Liberalism and Inflation in the 1970s
Iwan Morgan
Economic issues were the making of modern liberalism in the 1930s and seemingly the
unmaking of it in the 1970s. Amidst the Great Depression, Franklin D. Roosevelt declared
that liberalism was “plain English for the changed concept of the duty and responsibility of
the government toward economic life.” Amid the Great Inflation, by contrast, Ronald
Reagan placed the blamed runaway price instability on the excesses of the liberal state
created by the New Deal and expanded by FDR’s Democratic successors. In a typical
expression of this viewpoint, he declared in a 1977 radio address: “Inflation is caused by one
thing – government spending more than government takes in.”1
Anxiety about inflation became deeply woven into the American public’s psyche in
the 1970s. The Consumer Price Index [CPI], which had started to rise after nearly twenty
years of low inflation in the second half of the 1960s, accelerated dramatically from 1973
onward. It increased by nearly 9 percent on annual average from 1973 through 1980,
compared with 4.5 percent in 1967-1972, to culminate in double-digit inflation in 1979 (11.3
percent) and 1980 (13.5 percent). The Great Inflation was initially sparked by the Vietnam
War’s over-stimulation of a full-employment economy. It was subsequently fuelled by: the
OPEC oil-price shocks of 1974 and 1979; global rises in food and commodity prices; the
declining value of the dollar after final termination of post-war currency fixed-exchange rates
in 1973; and the declining productivity of the American economy. Other than in brief reconversion periods after the world wars (inflation had run at 14.4 percent in 1947), the
chronic price instability of the 1970s had no twentieth century precedent. Unsurprisingly,
therefore, inflation was consistently placed top by large margins in Gallup polls asking
respondents to identify the nation’s most serious problem from 1973 through 1980 – over
1 three-quarters doing so in 1974 and 1979. This was a trend confirmed in private polls for the
Carter White House, prompting presidential adviser Jerry Rafshoon to warn his boss that
inflation “affects every American ... causes insecurity and anxiety ... threatens the American
Dream.”2
Carter’s ultimately unsuccessful and increasingly conservative policy responses to
inflation have been extensively examined in the historical literature.3 Far less attention has
been paid by comparison to how liberal Democrats who still identified with the New DealGreat Society tradition responded to inflation over the course of the 1970s. Much of what
has been written tends to portray their economic policy ideas regarding price stability as
outmoded, irrelevant and intellectually bankrupt. Even a sympathetic historian like Sean
Wilentz commented, “New Deal liberalism, with no ready solution [for inflation] seemed to
have run out of steam; it was more apt to look back on the glory days of yore than to propose
coherent policies for the present and future.”4 Taking a different approach in this paper, I
argue that the policy solutions that liberals proposed to combat inflation were not mere
retreads of old orthodoxy but rational adaptations to new conditions that deserve
reassessment by historians.
The starting point for understanding liberals’ response to inflation in the 1970s is
their belief that high unemployment was a greater problem than price instability in this time
of stagflation. In the 1960s 4 percent joblessness had been considered the hallmark of an
effective full-employment economy. However, unemployment averaged 6.3 percent yearly
in 1970-1980 and there were three recessions with joblessness peaks of 6.1 percent in 1970, 9
percent in 1975, and 7.8 percent in 1980. The sixteen-month recession of November 1973March 1975 saw unemployment reach its highest level since the Great Depression and the 3.4
percent decrease in real GDP percent was the largest in any downturn between the Great
Depression of the 1930s and the Great Recession of 2007-09.
