Stagflation in the Economy – OpenBUCS

Stagflation in the Economy – OpenBUCS


In this segment I want to shift away
from foreign policy and I kind of hinted we were going this direction when I talked
about OPEC and the the oil embargo of the early
1970s but I want to talk about domestic issues. And
I want to start out by talking about the economy. One of the key factors in the 1970s in this questioning of America’s future, I think really came from the economic situation that
the US faced in the 1970s. At the heart
that economic situation is something called
stagflation. S-t-a-g-f-l-a-t-i-o-n- To start out here, if you think about expectations, just kind
of your basic economics, if you have rising demand for goods, you should see inflation of
prices. Growing economy means that more people are buying and
as demand increases and supply decreases, what’s
available to buy decreases, then the person selling can raise prices and that’s inflation, right? Inflation is
when prices go up or you might put it another
way, the value of the individual dollar declines. In other words, what a
dollar will actually buy declines. And you know, you can see that in a
box of cereal. A box of cereal costs a dollar and then the price goes up to $2.99 or $3.99 a box or more, well that’s inflation. Instead of
buying you a whole box of cereal your one dollar really will only buy you what a quarter of a box of cereal because it’s gonna take
four (4) of those dollars to get the whole box, that’s inflation.
Prices go up, the value of the dollar really goes down, what it will buy. That is in a
growing economy, but what if you have a situation like the Great Depression? Then you have people buying less, demand goes down and what you would
expect is that unemployment goes up, right? There are
fewer people that are needed to produce goods so they get
laid off, unemployment goes up, and you have deflation. You can’t get people to buy your stuff if you are a producer. Stagflation is where you sort of have the worst of both
worlds. And that’s what hit the United States in
the 1970s. On the one hand, you have a stagnant economy which is
effectively in a state of either non-growth or recession, not economic depression, but recession. So
that you have very minimal growth, but then you also
have unemployment. The economy is growing but you’ve got
unemployment. And then, on top of that, you have inflation.
Prices are going up, people are being unemployed and the economy is not
growing at any sort of a rate that it can keep up with inflation. So people begin to feel that what they can afford, that their standard
of living, is threatened. Let’s start out just briefly and let me give you some statistics here.
In terms of unemployment, in the 1960s, the average unemployment rate annually for the
United States was about 4.8%. That had gone up in the early 1970s to an average of about 5.4%. And by the late 1970s would
average approximately 7%. The high, during this sort of era, the highest
unemployment would be achieved in 1982 where it ran about 9.7%,
almost 10% unemployment. So over the course of the 1970s,
it doesn’t look like things are getting better, or even staying the same. It looks statistically as if things are getting worse. In terms of inflation, by January of 1971,
inflation was running at about 5.3% annually, but it continues to rise. 1973, the same time as we’re seeing the oil
embargo – and you can imagine what happens to gas prices, they go up enormously during this as a result of the embargo – inflation has
jumped to about 9% annually. 1974 that’s going to go up to 12%. 1980 almost 14%. So that over the course of the decade
things don’t look better or the same, they look worse. There are a number of factors behind what’s
happening and I have mentioned of course OPEC and the oil embargo and
what that does creating what has been called an energy
crisis in the United States. It’s like going to a buffet, I mean we thought it was all you can eat in
terms of oil but the 1970s was a wake-up. That’s what I’m talking about in
terms of the mentality of the ’70s. This, this, “Wait a minute. Can we continue to do
things the way we’ve been doing things here in in the US?” But another major factor coming out the 1960s were
the policies, or factors, were the policies of Lyndon Johnson. Remember that Lyndon Johnson had avoided, sort of placing on the American public,
any kind of substantial financial hardships as a
result of Vietnam. And he had continued creating federal
programs through The Great Society so that in
essence he’s paying for the war and he’s also seeking to pay for these
new programs of The Great Society without major tax increases or other money-raising schemes like Liberty Bonds and all that kind of stuff,
that normally the US has used to pay for its wars. Going all the way back to the Revolution where we got in massive debt trying to fight that. Historians have used the phrase “guns and butter”, that LBJ wanted Americans, he wanted guns, but he also wanted butter.
He wanted the extra on the toast, in terms of domestic spending.
The result, you would imagine over time would be
inflationary as massive amounts of federal dollars are pumped into the economy for military
spending, but also through these government
programs. I think those short term explanations
are important and they go a long way to explaining
what’s happening in the very early 1970s in the early
years of the Nixon administration. But, as we look at the 1970s, as we
expand out further and look at American history since, I
think it’s pretty clear, looking back anyway, that we see emerging
in the 1970s some very definite evidence of really almost structural changes
occurring in the United States economy. One of, well these are long-term efficiencies, you
might say, to use sort of jargon. But efficiencies as they’ve meant when we talked about
industrialization, the US post-civil war, efficiencies mean that you’re replacing
human labor with technology. You’re pushing productivity and there
are repercussions. There are repercussions whenever that
occurs. First of all in manufacturing, let’s talk
manufacturing just briefly, and I want to use the example of
steel. If you look at steel, the steel industry from 1947 just post-war to 1977, the US’s output of steel actually doubles during
