This piece was originally published in The Hill on 12/28/2021. You can access the original version here
Inflation is an issue again in 2021 for the first time since 1981 with prices jumping 6.8 percent in the past year. The price of regular gas, important to rural and suburban voters who drive longer distances, is $1.00 higher than it was just 10 months ago. Heating oil, natural gas, and other energy products that affect the bills of ordinary people are up sharply also. Dormant as a political problem since 1983, inflation is a serious one now despite a strong job market and rising wages. The question is what should the government do about it.
It may help to look back at what happened in the 1970s to see what policies worked to end that longer period of inflation. The inflation of the late 1970s was led by energy prices like the inflation this year. Energy prices in the 1970s though did not go up by just 30 percent as they have this year. They quadrupled from $3.00 a barrel to over $12 after OPEC cut supplies in 1972. What is important to note, however, is that when the OPEC pricing cartel collapsed in the early 1980s, energy prices and inflation dropped like a stone -- as they will if OPEC’s more limited ability to set prices is broken in 2022.
Transportation costs are a second large contributor to inflation in 2021, as they were in the 1970s. They are up 21 percent according to The Wall Street Journal. Again, the history is important. Inflation due to rising transportation costs had been recognized by a succession of presidents starting with Franklin Roosevelt. To deal with the problem after Presidents Nixon and Ford took a pass, President Carter signed the Motor Carrier Act of 1980 in July of that year. That act ended legal price fixing by regional “rate bureaus” dominated by large truckers and eliminated other inflationary artifacts carried over from the Great Depression. The reforms brought trucking costs down almost immediately. Rail freight had to follow or lose business to trucks. The Staggers Rail Act signed in October 1980 brought railroad rates into line. Air freight and passenger airfares tumbled too as a result of pro-competitive policies at the Civil Aviation Board (CAB).
Then there was inflation-prone manufacturing, a sector dominated in the 1970s by the Big Three automakers. Their dominance shaped markets for steel, machine tools, metal parts, and much else. The automakers raised prices year after year more or less in lock step. What broke this oligopoly was the arrival of smaller well-made Volkswagens followed by Toyota and other Japanese makes. Politically influential local car dealers wanted to sell the imports because the margins were generous. In part because of this and with gas prices rising the U.S. International Trade Commission (ITC) decided not to prevent smaller foreign cars from entering the U.S. market. The Big Three had to face competition that took away much of their pricing power.
The breakup of AT&T’s telecommunications monopoly during the 1980s also worked to bring inflation down. The monopoly called “Ma Bell” had about 85 percent of the market through the 70s. Major business users, however, who were increasingly using phones for data felt that the monopoly was charging them too much, but the powerful lady essentially ignored their complaints. The big data users to the surprise of many then backed MCI, an Illinois upstart that wanted to compete with the monopoly. The FCC let MCI in and gradually supported telecom competition more broadly breaking MaBell’s inflationary stranglehold.
The political and economic question today is whether to fight inflation by slowing the economy or to attack bottlenecks the way the country did successfully in the 1980s. What is clear is that none of the anti-inflationary changes cited above that made the economy from 1980 to 2020 so much less inflation prone than the economy of the 1970s had to do with raising interest rates and reducing government spending to slow the economy. Such policies, championed by a succession of Fed chairmen and many economists and businesspeople did nothing to reduce the arbitrary pricing power of many American industries. What worked was attacking structural bottlenecks and opening politically powerful industries to competition. Businesses in all these sectors, energy, transportation, manufacturing, telecommunications lobbied hard to maintain their pricing power, but Carter and the Congress beat them and Ronald Reagan backed and supplemented what had been accomplished by his predecessors.
Today, as the U.S. faces some months of inflation caused overwhelmingly by the post-COVID-19 economic surge, the American economy is not the inflation-prone one of the 1970s. There are only a few U.S. industries that have the power to raise prices arbitrarily the way many important ones could in the 1970s. The most prominent of these is health care, a bloated 17 percent of the U.S. economy where prices rise arbitrarily every year. Health care costs rise because local monopolies, shady sweetheart supplier relationships, needless paperwork and insane insurance arrangements guarantee inflation, and because the public and political leaders confused by the industry’s chaos accept it.
As the country enters 2022, temporary bottlenecks in areas where prices are surging in late 2021 will be eliminated. Inflation in the energy sector will be overcome as it was in the 1980s by production increases and new energy technologies that weaken OPEC’s pricing power. Bottlenecks at ports and transit hubs, shortages of containers, trucks and drivers will be dealt through the market with important government help. New investment will deal with shortages of computer chips. Used car prices will come back to earth. Once COVID surges fade, none of these industries will have anything like the market power to keep raising prices the way incumbents could in the 1970s.
Labor shortages, almost all closely related to COVID, also could be dealt with in ways that lead to a fairer sharing of economic rewards. Today the political power of the wealthy promotes bloated paydays for executives, pocket-lining financial engineering, stock buybacks and the like. These abuses are the result of the same kind of arbitrary pricing power that existed in many industries in the 1970s. It is long past the time to attack them. Economists who knowingly or innocently carry water for those who profit from these cozy financial arrangements will say the Fed needs to slow the economy to deal with them, in effect keeping down the wages of ordinary people. The economic story of the period from 1980 to 2020 should tell us to ignore them and attack bottlenecks.