2 In these circumstances, liberal Democrats insisted that jobs rather than stable prices
had to be the main focus of economic policy. “The key issue, as I see it,” Senator Hubert
Humphrey of Minnesota declared in late 1975 when inflation was running at 7 percent and
joblessness at 8.3 percent, “is what to do about the pervasive, persistent, stubborn
unemployment.” Such sentiments were to be expected from the venerable champion of the
old liberalism, but they were shared across the liberal spectrum of the party. Congressman
Henry Reuss of Wisconsin, chairman of the House Banking, Currency and Housing
Committee, asserted in 1976 that a full-employment economy would solve the inflation
problem by creating more savers and making organized labor more amenable to accepting a
social contract on wage targets that did not exceed productivity rates. The necessity for jobcreating stimulus to strengthen recovery from the mid-decade recession was also the message
that pragmatic liberals like House Speaker Tip O’Neill of Massachusetts trumpeted in early
congressional leadership meetings with the new Carter administration.5
Indeed Democrats of all varieties were broadly agreed that jobs constituted the main
economic priority until the hyperinflation of 1979-80 created a divide between liberals on the
one hand and centrists and conservatives on the other. In April 1976 a Harvard Center for
International Affairs/Washington Post survey asked county committee chairs, state committee
members and national committee members of both parties to rank the nation’s top ten
problems. The Democrats put unemployment top and inflation second; in contrast,
Republicans placed inflation top and unemployment sixth (behind reducing the role of
government, maintaining a strong defense, developing energy resources, and reducing
crime).6
Ironically, the most significant expression of liberalism’s commitment to jobs in the
1970s, the Full Employment and Balanced Growth Act (better known as Humphrey-Hawkins
after its main sponsors, Senator Hubert Humphrey and Representative Gus Hawkins of
3 California) was widely considered symptomatic of its proclivity to fuel inflation in pursuit of
its traditional agenda. Proposed in 1976 as an amendment to the Employment Act of 1946,
the original bill mandated a reduction of unemployment to 4 percent within three years and
made the federal government the employer of last resort through establishment of a public
jobs program if the private sector could not generate full employment.7 Dismissed forever
more by conservative analysts as, in the words of one economist, “the last product of New
Deal thought,” it has been defended by progressive sympathizers as providing a way of
“rejoining African-American policy interests to the mainstream of economic policy” through
its class-based focus on jobs and prosperity for all rather than race-based compensation.8
The measure predictably came under attack from big business and Republicans as an
expensive and inflationary expansion of the state’s role in the economy. More damagingly it
also met with criticism from the incoming Carter administration and many congressional
Democrats elected in the freshman cohorts of 1974 and 1976.9 Articulating their concerns
that it would aggravate inflation, Brookings Institution economist and Carter CEA chair
Charles Schultze asserted that public service jobs should be counter-cyclical rather than
permanent and that the proposal to pay the prevailing wage for such work would bid up
wages for low-skilled and semiskilled jobs in the private sector.10
Without doubt, Humphrey-Hawkins was far from perfect in its conception. The
original proposal undeniably engaged in what John Kenneth Galbraith, who sympathized
with its aims, dubbed “wishful economics” in assuming that public job creation would
simultaneously solve both unemployment and inflation. As Humphrey himself
acknowledged, the original bill contained inadequate safeguards against inflation because it
incorporated so many provisions demanded by core Democratic constituencies. “The AFL
and CIO were adamant [about their requirements],” he told economist Walter Heller, “… and
the Black Caucus wanted everything they could possibly think of plus another ten to fifteen
4 percent.”11 Humphrey-Hawkins also overestimated government’s capacity to fine-tune a
domestic economy that was becoming increasingly open and complex as a result of new
technology, financial innovations, and America’s growing integration into the international
economy.
Nevertheless, leading manpower economist C. C. Killingsworth lauded the measure
as the first step toward a rational labor policy that would have lesser inflationary
consequences than consumption-driven stimulus measures, which tended to widen the trade
deficit and aggravate inflationary pressures. It was also clear that the private economy was
unable to create sufficient jobs. Although unemployment declined steadily from 7.5 percent
in early 1977 to 6 percent by mid 1978, at least half of this decline resulted from the creation
of new Public Service Employment jobs. In total some two million people benefited from
work opportunities provided by this and other government programs in the first year-and-ahalf of Carter’s presidency. Without this support, joblessness would have been more than
two percentage points higher at between 8.0 and 8.5 percent of the labor force. Finally,
Humphrey-Hawkins sought to provide a race-neutral work-not-welfare solution to the
excessively high unemployment among African Americans, the group worst hit by the effects
of both cyclical factors and structural changes in the economy.12
Looking to paper over its growing rift with traditional Democratic constituencies, the
Carter administration eventually agreed to enactment of a much scaled-down measure in
1978. Not only did this lack a public jobs provision but also it allowed for a longer time
scale to achieve 4 percent unemployment by 1983 tied with an inflation target of 4 percent
and have the president latitude to adjust the employment goals if anti-inflation imperatives
required. As civil rights leader Bayard Rustin observed, “the inclusion of the ‘inflation goals’
will lead government officials – particularly economic policy makers – to regard the
employment goals rather casually.”13
5 As Judith Stein has observed, Carter regarded enactment of Humphrey-Hawkins “as a
political obligation, not a political opportunity” and his administration’s evisceration of its
full-employment provisions testified that jobs did not constitute its economic priority. As
inflation worsened in the late 1970s, however, liberal Democrats and liberal-oriented interests
inside and outside the party continued to fight to preserve its traditional commitment to high
employment. In early 1978 the AFL-CIO proclaimed, “The foundations of an anti-inflation
program must be full-employment and full production that will produce a balanced economy
and reduce inflationary pressures by eliminating waste and inefficiency from underutilized
plant and equipment and an underemployed work force.” A year later, the New Republic, in a
lead article entitled “Liberals and Inflation,” went further in declaring that a government
guaranteed job for anyone able to work and a guaranteed decent minimum annual income for
all had to be “the cornerstone of a liberal inflation program.” In its view this would increase
demand for unskilled and semiskilled labor, which was in excess supply, without increasing
demand for the kind of labor that was not in excess supply. To pay for this, it urged cutbacks
in federal transfer programs deemed no longer central to the liberal vision, including social
security, veterans’ benefits, some in-kind benefits for the poor, and tax expenditures.14
The short sharp recession of 1980 appalled liberals as a policy-induced downturn that
did nothing to alleviate double-digit inflation. The rise in unemployment was instrumental in
briefly reviving Edward Kennedy’s flagging presidential campaign, helping him gain primary
victories in Connecticut, New York, Pennsylvania, and New Jersey.15 It was also the critical
factor in the decision of the Liberal Party of New York, which had supported the Democratic
candidate in every presidential election since is founding in 1944, to give its backing to
independent candidate John Anderson in 1980. “We cannot accept deliberate recession
accompanied by increasing unemployment as a means of controlling inflation,” the party’s
chair, Donald Harrington, wrote Carter prior to its nominating convention. The president’s
6 response, a rote defense of his efforts to boost jobs that largely ignored the proposal in
Harrington’s accompanying policy memorandum for a “domestic ‘Marshall Plan’” with fullemployment policy as its core element, did nothing to revive Liberal Party enthusiasm for
him.16
All this did not mean that liberals were unconcerned about inflation. Rather they
were unprepared to fight it through means that would not only increase unemployment but
also disproportionately impact on Americans in the lower half of the income distribution.
