The massive inflation and oil crisis of the 1970s damaged Jimmy Carter's presidency. In Jimmy Carter's Economy, Carl Biven traces how the Carter administration developed and implemented economic policy amid multiple crises and explores how a combination of factors beyond the administration's control came to dictate a new paradigm of Democratic Party politics. Jimmy Carter inherited a deeply troubled economy. Inflation had been on the rise since the Johnson years, and the oil crisis Carter faced was the second oil price shock of the decade. In addition, a decline in worker productivity and a rise in competition from Germany and Japan compounded the nation's economic problems. The resulting anti-inflation policy that was forced on Carter included controlling public spending, limiting the expansion of the welfare state, and postponing popular tax cuts. Moreover, according to Biven, Carter argued that the ambitious policies of the Great Society were no longer possible in an age of limits and that the Democratic Party must by economic necessity become more centrist.
|Publisher:||The University of North Carolina Press|
|Series:||The Luther H. Hodges Jr. and Luther H. Hodges Sr. Series on Business, Entrepreneurship, and Public Policy|
|Product dimensions:||6.10(w) x 9.20(h) x 1.10(d)|
About the Author
W. Carl Biven is professor emeritus of economics at the Georgia Institute of Technology. His previous books include Who Killed John Maynard Keynes?: Conflicts in the Evolution of Economic Policy.
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Jimmy Carter's EconomyPolicy in an Age of Limits
By W. Carl Biven
University of North Carolina PressCopyright © 2002 The University of North Carolina Press
All right reserved.
Chapter OneHow It Ended
The 1980 Campaign
Jimmy Carter has said that there were three main reasons for his defeat in the presidential election of 1980. Among those on his list was the fallout of the Iranian hostage ordeal, which Gary Sick, Carter's principal White House aide for Iranian affairs, has called "the most devastating diplomatic incident in modern U.S. history." The part that the hostage crisis played in Jimmy Carter's loss to Ronald Reagan will never be known for certain. It obviously had an influence on the outcome. The taunting of Americans by a fanatical mob in the streets of Tehran added to the sense of loss of national prestige that had been building in the minds of voters since the ignominious escape by helicopter of the last Americans out of Vietnam. In addition to the hurt to the American psyche, there were more practical consequences of the Iranian crisis that tested the temper of the public; perhaps the most visible were a gasoline shortage and long lines of cars at gas stations caused by the cutoff of Iranian oil. Stuart Eizenstat, assistant to the president for domestic policy, remembers the tension of those days: "The cut-off of almost 6 millionbarrels of oil per day of Iranian production created gasoline lines throughout the nation. I personally felt the aggravation they caused motorists because I sat in several gasoline lines near my house for up to an hour so I could get to the White House to plan how to end them!"
The lingering hostage crisis added to the image of administration ineptness formed in the minds of many voters-in President Carter's words, "the sense of impotence and incompetence that was generated from those hostages not being released." Television's power to capture public attention was demonstrated in the Vietnam War of the 1960s and the Watergate scandal of the 1970s. Its capacity to transmit information instantly and graphically exerts a powerful influence on the conduct of public affairs and can be devastating in defining in the minds of voters their perception of presidential performance. Stuart Eizenstat reminisced, after Carter's term ended, how "daily press attention given to the Iranian hostage crisis, with its glaring films of American hostages carried away in blindfolds against the backdrop of burning American flags, undercut President Carter's political standing." With incredibly bad timing the first anniversary of the seizure of the hostages occurred on election day, November 4, 1980. On the day before going to the polls the public was again exposed on the evening news to the humiliating scenes captured by the television cameras a year before.
