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And the Last Shall Be First - It Was the Peanut Farmer, Not the Tall Guy or the Iron Lady

letsgetitdone's picture

Warren Mosler
(Cross-posted with permission of the author from
The Center of the Universe)

(Editor's note: I think this reaction of Warren's to the death of Margaret Thatcher is pretty unique and also the best statement I've seen of his view of why the “stagflation” of the late 70s and early 80s went away. Hint: President Jimmy Carter had more to do with it than Paul Volcker, and Thatcher is much less important to what happened next, than the Keynesian failure to handle the stagflation, and the resulting shift to monetarist economics. Here's Warren!)

Here’s how I remember it all.

I didn’t look anything up, with the idea that memories matter.

The ‘golden age’ from WWII was said to have ended around 1973. Inflation and employment was remembered as relatively low, productivity high, the American middle class thriving.

Why? Keynes was sort of followed. The Kennedy tax cuts come to mind. But also of consequence and ignored was the fact that the US had excess crude production capacity, with the Texas Railroad Commission setting quotas, etc. to support prices at maybe the $2.50-$3.00 price range. And stable crude prices, though maybe a bit higher than they ‘needed’ to be, meant reasonable price stability, as much was priced on a cost plus basis, and the price of oil was a cost of most everything, directly or indirectly.

But in the early 1970′s demand for crude exceeded the US’s capacity to produce it, and Saudi Arabia became the swing producer, replacing the Texas Railroad commission as price setter. And, of course, price stability wasn’t their prime objective, as they hiked price first to about $10 by maybe 1975, which caused a near panic globally, then after a too brief pause they hiked to $20, and finally $40 by maybe 1980.

With oil part of the cost structure, the consumer price index, aka ‘inflation’, soared to double digits by the late 70′s. Headline Keynesian proposals were largely the likes of price and wage controls, which Nixon actually tried for a while. But it turned out the voters preferred inflation to their government telling them what they could earn (wage controls on organized labor and others) and what they could charge. Arthur Burns had the Fed funds rate up to maybe 6%. Miller took over and quickly fell out of favor, followed by tall Paul in maybe 1979 who put on what might be the largest display of gross ignorance of monetary operations with his borrowed reserve targeting policy. However, a year or so after the price of oil broke as did inflation giving tall Paul the spin of being the man who courageously broke inflation. Overlooked was that President Jimmy Carter had allowed the deregulation of natural gas in 1978, triggering a massive increase in supply, with our electric utilities shifting from oil to nat gas, and OPEC desperately cutting production by maybe 15 million barrels/day in what turned out to be an unsuccessful effort to hold price above $30, as the supply shock was too large for them and they drowned in the flood of no longer needed oil, with prices falling to maybe the $10 range where they stayed for almost 20 years, until climbing demand again put the Saudis in the catbird seat. Meanwhile, Greenspan got credit for that goldilocks period that again was the product of stable oil prices, not the Fed (at least in my story.)

So back to the 70′s, and continuous oil price hikes by a foreign monopolist. All nations experienced pretty much the same inflation. And it all ended at about the same time as well when the price of crude fell. The ‘heroes’ were coincidental. In fact, my take is they actually made it worse than it needed to be, but it did ‘get better’ and they of course were in the right place at the right time to get credit for that.

So back to the 70′s. With the price of oil being hiked by a foreign monopolist, I see two choices. The first is to try to let there be a relative value shift (as the Fed tries to do today) and not let those price hikes spill into the rest of the price level, which means wages, for the most part. This is another name for a decline in real terms of trade. It would have meant the Saudis would get more real goods and services for the oil. The other choice is to let all other price adjust upward to keep relative value the same, and try to keep real terms of trade from deteriorating. Interestingly, I never heard this argument then and I still don’t hear it now. But that’s how it is none the less. And, ultimately, the answer fell somewhere in between. Some price adjustment and some real terms of trade deterioration. But it all got very ugly along the way.

It was decided the inflation was caused by unions trying to keep up or stay ahead of things for their members, for example. It was forgotten that the power of unions was a derivative of price power of their companies, and as companies lost pricing power to foreign competition, unions lost bargaining power just as fast. And somehow a recession and high unemployment/lost output was the medicine needed for a foreign monopolist to stop hiking prices??? And there was Ford’s ‘whip inflation now’ buttons for his inflation fighting proposal, and Carter with his hostage thing adding to the feeling of vulnerability. And the nat gas dereg of 1978, the thing that actually did break the inflation two years later, hardly got a notice, before or after, and to this day.

As today, the problem back then was no one of political consequence understood the monetary system, including the mainstream Keynesians who had been the intellectual leadership for a long time. The monetarists came into vogue for real only after the failure of the Keynesians, who never did recover, and to this day I’ve heard those still alive push for price and wage controls, fixed exchange rates, etc. etc. in the name of price stability.

So in this context the rise of Thatcher types, including Reagan, makes perfect sense. And even today, those critical of Thatcher type policies have yet to propose any kind of comprehensive proposals that make any sense to me. They now all agree we have a long term deficit problem, and so put forth proposals accordingly, etc. as they are all destroying our civilization with their abject ignorance of the monetary system. Or, for some unknown reason, they are just plain subversive.


It was the blind leading the blind then and it’s the same now.

And that’s how I remember it/her.

And i care a whole lot more about what happens next than about what happened then.