Their animus against macroeconomic restraint was mainly directed against Federal Reserve
monetary policy. The central bank’s sharp interest-rate hikes to douse inflation had
precipitated a short recession in 1970 and, in response to the oil-price shock, the deeper one
of 1974-75. Carter’s decision to appoint inflation hawk Paul Volcker as Fed chair in mid
1979 caused trepidation in liberal circles that more of the same would follow.
Liberals consulted by the search committee to recommend the appointment (Vice
President Walter Mondale, Keynesians Walter Heller and Arthur Okun, and AFL-CIO chief
Lane Kirkland) had adamantly opposed Volcker. In Okun’s assessment, Volcker was “very
right wing” and “dominated by international concerns [about the dollar].”17 However, the
refusal of any other credible candidate to take the post left him the last man standing.
Volcker’s shock therapy of money-supply control rather than conventional interest-rate
manipulation was widely blamed by liberals for the second-quarter recession of 1980.
Despite its private doubts about Fed strategy, the White House defended Volcker in public
and refused to support calls for monetary ease in order to preserve credibility with the money
markets that were in panic over the inflation rate. Carter also rebutted calls for Volcker to
resign from AFL-CIO boss George Meany and others. This stand served to tie the
administration to the unpopular policies of the central bank in the eyes of liberals18
7 Fiscal restraint was also anathema to liberals if this targeted programs that traced their
pedigree to the New Deal tradition. For its last thirty months in office the Carter
administration grew increasingly determined to progress towards a balanced budget to
reassure the money markets, prevent public-sector ‘crowding out’ of private-sector
borrowing, and douse inflationary psychology.19 The deteriorating relations between liberals
and the Carter administration over their differing fiscal priorities reached crisis point with the
White House announcement in late 1978 of an austerity anti-inflation budget plan for Fiscal
1980. This featured significant social program cuts not only to reduce the deficit but also
permit a 3 percent real expansion of defense as part of America’s NATO commitment in the
face of Soviet military expansion. At the midterm Democratic convention in Memphis in
December, a resolution critical of these proposals, offered by United Automobile Workers
president Douglas Fraser, gained support from 40 percent of the delegates. Presaging
Carter’s 1980 problems in New York, left-leaning members of the state delegation (Bella
Abzug, Shirley Chisolm, Herman Badillo, and Michael Harrington) were very active in
promoting this. A White House aide commented with considerable understatement that New
York City Democrats “are not crazy about us.”20
Instead of monetary restraint and social program retrenchment, liberals broadly
supported three approaches to tackling inflation. They were prepared to cut spending on
areas outside their core agenda. This was particularly the case with regard to defense, which
also served their post-Vietnam anti-militarist preferences until the renewal of Cold War
tensions in 1979-80. Reflecting their influence, the 1976 party platform had called for
détente-facilitated cuts of $5-7 billion in defense outlays (equivalent to 6.0-7.8 percent of
actual FY1976 spending), a goal that Carter ignored when in office. In a political trade-off,
liberal Democrats later agreed to soft-peddle their opposition to Carter’s FY1980 military
increases in return for moderate and conservative Democratic agreement to increase social
8 spending. The Soviet invasion of Afghanistan in late 1979 thereafter inhibited liberal calls
for deep military cuts. Nevertheless Edward Kennedy in his campaign for the Democratic
presidential nomination attacked Carter’s FY1981 budget plan for defense as wasteful,
inflationary and arbitrary in its insistence on a 5 percent real increase in military spending.
Insisting that savings could be found without damage to America’s strategic interests, he
declared, “National security cannot be purchased by merely spending additional sums.