A second reason Carter gave for his defeat was the division within the Democratic Party, with liberal elements in opposition to the more conservative president. Long simmering, the conflict broke into the open with the challenge to the incumbent Democratic president by the candidacy of his fellow Democrat, Senator Ted Kennedy, in a divisive primary. The relationship between the two men is an interesting one. On many issues they were in agreement, with Kennedy playing an important role in the passage of some of Carter's legislative proposals. On the fundamental direction of the party, they were in conflict, with Kennedy, the heir of a proud political tradition, taking sharp issue with Carter's more conservative approach to national problems, an approach which the senator interpreted as abandonment of traditional Democratic principles. Kennedy prolonged the challenge long after it was apparent that he could not win, forcing the president to defend administration policies publicly in a political confrontation well into 1980 and to concentrate his energies on opposition within his own party rather than getting into position for his Republican adversary. "We have come out of this primary year and the unsuccessful Kennedy challenge not enhanced or strengthened by the contest, but damaged severely," Hamilton Jordan, Carter's chief political adviser, wrote to the president in a memorandum in late June.
The third reason for defeat given by Carter is the condition of the economy at the time of the election. We come now to the economic issue and the focus of this book. Economic events of 1980 provided a major reason for Carter's defeat. There is compelling evidence that, in the end, people vote their pocketbooks.
The Iranian crisis and the split in the Democratic Party were contributing factors in the electoral outcome, but the inflation that dogged the administration from its first days in office, and which crested in 1980, was probably the decisive reason for the defeat. Inflation was combined with unemployment in the last year of the Carter term. The economy fell into recession in the second quarter, the sharpest one-quarter drop in national output on record. If eleven presidential four-year terms, starting with Truman and ending with Bill Clinton, are compared, only in the Carter administration was the total output of the economy declining in the fourth year in office, the year critical for reelection. Reagan was not elected in 1980 because he was viewed as strong by the public in terms of solving the Iranian crisis. When respondents were asked to choose the candidate "best able to handle the Iranian situation" in a poll two months before the election, only 33 percent selected Carter, an unsurprising result; on the other hand, only 39 percent selected Reagan. But the challenger hit a sensitive nerve when he asked voters during a campaign debate whether they were better off than they were four years before. It was not Iran but inflation and unemployment that were the uppermost concerns in the minds of voters. Asked in the same survey two months before the election to identify the "most important problem facing the nation," 61 percent named "the high cost of living," while only 15 percent chose "international problems." The intensity of public feeling two months before the election is illustrated by the fact that 52 percent took the surprisingly strong position of backing the imposition of wage and price controls. The diagnosis frequently repeated in the 1992 Clinton campaign, identifying the critical issue in the contest-James Carville's "it's the economy, stupid"-could also be applied to the 1980 election.
Perhaps one cannot separate too sharply the effects of the Iran affair and the inflation on the campaign. Theodore White made the perceptive observation that in the Carter years, inflation and the hostage crisis were not unconnected in the minds of voters. The psychological effect on voters was similar; they both contributed to the same sense of helplessness. We couldn't free the hostages and we couldn't stop the inflation.
The Economy in 1980
Herbert Stein, chief economic adviser during the Nixon years, has written that when Reagan asked Americans in the 1980 campaign whether they were better off than they had been four years before, he could count on a negative response. But, Stein writes, "despite the inflation, and despite the slowdown in productivity growth, real per capita income after tax, probably the best simple measure of economic welfare, increased between 1976 and 1980. Indeed it increased just about as much in that period as in the four preceding years." It could also be pointed out that the number of new civilian jobs created per year was greater during the Carter administration than for other presidents immediately before or after. But despite these positive outcomes, the Carter years were plagued with continuing economic crises, the worst of them concentrated in the final year in office.
The word that comes to mind in describing economic events in 1980 is "bizarre." The inflation rate soared to the highest level since the early 1950s. Charles Schultze, Carter's chief economic adviser, reported to the president that the inflation rate in January and February was in the 18 to 20 percent range. Unemployment rose, cresting at just under 8 percent in mid-summer and much higher in key industrial areas crucial in an election year. Of these two major ailments that afflict modern economies, inflation and unemployment, inflation is more subtle in its impact and more pervasive in terms of numbers affected.
