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The Specter of Inflation

Democrats don’t lose elections because of rising prices. They lose when they cut spending and raise interest rates, sacrificing other goals at the altar of price stability.

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President Jimmy Carter shakes hands with Paul Volcker, left, sworn in as Chairman of the Federal Reserve Board, August 6, 1979., AP Photo/Stf

As the national economy reopens, prices have been rising. Year over year, the consumer price index (CPI) increased 5.4 percent in both June and July—the largest annual increases observed since the summer of 2008, a few months before Lehman Brothers failed.

What are we to make of the jump? Thirteen years ago the bulge in prices was concentrated in petroleum products and food; today the spike is driven by used cars, airfare, and restaurants—sectors acutely impacted by the pandemic. But unlike 2008, there is little reason to suspect today’s rising prices are evidence of an overactive economy. The U-6 rate of total unemployment, which includes those working part-time involuntarily and those who have quit looking for work, remains 9.2 percent. Total capacity utilization, meanwhile, remains sharply depressed at 76 percent.

Nevertheless, some venerable liberal journalists are concerned that, when it comes to inflation, younger readers are not practicing proper deference to their political forebears. “I don’t care to be condescended to by a bunch of Gen Xers and Millennials about my ’70s-bred fear of inflation,” wrote Timothy Noah—former editor of the labor desk at Politico, contributing writer to MSNBC, and senior editor at the New Republic—in July. Rising prices, he argues, are responsible for delivering forty years of Republican hegemony. As Noah put it, “Inflation is death to progressive governance because it makes people feel that the government is spinning madly out of control, and when that happens—fairly or unfairly—voters always blame Democrats and elect Republicans instead.” In a similar vein, New York political columnist Ed Kilgore warns, “I am beginning to hear echoes of the inflation panics of the not-so-distant past, which make me tremble.” There is cause for alarm, Kilgore says, in “the abiding fact that the left has no clear prescription for dealing with [inflation] . . . other than by denying its existence or significance.”

But the history of inflation politics has a very different lesson than what these writers suggest. It is true that the liberal ascendancy of the 1960s ended with both rising prices and a decisive defeat of liberals at the polls. It was not inflation that caused these losses, however, so much as a particular way of responding to it: with tighter budgets and higher interest rates. This approach has dominated anti-inflationary policy ever since. Because rising prices are fundamentally a problem of excess demand, the argument goes, the solution must involve a contraction in spending. And since governments should always keep spending low enough to prevent rising prices, any inflation at all is a sign of political failure.

There are a variety of mistakes in this argument. Inflation is not always a problem of excess demand; it can also be caused by mismatch between existing demand and existing supply—a problem of shifting supply to changing demands. (Arguably this is what we are seeing now.) Moreover, reducing the level of spending in the economy can prevent us from achieving other, higher goals, such as raising total employment and incomes or expanding public services. Indeed, managed economies across the globe have often resorted to a variety of other tools—temporary price freezes, selective price controls, national wage policies, and targeted investments to expand supply-chain bottlenecks—to respond to rising prices while preserving commitments to more important economic goals. Both Harry Truman and Franklin Roosevelt confronted inflation without hiking rates and tightening budgets, and there is no reason governments can’t manage their economies similarly today.

Inflation, in short, does not have to be a totalizing problem, and we certainly have better prescriptions for dealing with it than those on offer today. The far greater threat, history shows, is inflation fearmongering. It is under the timorous banner of price stability that liberals have acceded to conservative demands for austerity over the last forty years of neoliberal consensus, delivering decades of skyrocketing inequality, stagnant wages, and deteriorating public services. If a progressive agenda is to stand any chance today, we must reject these tired fears over rising prices and recover a more ambitious program for managing the economy.

Since World War II, inflation has risen above 4 percent for a sustained period during five different historical eras: (1) the “reconversion” period immediately following the war and enduring through the Korean War, (2) the later years of Vietnam War (1968–1975), (3) the Carter administration and first Reagan term, (4) the last two years of the Reagan administration and the first half of the George H. W. Bush administration, and (5) the last year of the George W. Bush administration. A close consideration of these periods shows that inflation politics is hardly as simple as writers like Noah suggest. 

In the era of massive federal spending at midcentury, rising prices served as an equal opportunity political platform. When prices ticked up following the end of the wartime mobilization program in 1946, both conservatives and New Dealers lay the blame for inflation with the Truman administration and its prevaricating business Democrats: Treasury Secretary John Snyder, Labor Secretary Lewis Schewellenbach, and Reconversion Director John Caskie Collet. The Democrats lost the midterm elections in November 1946, just months after price controls were lifted, at a moment when the year-over-year CPI increase was 16.6 percent. But to say that inflation caused this anti–New Deal landslide is to ignore the politics of the campaign and the economics of the postwar inflation.