Defense resources must be effectively directed toward actual military needs.”21
Another means of fighting inflation that held particular appeal for liberals was to
tackle administered price increases. Many associated this problem with economic regulation
because of the ‘cosy triangle’ relationship between the regulated industry, congressional
committee overseers, and the federal agency implementing regulations.22 Liberal reaction
against economic regulation reflected belief that it served the entrenched interests of the
regulated industry rather than the public, inhibited innovation, and distorted prices by
limiting price competition. Hearings held in 1975 by the Senate subcommittee on
administrative practice and procedure, chaired by Edward Kennedy, put economic
deregulation on the political agenda. Economic deregulation was one of the few areas of cooperation between liberals and the Carter administration in the battle against inflation.
Promising to support such initiatives in his 1976 campaign, Carter made the airlines his first
target and then outlined a broad plan in his inflation program announced in October 1978.
Thereafter liberal Democrats supported administration-promoted enactment of a swathe of
deregulation affecting airlines, trucking, and railways and financial institutions. The
transport-sector measures proved highly successful in encouraging competition and reducing
prices, but the Depository Institutions and Monetary Control Act law of 1980 that removed
Depression-era Regulation Q caps on banks became associated with the solvency problems
that overtook the savings-and-loan industry in the mid 1980s.23
9 One area of deregulation that was a major bone of contention between the White
House and liberals was the removal of the oil-price controls initially imposed by the Nixon
administration and maintained by the Ford administration with the support of a heavily
Democratic Congress. Their effect was to encourage domestic demand and subsidize
imported oil, for which Americans paid less than did Europeans. The Carter administration
ended the controls in 1979, largely to secure Germany’s support for international economic
coordination measures and to relieve speculative pressure on the dollar. Liberals, in contrast,
saw this as hurting the party’s basic constituencies who would pay more for gasoline, which
cost a dollar a gallon in late 1979 compared with 25 cents in 1974, and home heating. An
angry UAW president Douglas Fraser warned presidential inflation adviser Alfred Kahn, “If
you make my workers pay a dollar for gasoline then I’m not going to stick to the wage
standards.”24
Such threats aroused concern that union leaders would not adhere to the wagestandard price guidelines that the AFL-CIO agreed with the White House in September 1979.
Liberal Democrats, in particular, regarded this Accord as giving organized labor a voice in
shaping anti-inflation policy – the AFL-CIO were given five of the fifteen seats on the newly
created Pay Advisory Committee to advise the White House Council on Wage and Price
Stability, with five also going to business and to the representatives of the general public.25
The dread scenario in their mind was a labor rebellion against wage restraints such as
happened in Britain in the so-called Winter of Discontent of early 1979. The attendant rash
of strikes, particularly by public-sector unions, had contributed to the election of Margaret
Thatcher’s Conservative administration in place of James Callaghan’s Labour government in
May. To keep labour in support of efforts to control inflation, many liberal Democrats came
to see mandatory wage-price controls as the panacea to inflation by late 1979.
10 An offshoot of their animus against administered prices, liberal Democrats and their
allies claimed that control over market sectors by a handful of key firms enabled these to pass
on rising wage and commodity costs to customers because of lack of competition. Liberal
economist and public intellectual Robert Lekachman cited the case of the Big Three
automobile companies being able to raise their automobile prices by $1000 over the course of
1974-75 even though these were bad years for sales.26 Memories of the politicisation of the
Nixon controls in favour of business in their phase II and III manifestations and the
mistiming of their eventual removal initially restricted enthusiasm for a broad program.27
Support gathered instead for targeted price controls focused on the ‘basic necessities of life’ –
food, housing, health care, and ‘basic’ energy.28 As inflation worsened, however, opinion
polls showed public support for broader controls growing substantially.29
Emboldened by this, Edward Kennedy made a wage-price freeze a key element of his
victorious campaigns in the New York and Connecticut presidential primaries. Drawn up in
initial outline by aides earlier in the year, his plan called for legislation to establish a freeze
for up to six months after enactment. If inflation remained high, the president was then
empowered to impose mandatory controls in their stead to establish standards for wage
increases in line with productivity gains and rules governing passing-on of rising costs in the
form of higher consumer prices. In addition the Kennedy plan advocated a transferablecoupon gasoline-rationing plan to reduce consumption by 25 percent over two years.30 As his
campaign progressed into New Jersey, it was further refined to include structural measures on
the supply-side of the economy to boost the productivity and competitiveness of American
industry, notably though permitting faster depreciation of capital assets to spur business
investment.31 Adamantly opposed by the White House as a political gimmick that would
merely paper over the inflation cracks in the economy and be very difficult (if not
impossible) to administer, the Kennedy wage-price plan died with the failure of his
11 presidential campaign. However, his industrial policy proposals proved more resilient
because the Carter White House recognized the danger that the unemployment concerns of
liberal voters might drive them to support Anderson if ignored. Accordingly, a reluctant
president allowed inclusion of a variant of them in the economic recovery program on which
he ran for re-election against Reagan, but never promoted the idea with any enthusiasm in the
campaign.32
In formulating their ideas to combat inflation, liberal Democrats drew on expert
advice for guidance. The Keynesian economists who had counselled the Kennedy-Johnson
administration had lost some intellectual lustre in the face of monetarist and supply-side
critiques that their ideas had fuelled the Great Inflation. Nevertheless they remained
influential in liberal Democratic circles throughout the 1970s. The tendency to dismiss the
approach of political liberals to inflation as an outdated underestimation of the problem
extends to their economic advisers, but arguably with equal lack of justification.
