THAT, MY CHILDREN, WAS WHAT A REAL ECONOMIC CRISIS WAS LIKE:

Econoclasts: The following is excerpted from Chapter 1 of Econoclasts (Brian Domitrovic, 09/24/09, First Principles)

From 1968 to 1982, the American stock market nearly collapsed, with the Dow Jones Industrial Average losing 70 percent of its real value. The “misery index,” whereby the inflation and unemployment percentages are represented as real numbers and summed, blew through the historical trend of 6 to 8 early in the 1970s, plateaued in the double digits, then hit unlucky 21 in 1980. Interest rates also hit 21—no misprint, a 21 percent prime rate—in 1980. Big things that never were supposed to go bust declared default: New York City, most famously, and Chrysler, too.

Those who tried to wait out the chaos by saving money were brutally punished. The greatest inflation since the Revolutionary War destroyed the value of funds in bank accounts, the stock market was in free fall, and municipal-bond issuers missed payments. The only thing to do was to stash cash in commodities. Because commodities originated in the geologic history of the planet, commodities had a guaranteed delimitation of supply and therefore could hold their value against inflation. Gold, oil, gas, land—everything in the commodities universe went up in the 1970s, as if everything in the earth had suddenly become impossibly scarce.

The halcyon “postwar prosperity” that had characterized the years after 1945 seemed to be in terminal decline, a brilliant flash that had lasted for an unusually long spell and had given the illusion of permanence. It was hard to put a finger on what was going on. Sometime around 1970, everything started getting worse, economically, with every passing year.

Inflation had hitherto been rather unheard of. Now it reliably hit double-digit rates. Unemployment, theoretically a converse of inflation, and low since World War II, went up, too. Unemployment in tandem with inflation led to the popularization of a new word, “stagflation” (from stagnation plus inflation), which was on everyone’s lips by the last days of disco. Entrepreneurial startups, the very stuff of the “American dream,” passed from the scene; venture capital was waiting things out in commodities.

Then there was the government. Throughout the long 1970s, the federal government of the United States preoccupied itself with such things as fixing prices, pressuring labor unions not to take wage increases, begging shoppers to rein in their spending, mistaking nominal for real income in the tax code, adding regulations, running deficits, reneging on the pledge to exchange dollars for gold, and gobbling up an ever-increasing share of the gross national product. This was no ordinary downturn. It was not exactly the Great Depression, either. And it was hard to pin the blame on “business” for what was going on.
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What was going on? Unsure, President Ford asked the nation in 1974 to “Whip Inflation Now.” He also asked people to sign a pledge saying that they would refrain from new purchases, in the interest of holding down inflation. Five years later, with the same problems still raging, a memo to President Jimmy Carter proposed that America had gotten caught up in a “malaise,” whatever that meant. In other words, leadership was befuddled. It had no answers.

What Happened?

The most important fact about the economic funk of the 1970s, the stagflation decade, was that it stopped. [...]

The unique ability of the United States to maintain a historic rate of economic growth over the long term is what has rendered this nation the world’s lone “hyperpower,” as the French are sometimes wont to say. The only other realistic aspirants to that status—China and India—will not see economic maturity for decades to come.

The exception to this trend was the stagflation decade: 1973–82. That was the only period since 1945 when the United States did not sustain a 3.3 percent rate of growth. Before and after this interregnum, there was the odd, mild recession or boom year, but the growth trend remained at that steady, historically high rate. Growth was 3.3 percent from 1945 to 1973, and it was 3.3 percent from 1982 to 2007. From 1973 to 1982, however, growth averaged 1.8 percent, essentially the rate that prevailed in the long semi-stasis that gripped Japan and Western Europe in the 1990s and the first decade of the twenty-first century.

That the 1973–1982 period proved to be an interregnum—as opposed to an augury of a new trend—is the most significant fact in the postwar economic history of the United States. It is also, from a geostrategic perspective, one of the most significant facts in the postwar history of world power relations. [...]

Supply-side economics was never meant to be a sustained policy requiring annual recalibration and reapplication. In this it differed markedly from Keynesianism. Rather, the purpose of supply-side economics was to solve one problem: the great stagflation. Establishing a high trend line of American growth was the furthest thing from the supply-siders’ minds in the 1970s, because that trend line already had been definitively established by history. The matter at hand was re-establishing the trend line. Once that discrete matter was dealt with, the supply-siders would allow the economy to achieve its healthy potential.

A metaphor from Spanish bullfighting can perhaps illustrate the point. A toreador can bring a muscular, energetic bull to a full stop simply by lowering a sash in front of its face. With the lifting of the sash, the bull surges forward for as long as it desires. So it was with the American economy. Bursting with potential in the 1970s, a potential inherent in the nation’s inherited entrepreneurial knack and enhanced by a technological revolution of historic dimensions, the American economy found itself held in place by a master wielding a sash. The master was the government, the sash a destabilized means of exchange and a punitive tax system. Come a certain juncture, the sash was lifted, the bull surged, and the lore since has been of the energy, dynamism, and insatiability of the bull.

Meanwhile, Paul Volcker--very nearly the only thing Jimmy Carter got right--was killing the bull of inflation.

Posted by Orrin Judd at September 24, 2009 8:14 AM