Prices rose because the political opponents of the expanded wartime New Deal—Southern Democrats and Republicans—refused to extend authority for price control during the period of “reconversion” to a peacetime economy. The Truman administration hardly gave them reason to trust effective federal oversight: between April 1945 and June 1946, the White House had failed to prevent corporations from cutting wages amid the reduction of war orders and overtime pay and allowed widespread lockouts and strikes to idle factories, causing shortages of manufactured goods. The administration’s request for statutory “fact-finding boards” in the mushrooming labor disputes pleased neither the new unions—who wanted more than non-binding fact finding—nor corporate executives, who blithely ignored the boards’ requests for information and refused to comply with the president’s wishes.

Organized capital campaigned against the administration, primarily for the paperwork required for price control. But because the cost of living was rising, the new industrial unions also campaigned against the White House, organizing a “dump Truman” campaign for the 1948 election. Henry Wallace, Secretary of Commerce and opponent of the emerging Cold War, grabbed national attention as a third party candidate. In response to rising prices, organized labor forced three “rounds” of catch-up wage increases between 1946 and early 1948. Located in the newly organized mass production industries, but radiating out into the wider labor market, these wage increases failed to restore real earnings to their wartime highs.

Instead, an agenda of public control of prices and federal economic planning won elections in this period. As the public acquainted itself with the beneficent possibilities of full employment and grew apprehensive about proposals to stabilize prices at its expense, workers came to see their bargaining power at the workplace was not enough to advance their interests as a class.

Only belatedly did the centrist Truman administration come to realize the potential electoral gains of this political formula. When Truman finally shifted his rhetoric on inflation, campaigning on reimposing price controls, he pulled an upset victory out of 1948. With the price level still rising at an astounding 6 percent for the year, Truman not only won reelection to the White House but brought the Democrats back into control of both the House and Senate. Price control was a small part of the broader Fair Deal program, which included federal construction of steel and electricity plants, co-determination in industry, national health insurance, and civil rights for African Americans. Looking closely, we can see that the key events in the Truman era related as much to McCarthyism as to inflation, since it was the anti–New Deal bloc of Southern, Jim Crow Democrats that both led the charge against price control in 1946 and opposed the Fair Deal agenda in 1949. 

When the Korean War began in June 1950, the White House waited six months before freezing prices to stabilize the economy, defensively placating McCarthyite opponents of price control. Two waves of panic buying ensued; in the months after the North Korean invasion of the South, wholesale rubber prices doubled, and used cars were selling at a 50 percent markup from factory prices. In September Congress granted the White House price control authority, but not until Chinese soldiers crossed the Yalu River in late October—signaling a prolongation of the war—did the administration begin to prepare a price freeze. The resulting Korean War stabilization program, aided by three wartime tax increases, maintained price stability amid a moment of unprecedented public and private investment during the armaments build up. As a share of GDP, government spending (consumption expenditures and gross investment) reached its twentieth-century peak of 25 percent during the Korean War. Annual increases in the CPI collapsed to 2 percent in 1952.

Success rested in part on the collaboration of organized labor. As in World War II, wage controls worked because union leaders sat on the stabilization boards and negotiated the terms of wage restraint. This is the origin of private pensions and health insurance benefits in the United States: compensation deferred in exchange for stabilized wages. Securing workers’ consent did raise tension in Washington. The United Steelworkers of America forced the abortive socialization of the steel industry in 1952, when the Truman administration seized the mills to enforce the orders of the Economic Stabilization Agency to raise steelworker wages without raising the price of steel. The Supreme Court ultimately prevented this expansion of the public sector into a fundamental industry supplying basic materials to the rest of the industrial economy.

During the Vietnam War, inflation peaked at 6 percent before the late 1974 recession. But whereas Truman waited six months to freeze prices during Korea, the White House waited six years during Vietnam. The Democrats lost the 1966 midterms in part because Lyndon Johnson’s White House refused the recommendations of senior members of the congressional Joint Economic Committee and the infamous counsel of the “Wise Men” to impose wartime profit taxes and to freeze prices and wages. The unions of the AFL-CIO had struck a national wage bargain with the White House: restraint at the employers’ bargaining table in exchange for raising the minimum wage and establishing Medicare. Once the massive mobilization of troops Vietnam began in 1965 and war profits were left untaxed, this wage bargain came apart and wages nationally began to leapfrog in the uncoordinated economy. Then Richard Nixon defeated Hubert Humphrey in 1968 on the promise of law and order: not only in the cities, but against the unions eager to regain losses to inflation. 