Without doubt Keynesian economists did initially misjudge the inflation problem
until the surge of 1979-80 compelled a rendezvous with reality. In 1970, Arthur Okun, the
Johnson administration’s final CEA chair, acknowledged that the “task of combining
prosperity with price stability now stands as the major unsolved problem of aggregative
economic performance,” but insisted that a “satisfactory compromise” between these ends
could be found.33 In their efforts to develop this, however, Keynesians paid more heed to
stagnation than inflation because they underestimated the scope of the productivity decline
that affected the economy, but in this failure they were in crowded company.
Commonly misperceived at the time – the Carter CEA itself did not appreciate the full
scale until late 197934 – the causes of productivity decline long remained a matter of
scholarly dispute. It is likely, however, that they included: adaptation to labor market changes
12 (30 million new workers entered the workforce between 1965 and1980, mainly women and
baby boomers), a shift of business investment to meet occupational safety and environmental
regulatory requirements, and enhanced transfer of manufacturing operations to American
subsidiaries abroad.35 What finally alerted economists to the problem was that
unemployment in 1977-79 fell faster than economic growth warranted because it now took
more workers to increase GDP. As a consequence Keynesians in particular overestimated the
economy’s potential output and therefore its level of slack, which determined how much it
could be stimulated without aggravating inflation.36
Even allowing for this, however, the worrying surge in inflation in 1979 largely
flowed from two sources. According to the Carter CEA, huge rises in energy costs –
connected to domestic oil-price decontrol and the second OPEC oil-price hike – had added 3
percentage points to the CPI over the year, and rising home-ownership costs that reflected
higher mortgage interest charges had added a further 2.5 percent. In its assessment,
budgetary restraint in both the short-term and long-term was necessary to stop the bulge in
inflation spreading to the rest of the economy. The economists advising liberal Democrats,
by contrast, warned that this would make a sharp recession inevitable in 1980 because, in
Walter Heller’s words, “the economy can’t keep moving up against the combined force of the
fiscal drag, the oil drag, and the Volcker drag.”37
As such, Keynesian economists were virtually unanimous in advising both the
Kennedy and Carter camps to engage in spending stimulus to prevent recession coinciding
with serious inflation. Other than targeted tax cuts, they showed little interest in the kind of
supply-side reductions touted by Republicans and eventually by Democratic members of the
congressional Joint Economic Committee in 1980.38 With particular regard to the KempRoth tax cut, Lawrence Klein warned the congressional Democratic Steering and Policy
Committee in August 1978 that the measure would have grave inflationary consequences
13 because its incentive assumptions were “seriously deficient in terms of economic analysis,
statistical method, and documentary evidence.”39
It could be argued, of course, that the enactment of Kemp-Roth in the guise of the
Economic Recovery Tax Act of 1981, which offered a three-phase personal tax reduction of
unprecedented magnitude, without igniting inflation showed how wrong Keynesians were.
Nevertheless, as scholars increasingly recognize, the reality was more complex. The Volcker
monetary shock of 1981-82 plunged the economy into recession and wrought havoc on
American manufacturing but the attendant high interest rates benefited the rise of finance by
drawing foreign capital into the United States. The continuation of relatively high interest
rates after 1982 ensured the continued supply of capital from abroad and had the effect, in the
words of historical sociologist Greta Krippner, of “transfer[ring] inflation from the
nonfinancial to the financial economy-where it was not visible (or conceptualized) as such.”
The return of economic growth and prosperity after 1982 was very much concentrated in the
financial sector of the economy, and unemployment did not return to its 1980 level until
1986. With profit-making increasingly reliant on the financial sector, holders of capital
maximized their share of national wealth, thereby resulting in increased income inequality
that was a salient feature of the last two decades of the twentieth century and remains so in
the early twenty-first century.40
The dominant narrative of political conflict is written first from the vantage of the
winners. Unsurprisingly, as the losers in the political battles over economic policy in the
1970s, liberals and their economic ideas have tended to be written off in our understanding of
the history of this period – rather as conservatives were in the history of the 1930s and postwar eras until recently. Quite clearly liberal Democrats did not have a sure-fire means of
ending runaway inflation, but neither did anyone else in the 1970s. It is equally clear,
however, that economic policy of a liberal pedigree was responsible neither for rising
14 inflation – other than in the latter 1960s when the problem appeared capable of containment –
nor the failure to throttle it. Despite the Carter administration’s emphasis on fiscal restraint,
the actual effect of retrenchment on the inflation rate was minimal. One authoritative
econometric analysis calculated that if every Jimmy Carter budget had been in balance, the
core inflation rate in 1980 would have been 9.4 percent instead of 10.1 percent, but
unemployment would have been near 10 percent instead of 7.5 percent.41
Whatever the psychological benefits to business and to middle and upper income
consumers, the Carter administration’s chimerical search for a balanced budget hardly
justified the real economic costs to Democratic constituents and the political ones for the
party as a whole. If any public policy was to blame for rising inflation in the 1970s, it was
arguably the Federal Reserve’s money-supply expansion in violation of its own targets under
the chairmanship of Arthur Burns (1970-1978).42 Otherwise factors pertaining to structural
changes in the U.S. economy and external supply-shocks had greatest impact in driving up
inflation.