this period. But at the same time, the American
workforce, the steel workforce, is being cut and it’s cut –
the same period that production’s doubling – the workforce
is cut by about 30%. Now part of the reason for this manufacturing decline in the United
States, will be that by and large the US dollar remains
strong compared to other currencies. There is
still considerable faith in the United States and its economic
position going into the future, at least abroad. But I think something else we
have to think about is just time and recovery. That from the late 1940s through
the early 1970s, the United States was the productive engine of the
world. Most of the rest of the world had been
destroyed, decimated by the Second World War. The
major economies, think about Germany, think about Britain, think about France
but also think about Japan. Major economic engines in the world had not been in a position since World
War II to actually produce products that would
compete with the United States. And so what we begin
to see is a situation in the United States in which high wages and high costs of production produce products that simply cannot
compete – and also add in a strong dollar – cannot compete with products being
produced more cheaply abroad. They may not be the same quality, they
may not be as good, at least in the early 1970s,
but they’re cheap and they’re competitive. And the US will
begin to see the results of this competition and how it’s going to
play out in the 1970s will be through the so-called rust belt. This is a stretch of industrial cities
across the American North, the northern United
States. Places like Allentown, Pennsylvania, and Gary, Indiana, and in major, major cities where you see
these sort of high-paying union jobs disappearing. And you see the communities where so many workers
had flocked during the Second World War for
industrial employment, whole portions of the city began to
fade, began to disappear. The term that has often been used
is the rust belt. You know, the old focal points for
American industry and manufacturing – they begin to decline. Jobs are lost,
plants close, largely in the face of foreign
competition but also a shift in the United States
toward the service sector and away from
manufacturing. This trend is also happening though not
just in manufacturing; it’s also in some place you might not think
to look and that’s agriculture. And that’s a big one.
It’s a big deal. As with industry, as with manufacturing,
technology will play an increasing role in American agriculture. First of all, we have the introduction
post-World War II of machinery and that’s primarily tractors. We also have the introduction of chemical fertilizers
and we have the introduction of herbicides
like Roundup. These are chemical treatments
designed to kill certain species of weed which diminish the amount of labor
required to keep fields, crops, weeded and weed free. Chemical fertilizers increase the
productivity of plants, and of course we also have certain amounts
of scientific engineering and hybridization going on which allow for greater yields off the same
amount of land. So we’re introducing new technologies
which are actually, as with machines in industry, they come with some expense.
You know, they’re not cheap. What this ultimately will mean is that
farmers who cannot achieve efficiencies of scale will be pushed out of
agriculture. In other words, if my farm is just a few
acres, I cannot as easily afford these new
technologies as a farmer who is farming a vast
acreage. It’s like the huge corporation versus
the little mom and pop factory. Or, the huge retail store that’s
nationwide that can purchase in volume and create certain efficiencies in
management that a little mom and pop retail store
just can’t achieve. So what we see in the US is influenced by technology but
it’s also being influenced by global markets. In the early 1970s
there’s huge demand for American agricultural products. Huge demand. Part of it is just natural,
environmental. There are famines around the
world and the US is producing vast quantities of crops. And, in fact, the Nixon administration will encourage
greater production. When the production looks good and it looks
like the US is set and there’s real money to be made in agriculture,
you see farmers seeking to expand. And throughout much of the 1970s, that’s exactly what they did. If I’m going to make this much money off of
X number of acres, if I add more acres to what I own, how
much more money can I make here in the boom times. So farmers are taking out loans, they’re
expanding their acreage, they’re investing in machinery to be more efficient. And what happens then by the early 1980s
when the market slumps, is that these farmers
are left holding the bag, so to speak. Sort of an empty bag. But they often can’t make the
payments and they end up losing their land. So the overall trend in the United
States during the 1970s which was leaning toward unemployment, right, but it’s also sort of operating
within these inflationary pressures will be the loss of
American farms. Just to give you some idea, in 1960 there were approximately 4 million
farms operating in the United States. By 1980, just twenty years
later, that number had gone down to 2.4 million farms. And, by the year 2000, we are down to approximately
1.9 million farms. So overall, we see the diminution
of traditional sectors of the American economy. And real questions about what form
they’ll take and what it will mean for many, many Americans who depended upon
these sectors of the economy for jobs,
good jobs, union jobs, high-wage jobs that are now being lost, in part, to
competition in part to greater efficiencies being
sought after as a result of that competition and
agriculture for other reasons. So you can begin to see, I hope, both with what we saw in Vietnam, with
OPEC and the oil embargo, and then on the domestic side with the economy, hopefully you can begin to see why in
the 1970s Americans might question what the future
would hold for them and for the United States. In the next segment I’ll take up with some
other domestic issues and we’ll go from there.

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