The Nixon White House eventually administered the Vietnam War controls program. Simultaneously, Nixon’s reelection campaign implicated the president in the illegal campaign financing and overt bribery revealed during the Watergate hearings. This fact has come to shape popular interpretations of federal price control ever since. Conservatives, who had always hated federal price freezes or any economic guidance beyond cutting taxes, felt vindicated by the inflation that accompanied Watergate and that continued into the Carter era: if controls brought corruption, then only a recession could bring stability. Liberals, divided by the Vietnam War, also divided over price controls to fight inflation. Did stabilizing the war economy imply supporting the war? After Watergate, Northern and Western liberals like Massachusetts’s Ted Kennedy and Washington’s Henry Jackson continued to campaign on stabilizing prices through controls. Senior Democratic Party advisers such as John Kenneth Galbraith, Robert Lekachman, and James Tobin advised expanding controls into broader “incomes policies” including taxes and transfers such as those practiced by European governments.

It didn’t matter what they argued: Carter instigated a recession, and the public elected Ronald Reagan. Unlike Truman in 1948, Carter broke to the right before his reelection campaign in 1980. Under the influence of Wall Street bankers such as David Rockefeller, as well as all those who favored a strong dollar in the world economy, Carter moved to reduce the federal budget deficit and pursued stabilization through austerity and deregulation of trucking, airlines, and banking. In the summer 1979, he appointed Paul Volcker to head the Federal Reserve. Thereafter, the central bank—rather than Congress or the White House—would hold primary responsibility for fighting inflation.

The last two moments of 4-plus percent inflation during the twentieth century demonstrate inflation’s political indeterminacy. During both the George H. W. Bush administration and the last years of the second George W. Bush administration, relatively high inflation was driven by rising global oil prices. From 1988 to1991, rising prices were also driven by wage pressure: union power nationally, though declining, still remained influential, with around 16.5 percent of the workforce claiming membership in unions whose contracts set wages for 18.5 percent of the workforce. But both the elections of 1992 and 2008 turned on political issues considerably broader than rising prices. Would anyone argue that inflation can be singled out for the defeat of George H. W. Bush or John McCain?

Pundits often argue that a certain rate of inflation dooms incumbent politicians in electoral campaigns. A journalistic rule of thumb dating from the 1970s argues that this occurs when the price level rises at an annual rate above 4 percent. Historians share much of the blame for this perspective. Princeton Historian Meg Jacobs, for example, has argued that inflation had always been the “Achilles heel” of the “redistributive ideology” of the New Deal order, while older economic historians such as Alan Matusow or Alan Metzler never seriously considered the reasons for the failure of strategies for combating inflation beyond having the Federal Reserve deliberately instigate a depression. These arguments have continued to trickle down to the present. As Janet Yellen argued in the 1990s and the 2010s, so Larry Summers argues today: it is time to raise interest rates, depress spending, and slow down price increases.

Yet a close look at history belies this contention. The interpretation of the past that government management of the economy once “worked” only to be undermined by inflation misdiagnoses the problem of stabilization policy, which in a democratic economy means winning the support of the public. It was not tolerance for inflation, but rather political failure to administer controls, that fueled the great transformation of U.S. politics in the final third of the twentieth century.

It is to the credit of many a liberal inflation hawk that they do not explicitly call for a smaller spending package from Congress or tighter money from the Fed, only going so far as to caution about the mysterious dark forces thereby unleashed. But arguing that we can “blame inflation” in the past for plutocratic control of the economy in the present is not a serious way to discuss what happened during the 1970s or since. It simply does not follow that, because contingent political arrangements failed to control inflation for fifteen years between 1965 and 1980, liberals should curtail their spending program today after six months of rising prices in a profoundly dislocated economy. So long as journalists and thinkers continue to imagine “inflation” as a monolithic historical experience, such a serious discussion of how to think about inflation will be impossible.

In fact, it is arguably the prevalence of this interpretation among liberal elites that better explains the past forty years of Republican Party power than anything that occurred when inflation was actually out of control. This attitude has bred a Democratic Party all too willing to concede to Republican fears and demands. Decades of high-end tax cuts punctuated by congressional gridlock and a narrowing legislative program—all this has been a product of a bipartisan insistence on Fed-managed price stability and fiscal “discipline” above all else.

Confronting a period of instability and rising aspirations—historically accompanied by rising prices—requires nothing less than making history. Given the sheer size and influence of the politically managed public sector of our mixed economy, there is no way to pursue economic change without risking some degree of inflation. The true culprit in the winnowing of our political imaginations over the last forty years has been a bipartisan embrace of fiscal austerity and monetary contraction as the first weapons in the pursuit of price stability.

The results are all too familiar: a stubborn increase in unemployment, a sharp decrease in labor force participation, a stark deterioration in public services, and spiraling inequality. It is the insistence on depressing activity to stabilize prices before all else that has helped to disfigure our society and political life, diminishing our capacity for shaping and guiding our society’s historical development. Until we seriously consider the record of methods for controlling inflation, a future out from under these trends will be foreclosed.


Andrew Elrod recently completed a dissertation on the history of wage and price controls in the United States between 1945 and 1980. His writing has also appeared in Phenomenal World, Jacobin, Dissent, and New Labor Forum.

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