It would be inaccurate to say, however, that liberal policies bore no relevance to the
inflation crisis of the 1970s simply because they were never truly implemented. This did not
prevent them being rubbished as the root cause of the problem not only by Republicans but
also newer elements in the Democratic party that did not identify with its traditional base.
“Basically the New Deal died yesterday,” declared Senator Paul Tsongas of Massachusetts
the day after the 1980 presidential election. Even some of the true believers eventually
absorbed this message. In 1982, Walter Mondale, who had chafed against Carter’s austerity
as vice-president, effectively declared Keynesian liberalism politically bankrupt. “In 1980,”
he declared, “we lost the middle class. They thought we only cared about the very poor.”
This was a highly dubious retelling of history. In mid 1980, pollster Louis Harris had warned
the White House that the only way it could win the election was with a northern-focused
15 campaign that mobilized a traditional base because Republican Ronald Reagan would always
outbid it in his appeal to the Sunbelt and the suburbs. The White House’s own polling
sounded the same message in the final month of the campaign, desperately urging the Carter
camp of the need to regain the support of core groups in northern states disaffected by its
policies on inflation and unemployment. 43
Whatever liberalism’s lack of culpability for runaway inflation, the price instability of
1979-80 spelled the end of its capacity to shape the nation’s governing agenda. From that
point on Democrats who identified with the New Deal tradition scrambled to play defense
against the ascendant conservative Republicanism and the broader conservative movement.
For the last two decades of the twentieth century and the early years of the new century, the
profit needs of financialization rather than production would primarily drive economic policy
with a resultant rise in income inequality that would have seemed inconceivable in the 1960s
and 1970s. In the post-war years, liberalism had – in however imperfect a fashion – helped in
diminishing somewhat the economic inequalities in American society, a process that historian
Judith Stein dubbed “the great compression.”44 Owing to the political fallout from inflation,
however, the United States entered an era in which liberalism descended into pariah status
and income inequality rose to levels unparalleled in any other western democracy.
1
FDR quoted in Alan Brinkley, The End of Reform: New Deal Liberalism in Recession and
War (New York: knopf, 1995), 10; Reagan radio address, “Inflation,” August 15, 1977, in
Kiron K. Skinner et al, eds., Reagan’s Path to Victory: The Shaping of Ronald Reagan’s
Vision: Selected Writings (New York: Free Press, 2004), 187.
2
Patrick Caddell, Memorandum to the President, “Inflation Rating,” January 16, 1979, Staff
Secretary’s File-Presidential Handwriting File [SSF-PHF], box 115, Jimmy Carter
Presidential Library [JCPL]; Jerry Rafshoon, Memorandum for the President, “Inflation,”
September 1, 1978, SSF-PHF, box 101, JCPL.
16 3
Carl Biven, Jimmy Carter’s Economy: Policy in an Age of Limits (Chapel Hill: University of
North Carolina Press, 2002); Bruce Schulman, “Slouching towards the Supply-Side: Jimmy
Carter and the New American Political Economy,” in Gary Fink and Hugh Davis Graham,
eds., The Carter Presidency: Policy Choices in a Post-New Deal Era (Lawrence: University
Press of Kansas, 1998); Iwan Morgan, “Jimmy Carter, Bill Clinton and the New Democratic
Economics,” Historical Journal, 47 (December 2004),1015-39 4
Sean Wilentz, The Age of Reagan: A History, 1974-2008 (New York: Harper, 2008), 23.
See too: Stephen Hayward, The Age of Reagan: The Fall of the Old Liberal Order 1964-1980
(Roseville CA: Prima, 2001), 515-20; and Dominic Sandbrook, Mad as Hell: The Crisis of
the 1970s and the Rise of the Populist Right (New York: Knopf, 2011). An exception to this
trend is Timothy Stanley, Kennedy vs. Carter: The 1980 Battle for the Democratic Party’s
Soul (Lawrence: University {Press of Kansas, 2010).