The social damage from inflation traditionally cited is the redistributive effect on income and wealth. Redistribution of income is, in itself, not necessarily undesirable. Governments, from ancient times to the modern era, have redistributed income through the imposition of taxes that affect income recipients differently. But redistribution through taxation, while resented by the losers, at least takes place through a democratic political process. Redistribution through inflation lacks this legitimacy; it happens as though by the hand of fate, arbitrary in its selection of victims. Among the victims are creditors. Loans fixed in amount are paid off by debtors in cheaper dollars because of inflation. Those whose wages and salaries adjust sluggishly and rise more slowly than prices find their position in the wage and salary structure worsened. Those not protected by the automatic cost-of-living adjustments made for union wages and Social Security payments lose relative to those who are.
While inflation has undesirable social effects, the damage is usually exaggerated in the minds of the public. It has long been observed by those who do surveys of consumer sentiments that even those who benefit financially from inflation think of themselves as damaged. People have a limited sense of their net worth. The prices of houses rose more rapidly in the 1970s than the consumer price index, giving home owners generous capital gains. Housing was an excellent inflation hedge in the Carter years. The president's Council of Economic Advisers stated in its annual report in 1978 that the rise of new home prices was then "about 11 percent annually, or about five percentage points greater than the average increase of other prices." For the most part, home owners ignored this windfall in assessing the effect of inflation on their personal economic welfare.
For every loser in inflation there has to be a winner. Creditors are hurt, but debtors are helped as their indebtedness is reduced when adjusted for price changes. It is difficult to determine precisely who loses and who gains, but we know enough to suggest that widespread perceptions are probably incorrect. We tend to think of lower income families as the most vulnerable, but one careful study, published while inflation was raging in 1980, found that it was not the poor but the upper income classes that were hurt more by the inflation due to a drop in the value of their assets.
While the social effects of general price increases are more modest than generally thought, the impact on the operation of the economy is substantial. Inflation increases the uncertainty associated with business strategies, uncertainty that affects both the amount and direction of investment decisions. Paul Volcker, appointed by Carter to be chairman of the Federal Reserve Board in mid-1979, pointed out in his first appearance before a committee of the House "that the uncertainty about future prospects associated with high and varying levels of inflation tends to concentrate the new investment that does take place in relative short, quick pay-out projects. Or firms may simply delay investment commitments until the pressures of demand on capacity are unambiguously compelling."
In addition to the restraining effects of uncertainty on investment, the interaction of inflation and tax provisions may weaken incentives for capital accumulation. When inventories and fixed assets are valued at the original purchase price rather than at replacement cost, as they commonly were in the 1970s, costs are understated and profits overstated, an accounting practice that has the effect of increasing the tax liability. Volcker again pointed out in his first appearance before a House committee that "we can observe in these recent inflationary years a declining tendency in the profitability of investment.... One estimate indicates that the annual after-tax return on corporate net worth, measured as it reasonably should be, against the replacement cost of inventories and fixed assets, has averaged 3.8 percent during the 1970s, a period characterized by rapid inflation, as compared to 6.6 percent in the 1960s."
Inflation and Financial Markets
While the fallout from inflation hung heavily on the country in 1980, the sense of crisis was signaled most dramatically by the behavior of financial markets. Interest rates rose in January to their highest level since World War II. Indeed, the yield on long-term Treasury securities moved above 11 percent for the first time in history. Rates even exceeded "the extreme levels set during the Civil War, when a viable market for long-term Treasuries simply didn't exist."
The first effect of high interest rates is, of course, to stifle economic activity. Charles Schultze cited the powerful restraining effect in a memorandum to the president in early April. "A builder now starting a house must pay, typically, over 20 percent for a construction loan, and at the end find a buyer willing both to pay the extra price and to assume a 15 to 16 percent mortgage. The typical business firm ... must pay 19 to 20 percent interest to carry inventories or to meet other working capital needs. Reg Jones [head of General Electric] told me that just in the past week, those GE dealers who must finance themselves (as opposed to getting GE financing) have virtually stopped ordering."
