From: brownfield!jbrow (Jim Brownfield)
Subject: Re: Inflation and Carter?
Reply-To: <jbrow@glv.com>
Organization: Encompass
Date: Tue, 25 Aug 1992 19:34:31 GMT

In article <81127@bcsaic.boeing.com> rwojcik@atc.boeing.com (Richard  
Wojcik,snake) writes:
> In article 3173@brownfield.glv.com, Jim Brownfield writes:
> 
> [Responding to the claim that the "oil shock" was the major cause of  
inflation
>  under Carter]
> 
> >The early Carter years were inflationary because the government printed  
money  
> >out the butt (quite a feat :-) ).  A price increase in one commodity will  
not  
> >cause long term inflation, although it might cause a near term spike.  The  
> >reason for this is that as resources are diverted toward the perchase of  
> >gasoline (in this case), they must be pulled from some other place (like  
> >hamburgers).  Supply vs. demand generally means that other commodities will  
> >drop in price to offset the one commodities' increase.  _Free to Choose_, by  
> >Milton Friedman, is an excellent book to read to understand this process.
> 
> There are other factors besides supply and demand that affect things.  From  
reading
> this, I get the impression that you don't remember too much about those  
times.  

Cheap shot :-)  My memory is  quite good, thank you. I wasn't writing a book on  
the Carter administration, I was refuting the common misconception that a  
rising commodity price increases inflation.

> Friedman is the quintessential monetarist who thinks that everything can be  
con-
> trolled by controlling the money supply.  Unfortunately, the central role of  
oil
> in our economy far exceeded the "single commodity" status that you give it.   
It is
> used in countless products--e.g. anything made from plastic.  Asphalt in the  
roads.
> Heating oil--the major source of heat in the winter for the Northeast.   
Pharma-
> ceuticals.  So everybody's costs increased.  You couldn't just lower the  
price of
> hamburgers if you had to pay more for heating, cooking, plastic utensils,  
etc., not
> to mention the demand for increased wages to cover hikes in utilities and  
automobile
> costs.  

I was not arguing that the oil cartel did not hurt our economy, but that is a  
much different thing than arguing that it caused inflation.  When more of your  
resources are dedicated to one commodity (or group of commodities), there will  
be less to dedicate to other enterprises, and your standard of living declines.  
I agree that the oil embargo hurt our standard of living, but it definitely did  
not *cause* inflation (except perhaps that it influenced politicians to  
pressure the fed into printing more money to *spur* the economy). 

Friedman presents direct and compelling evidence that the money supply is the  
main factor in inflation.  In _Free to Choose_, he presents graph after graph  
showing how inflation increases (with a 6 to 9 month lag) in direct proportion  
to the increase in the money supply.

> The fed can control how much money it prints, but it can't control how much
> money flows out of the country.  And that is just what happened.  The value  
of the
> dollar plummeted relative to the amount of technology-sustaining oil it could  
buy.
> That is what produced our "staglfation"--rising prices in a stagnant economy.  
> Carter did develop some excellent energy policies to meet the challenge, but  
there
> is a limit to what you can do to minimize the impact of a more than doubling  
in
> prices of one of our major sources of energy and raw materials for products.
> 

Besides the fact that the money supply *did* increase dramatically in the  
Carter administration (maybe *your* memory is a little weak :-) ), when U.S.  
companies purchase foreign commodities,  they pay for them using American  
dollars.  These dollars eventually wind up purhasing American products.  Unless  
the American GDP decreases (which it didn't during do by 12%-13%), or the feds  
print too much money (which they did do), foreign trade will not significantly  
effect long term inflation.

Money should be a reflection of our productive output.  When you increase the  
total amount of money in circulation by a rate that exceeds our increase in  
production (GDP), each money unit (dollar) will fall in value (ability to trade  
one person's productivity for another's).  That is inflation, and it is just  
another form of government theft.

> >...  Interestingly,  
> >late in the Carter administration, Carter appointed Paul Vocker as chairman  
of  
> >the Fed.  Vocker believed in a tight money supply to control inflation, but  
it  
> >was already too late for Carter to be re-elected.
> 
> I agree that the poor economy did not help Carter's reelection bid, but I  
think
> that the major problem for him was the appearance of weakness and lack of  
vision.
> The country felt deep humiliation at what was going on in Iran.  Look at the
> current situation with Bush.  We are much worse off now than we were with  
Carter,
> but the public is easily distracted by so-called "character" issues.  It is  
rather
> conventional wisdom that the economy rules in elections, but I sometimes  
think
> that tabloid issues are far more important to Americans. 
> 

Again, I find it interesting that you accuse *others* of not remembering the  
Carter administration.  Certainly Carter did hurt our national image, and he  
blundered consistently in foreign policy issues, but the main reason for his  
defeat was the atrocious way he handled the economy in his early  
administration.  This was why Reagan's libertarian rhetoric (rhetoric because  
he certainly didn't believe much of what he was saying) played so well to the  
American people.

Stagflation just proved that the Keynesian premise of pumping money into the  
economy to give it a long term boost didn't work.

Actually, some of the things that Reagan got credit for were actually things  
that Carter did.  The change in monetary policy brought on by  Paul Vocker, and  
airline deregulation were actually implemented during Carter's administration.   
Had he taken this approach early in his administration, he probably would have  
been reelected.

> -----
> Disclaimer:  Opinions expressed above are not those of my employer.
> 
>     Rick Wojcik   (rwojcik@atc.boeing.com)   Seattle, WA

Jim Brownfield
#include <standard/disclaimer.h>

Newsgroups: talk.politics.misc