5
Hubert Humphrey to Walter Heller, December 15, 1975, Hubert Humphrey Papers –
Senatorial Files 1971-1978 [HP-SF], Correspondence Files- Legislative [CF-L] 1975, Box 3,
Minnesota State Historical Society [MSHS]; Henry Reuss, “Full Employment Without
Inflation,” in The Future of Democratic Capitalism [booklet based on conference May 5,
1976], 25-30 (New York: Loeb, Rhodes & Co. 1976); Congressman John Brademas
[Indiana], Memorandum: “Meeting at White House, May 2, 1977,” HHP-SF, VIP
Correspondence, Box 1, MSHS. Though outwardly loyal in the main, the Speaker continually
counselled the White House against retrenchment. In an unusual public display of
opposition, he told reporters in early 1979, “I did not become Speaker of the House to
dismantle the programs I’ve fought for all my life. I’m not going to allow people to go to bed
hungry for an austerity program.” See John A. Farrell, Tip O’Neill and the Democratic
Century (Boston: little, Brown, 2001), 527-28.
6
For full survey, see Washington Post, September 17, 1976.
7
For discussion, see Margaret Weir, Politics and Jobs: The Boundaries of Employment
Policy in the United States (Princeton NJ: Princeton University Press, 1992), 134-40;
Timothy Thurber, The Politics of Equality: Hubert H. Humphrey and the African American
Freedom Struggle (New York: Columbia University Press, 1999), 223-48; and Robert
Collins, More: The Politics of Economic Growth in Postwar America (New York: Oxford
University Press, 2000), 167-71.
8
Nicholas Spulber, Managing the American Economy from Roosevelt to Reagan
(Bloomington: Indiana University Press, 1989), 100; Weir, Politics and Jobs, 134.
9
“Full Employment Stirs Partisan Battle,” Congressional Quarterly Weekly Report, April 15,
1976. 1171-75.
10
Schultze, “The Economics of Full Employment,” Adherent 3 (August 1976), 11-23. For a
rebuttal by economist Leon Keyserling, who was largely responsible for writing the bill, see:
Keyserling to Humphrey, September 2, 1976, and to Schultze, September 2, 1976, HP-SP,
CF-L 1976, box 2, MSHS.
11
Thurber, The Politics of Equality, 276; Humphrey to Walter Heller, August 6, 1976, HPSF, CF-L 1976, MSHS.
17 12
Charles C. Killingsworth, Unemployment: Exposing the Inflation Alibi (Washington DC:
AFL-CIO American Federationist, 1976); Paul Bullock, ed., Goals for Full Employment: the
Full Employment and balanced growth Act of 1976 (Los Angeles: UCLA Institute of
Industrial Relations, 1976) http://cdn.calisphere.org/data/28722/8r/bk0003t8r/files/; Judith
Stein, Pivotal Decade: How the United States Traded Factories for Finance in the 1970s
(Princeton: Princeton University Press, 2010), 190-92.
13
Rustin quoted in Stein, Pivotal Decade, 192.
14
“Liberals and Inflation,” New Republic, January 20, 1979, 1-13.
15
“Jobless rate at 7%: Total is 7 Million, Largest in 3 Years,” New York Times, May 3, 1980,
1; “Kennedy Pounds at Jobless Increase,” Washington Post, May 6, 1980, 1. For Kennedy
speeches to soon-to-be-unemployed automobile workers in New Jersey, see Newark StarLedger, May 6 and 9, 1980.
16
Donald Szantho Harrington to the President, June 17, 1980, plus enclosure “Liberal Party:
Memorandum on National Policy 1980” White House Staff Files-Hamilton Jordan, box 79,
JCPL; Jimmy Carter to Donald S. Harrington, August 28, 1980, White House Central FilesSubject Files [WHCF-SF], box PL-10, JCPL.
17
For material on the selection process, see Richard Moe, Memorandum for the President,
July 22, 1979, Walter Mondale Papers, box 154.J.10.1B, MSHS.
18
Congressman Jim Wright to the President, March 31, 1980, James Wright Papers, Box 721,
Texas Christian University. For administration defense of Volcker, see Charles Schultze to
Wright, November 28, 1979, WHCF-SF, box FG-188 , JCPL; and “Interview with the
President,” October 26, 1979, American Presidency Project [APP](University of CaliforniaSanta Barbara), www.americanpresidency.org
19
Iwan Morgan, The Age of Deficits: Presidents and Unbalanced Budgets from Jimmy Carter
to George W. Bush (Lawrence: University Press of Kansas, 2009), chapter 3.
20
Joel McLeary to Tim Kraft, “Memphis Follow-Up,” December 15, 1978, SSF-PHF, box
242, JCPL. For the convention, see Morgan, 60-61; and Stanley, Kennedy vs. Carter.
21
“Budget: Liberals Force Social Spending Hike,” Congressional Quarterly, May 26, 1979,
995-96; Morgan, The Age of Deficits, 45, 62; “Statement of Senator Edward M. Kennedy on
the Carter Administration Budget for Fiscal 1981,” February 12, 1980, copy in Staff Office
Files, Louis Martin, Box 79, JCPL.
22
Hubert Humphrey to Kevin White, September 30, 1974, HP-SP, CF-L 1974, box 3, MSHS;
Reuss, “Full Employment Without Inflation,” 28-29.