There is another major effect of rising interest rates: a decrease in the net worth of wealth holders. The case of bonds provides us with a good example to make the point. The bond market is a major source of funds for the federal government and for American firms. Bonds represent a huge pool of accumulated wealth held by the public, with ownership constantly changing hands among the players-bankers, agents for life insurance companies and retirement funds, wealthy Americans, nonprofit institutions like universities, and, indirectly, the ordinary American who has bought shares in a mutual fund. The daily turnover in the secondary market for bonds is large in volume with prices changing continuously. The action is amplified by the movement of vast amounts of money across international borders with instantaneous transfer of funds through electronic means.
In the simple algebra of compound interest, the interest rate and the price of debt instruments are inversely related: as one goes up, the other goes down. Because of the nature of compound interest, it is at the long end of the market that swings in securities prices due to changes in interest rates are the greatest.
Excerpted from Jimmy Carter's Economy by W. Carl Biven Copyright © 2002 by The University of North Carolina Press
Excerpted by permission. All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
Table of Contents
1 How It Ended: The 1980 Campaign
2 How It Began: The 1976 Campaign
3 The New Administration: The Process of Economic Advice
4 The Stimulus Package
5 The Mondale Mission and the London Summit
6 Strategy for Inflation
7 The Bonn Summit
8 Bonn and Oil: The Internal Debate
9 The Worsening Inflation
10 Government Actions and Inflation
11 Enter Paul Volcker
12 Jimmy Carter and the Age of Limits Notes Bibliography Index
Carter and Charles Schultze Carter and James McIntyre Carter and some members of the economic policy group First meeting of the Quadriad Carter and his advisers at a meeting with George Meany Bonn summit Alfred Kahn with Stuart Eizenstat and John Wright Carter awaiting the start of his October 24, 1978, inflation speech Carter at an inflation breakfast Alfred Kahn addresses the cabinet Meeting on budget revision, early 1980
William Miller and Carter Paul Volcker with William Miller and Alfred Kahn
What People are Saying About This
"W. Carl Biven offers a deeply researched, fine-grained history of policy-making in the Carter administration . . . Jimmy Carter's Economy makes a valuable contribution to the history of public policy and economic thought in this crucial period. . . . [Biven's] book puts important evidentiary flesh on what had remained a skeletal interpretation of the Carter administration as a transitional presidency."Journal of Southern History
"A nicely detailed and thoughtful account of economic policy during the Carter administration. . . . A much more nuanced and ultimately accurate portrait of the Carter years than presented by those who perceive the former president as politically unskilled and incapable of developing sound policy. . . . Highly recommended."Choice
"Biven has provided us with an insightful study of Carter's long-term significance for American political economy that should be welcomed by everyone with an interest in American economics and politics in the late twentieth century."Economic History Review
"Biven here provides a cogent and compelling interpretation that is more a critical lamentation than an exercise in special pleading. The result is a first-rate piece of scholarship."Georgia Historical Quarterly
"Carl Biven has written the definitive account of how inflation helped to destroy the presidency of Jimmy Carter. Biven knows his economics and his politics. He handles the complex issues of money, energy, and the international economy with clarity and grace. And he has mastered a vast body of archival evidence. One of the best case studies we have of policy making in the White House, Biven's book will be indispensable reading for policy analysts, students of the Carter presidency, and anyone interested in the recent history of the American economy."Allen J. Matusow, Rice University
One of the best case studies we have of policy-making in the White House, Biven's book will be indispensable reading for policy analysts, students of the Carter presidency, and anyone interested in the recent history of the American economy. (Allen J. Matusow, Rice University)