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Veterans of Carter-era inflation warn that Biden has few tools to tame prices

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WASHINGTON (NYTIMES) – When inflation surged in the late 1970s, President Jimmy Carter convened his top economic advisers for weekly lunch meetings in which they tended to offer overly optimistic forecasts of how high prices would rise.

But the political consequences of rising prices could not be escaped: By 1978, Democrats had lost seats in the House and Senate. A year later, Mr Carter’s Treasury secretary, W. Michael Blumenthal, was ousted in a Cabinet shake-up. In 1980, Mr Carter lost his reelection bid in a landslide as the Federal Reserve, intent on bringing inflation down, raised interest rates so aggressively that it tipped the economy into a painful recession.

President Joe Biden and the Democrats in power now face a similar predicament as they scramble to tame inflation after a year of telling Americans that price gains would be short-lived. In recent weeks, Mr Biden has pressed oil refineries to ramp up production, proposed a three-month gas tax holiday and called on the Fed to do what is needed to cool an overheating economy. But to veterans of the Carter administration, the echoes of the past call for a greater sense of urgency from Biden despite his limited power to bring prices down.

“The basic problem that this president faces is really not too dissimilar from the one that confronted Carter,” said Mr Blumenthal, who is 96 and divides his time between Princeton, New Jersey, and Germany, where he was born.

“President Biden faces this dilemma, and it’s certainly my hope that he will choose clearly, choose decisively and be very clear not only about the fact that he recognises that inflation has to be dealt with, but that he is really willing to support painful steps to do that.”

That pain could be severe if the Fed, as economists increasingly expect, is forced to tip the economy into recession in order to bring inflation to heel. The central bank has already begun raising interest rates quickly and signalled it will do whatever it takes to restore “price stability” as it tries to avoid the mistakes of the 1970s.

Veterans of the Carter administration say Mr Biden would be wise to also learn from the past and avoid half-measures that have popular appeal but do little to resolve the underlying problem, as well as forgoing large spending initiatives.

The United States has been buffeted by soaring prices this year as supply chain disruptions that emerged during the pandemic coincided with a surge in food and energy prices spurred by Russia’s war in Ukraine. The Consumer Price Index picked up by 8.6 per cent in May from a year earlier, as price increases climbed at the fastest pace in more than 40 years. Gas hit US$5 per gallon in June and is now averaging around US$4.80.

The dynamic has parallels to the 1970s, when the Arab oil embargo of 1973-74 and the Iranian Revolution of 1979 curtailed oil supply so severely that it caused shortages, sending gas prices soaring. Inflation peaked at 14.6 per cent in 1980 before easing as Paul Volcker, who was the Fed chair, aggressively raised interest rates to nearly 20 per cent and triggered a recession that eventually tamed inflation.

The Carter administration tried an array of measures to contain rising inflation that proved ineffective. Among them was a scheme to encourage businesses to voluntarily cap wages and prices, a release of grain reserves to smooth food prices and a call for deficit reduction.

Mr Blumenthal said Mr Biden should heed the lessons of Mr Carter’s failed attempts to curb inflation by avoiding measures that are counterproductive. He urged Mr Biden to support a substantial interest rate increase and to abandon his sweeping legislative package in favour of deficit reduction, which some economists argue could dampen prices by slowing growth depending on how it is approached.

“Inflation fighting comes first,” said Mr Blumenthal, who escaped Nazi Germany and lived in Shanghai during a period of hyperinflation in the 1940s. “He has to show the recognition to the public that inflation has lasting deleterious effects on the economy and that by trying to take half-measures now, you merely prolong the pain of these effects.”

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