(Editor's note: So, we have ignorance about the fiat monetary system and “chance” to blame for the displacement of the Keynesians by the monetarists, the victories of Thatcher, Reagan, and neoliberalism, and the ensuing decades of increasing evolution to a new feudalism. This is the broad scope of change over the past 40 years. In viewing this change, we can't forget what it's done and is still doing to people. Bill Mitchell's retrospective on Thatcher is very good on that. Don't miss it!)

(Cross-posted from New Economic Perspectives.)

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Submitted by Hugh on

Oil prices went up in 1974 from the Arab Oil Embargo. They went up considerably more at the end of the decade due to the Iranian Revolution and Iraq-Iranian War. They did not come down to post-embargo levels until the mid-80s.

So if it was Carter's natural gas deregulation in 1978 which broke the back of inflation two years later in 1980 or thereabouts, why did it take another 5 years for this to show up in oil prices?

And while interest rates came down, the velocity of inflation in society as measured by the CPI-U never did.

"It was forgotten that the power of unions was a derivative of price power of their companies, and as companies lost pricing power to foreign competition, unions lost bargaining power just as fast"

A pile of neoliberal tripe. Anti-communist hysteria whipped up by corporatists going back to the 20s, certainly the 30s, had removed most of the social movement aspects from unions. Their organizations had become bureaucratized and their scope of action reduced to a relatively narrow band of issues. This set them up to be isolated and stigmatized by other workers, a classic case of labor being set against itself. The war on labor that resulted had three prongs. The first was the Volcker policy of viewing wage increases as inherently inflationary and to be suppressed. The second was deregulation like Carter's deregulation of the airlines in 1978 and trucking in 1980. The third was direct anti-unionism like Carter's 1978 Civil Service Reform Act which set up the Federal Labor Relations Authority to oversee collective bargaining with federal workers. It was this Authority which Reagan used in 1981 to decertify Patco, the air traffic controllers union. Patco was a watershed moment and though it concerned federal workers, it marked the point when open anti-unionism became fashionable.

Effective unions are about social cohesiveness, solidarity, and vision, not Mosler's sterile neoliberal take based on pricing power and foreign competition.

Memory is certainly an OK place to begin, but in the age of the internet, how hard is it exactly to back one's memories up with a few facts?

Submitted by MontanaMaven on

Thanks, Hugh. You are right to point out that there is a difference between the idea of solidarity and union big shots trying to get a good contract in their particular fiefdom. I also thought that lifting the cap on interest rates aka usury which was done by Democrats in 1979-1980 while stifling wages led to most Americans starting to live on credit and sinking into debt.

letsgetitdone's picture
Submitted by letsgetitdone on

That was awful legislation.

warren mosler's picture
Submitted by warren mosler on

Not feeling any love here...

first, the idea that strong unions are a derivative of corporate pricing power is hardly 'neo liberal' In fact, I recall Galbraith wrote extensively on it in maybe 'the new industrial state'? And I agree with most all of what you say about unions and the other deregulations as well. But I recall the loss of power began before that, when foreign competition began removing pricing power from US companies. And private sector unions were already seriously weakened when Regan went after the federal air controllers, etc. And didn't Nixon's wage and price controls apply largely to unions?

I wrote only from memory deliberately to show how I remembered it all before looking it up. If that's a problem for you, take it up with Joe. He's the one who thought it was worth putting on this website, and also asked me to respond here.

next, check out opec production, as, again from memory it fell steadily a couple of years after deregulation of nat gas as opec struggled to hold price over 30.

And yes, inflation stayed high after oil prices peaked. (*Remember, they only have to not go up to not be contributing to 'inflation'.) I attribute that to the high interest rates, which support both interest income and costs of production. As rates fell, inflation fell, and yes, I know that doesn't prove causation, but it doesn't prove there isn't causation either.
It's been my suspicion for a very long time that with floating fx the spectrum is that high rates are a govt subsidy and inflationary, zero is neutral as it is the result of no govt interference in rate markets, and negative rates a deflationary tax. But yes, that's just me.

letsgetitdone's picture
Submitted by letsgetitdone on

Thanks, that was very good reply, and Hugh's comment was about a lot more than the major thesis in your post. I think your analysis was quite right and isn't in conflict with the view that Volcker's high rates sustained the stagflation long after it should have ended.

Submitted by Hugh on

One of the hallmarks of neoliberalism is its scission of economic factors from the social purposes that underlie them and imbue them value and meaning. The social purpose of a union is to protect and improve the lives of workers, not just its members. Union strength comes through the solidarity of union members with each other, unions with unions, and union members with workers generally. Only a neoliberal would cast union strength in terms of corporate power since unions are precisely a counterweight to such power. Only a neoliberal would completely drop out the social purpose for having unions in the first place.

There was a double dip recession in the early 80s. There was also as I mentioned previously the Iranian Revolution and the Iraq-Iran War. Saudi Arabian production cuts and natural gas were just some of several factors in play.

Figures 1 and 3 give an idea of Persian Gulf cuts vs worldwide production.

As for high interest rates supporting interest income (by which I assume you mean rents) and costs of production, it can, but even more importantly low interest rates can support rentier income at the expense of workers' wages as a cost of production. And that is in fact what we have seen.

blue line = nominal wages
green line = CPI-W
red line = real wages

Over the last 30 to 35 years real workers' wages have been flat. However, we know that there have been large increases in productivity over this period, the benefits of which have gone to the rentier class.