COVID-19 is not the last crisis we will endure. The best solution to a crisis is a robust and growing economy powered by dynamic entrepreneurship. This is enabled by economic and civil freedoms, which can always be improved. Things today are better than we often admit. Yes, there are real problems and there will continue to be—we live in a fallen world. Yet the quest for growing human flourishing remains achievable.
Let’s end with some good news. The middle class isn’t shrinking because people’s incomes are regressing, but because they are growing. Economist Mark Perry has highlighted this remarkable trend: From 1971 to 2016, middle-class households, which earn between $35,000 and $100,000 per year, were 53% of U.S. households, while today they are only 42%. Again, this is not because the middle class is shrinking but because middle-class earners are moving into high-income brackets, earning more than $100,000 per year. In 2016, 27.7% of households earned more than $100,000 per year compared to only 8.1% in 1967. Middle-income Americans are becoming high-income Americans.
American incomes are growing but, just as importantly, the labor hours needed to purchase many goods and services are decreasing. We don’t simply want income to grow; we want income growth and the progressive cheapening of goods and services. Perry has also done his homework on trends before the pandemic-induced inflation we’re seeing now.
During the most recent 21-year period, from January 2000 to December 2020, the consumer price index (CPI) for all items increased by 54.6%, and we can look at the relative price increases over that period for selected goods and services based on hourly wages. Seven of the 14 have increased far more than inflation, including: hospital services (+203%), college tuition (+170%) and college textbooks (+151%), medical care services (+117%), childcare (+106%), housing (+65%), and food and beverages (62%). Average wages have also increased more than average inflation since January 2000, by 82.5%, suggesting that hourly wages have increased 28% more over the past two decades than the average increase in consumer prices. Prices that have declined over the same period are TVs (-97%), toys (-73%), computer software (-70%), and cellphone service (-40%).
The areas where the costs of goods and services have increased above standard levels of inflation since 2000 are the sectors of the economy that face a much greater regulatory burden and more government intervention. The goods and services that are becoming far more affordable are areas where there is less government intervention.
We are living in a time of exponentially increasing consumption equality. As economist Deirdre McCloskey has pointed out, the biggest difficulty in measuring GDP per capita over time is the availability of new goods and services spurred by innovations and advancements in technology. The richest American in 1975 could not even conceptualize walking around with a smartphone in his pocket. Such a product was inconceivable, and it was certainly unimaginable that every American could have one.
The labor hours required to get things is decreasing at an increasing rate. Average Americans consume double today what they did in 1980 and triple what they did in 1960. The scarcest resource we have is our time, and time is money. Americans must work fewer labor hours today to get things that are better than they were in 1970! Consider a television set from the 1970s versus one bought today. Our productivity is far greater, which means we need to work fewer hours to afford the television, and it’s a far better product.
Politicians tend to fearmonger, especially during a crisis because they want the power to save us. What the past 50 years demonstrate is that even constrained markets are robust and provide life-extending and life-enhancing change and innovation. Policy can’t ward off a crisis. What we can learn from the 1970s is to dispense with the political response that calls for us to be afraid, trust those with power, give them more power, and let them solve the problems. In this regard, politics has changed little since the 1970s. But what has changed the most is what provides us with the most economic hope for today and the future: the explosion of market exchange and the wealth it affords us.