23
Biven, Carter’s Economy, 217-22; Martha Derthick and Paul Quirk, The Politics of
Deregulation (Washington DC: Brookings, 1985); Dorothy Robin, Breaking the Special
Interests: Trucking Deregulation and the Politics of Policy Reform (Chicago: University of
Chicago Press, 1987); Greta Krippner, Capitalizing on Crisis: The Political Origins of the
Rise of Finance (Cambridge MA: Harvard University Press, 2011), 58-85. .
24
Biven, Jimmy Carter’s Economy, 163-83; Alfred Kahn interview, 110, in Project on the
Carter Presidency, White Burkett Miller Center for Public Affairs, University of Virginia.
18 25
For a sense of the tortuous negotiation of the Accord see: Charles Schultze and Michael
Blumenthal Memorandum to the President, May 29, 1979, and Blumenthal, Memorandum to
the President, June 20, 1979, SSF-PHF, boxes 133-136, and Walter Heller, Memorandum to
the President, July 25, 1979, Alfred Kahn papers, box 8, all in JCPL. For very good analysis,
see Stein, Pivotal Decade, 219-224.
26
Robert Lekachman, “The Case for Controls,” New Republic, October 14, 1978.
27
In a typical expression of liberal disdain for the phase II and III stages of the Nixon
controls, Hubert Humphrey accused them taking “the laboring people of this country … for a
ride.” See Humphrey to George Meany, September 30, 1974, HP-SF, CF-L, 1974, box 3,
MSHS
28
Gar Alperowitz, Mark Green, and Frances Zwenig to Esther Peterson, “Consumers,
Inflation and the Basic Necessities of life,” May 23, 1978, WHSOF-Gerald Rafshoon, box
49, JCPL; Vernon Jordan, “Inflation fight needs target,” October 8, 1977, Chicago SunTimes, October 8, 1977; Tom Braden, “How Carter Could Halt Inflation,” Washington Post,
March 11, 1978.
29
Testifying to this, the CBS/New York Times poll of late January 1980 found 65 percent of
respondents in favour of wage-price controls. See E.J. Dionne, “The People Want Controls,”
New York Times, February 3, 1980, III:18.
30
Keynesian economist Walter Heller had helped to shape this proposal with its concept of a
flexible coupon value dependent on the changing volume of OPEC oil supplies. “It’s a ‘can
of worms,’” he asserted, “but it’s better than a can of snakes…. It would tell the world, in no
uncertain terms, that we are no longer gasaholics.” See Heller, Memorandum for the
President, “Recession, Inflation, and Policy,” January 3, 1980, SSF-PHF, box 163, JCPL.
31
“Transcript of Kennedy Speech at Georgetown University on Campaign Issues,” New York
Times, January 29, 1980, A12; Steven Rattner, “Kennedy in Economic Statement, Argues for
Controls,” NYT, February 7, 1980, A12; Leonard Silk, “Kennedy’s Call for Controls,” NYT,
March 26, 1980, D2; “Kennedy Calls for Reindustrialization Unit,” Washington Star, May
21, 1980.
32
Hamilton Jordan to President Carter, “Planning Memorandum for the 1980 Campaign,”
July 1980, and William Miller, Memorandum for the President, “Background for Meeting
with Economic Advisers,” SSF-PHF, box 19, JCPL; “Remarks Announcing the Economic
Renewal Program,” APP, August 28, 1980; Steven Rattner, “Carter Seeks Recovery Plan to
Help Business and Jobless: Revitalization Panel Named,” New York Times, August 29, 1980,
A1.
33
Arthur Okun, The Management of Prosperity (Washington DC: Brookings, 1970), 130.
34
Schultze, Memorandum to the president, “Some disturbing thoughts about the economic
outlook,” May 6, 1978, and “Our Past Forecasts,” December 14, 1979, SSF-PHF, boxes 84,
160, JCPL.
35
For discussion, see Paul Krugman, Peddling Prosperity: Economic Sense and Nonsense in
An Age of Diminished Expectations (New York: Norton, 1995), 55-65.
19 36
For examples of Keynesian overestimate of potential output, see: Walter Heller to Hubert
Humphrey, “A Few Thoughts on Current Economic Policy,” November 24, 1975, HP-SP,
CF-L 1975, box 3, MSHS; and Laurence Klein to Stuart Eizenstat and Jerry Jasowinski,
“Contemporary Economic Outlook,” November 18, 1976, Domestic Policy Staff-Eizenstat
Records, Box 194, JCPL. Advising the Carter transition team, University of Pennsylvania
economist Lawrence Klein urged large-scale fiscal and monetary stimulus to produce several
high recovery quarters at about 6-7 percent economic growth to eliminate unemployment in
1977. “The large amounts of slack and unemployment in the economy,” he declared, “[will]
serve to hold price changes in check.”
37
Schultze, Memorandum to the President, “An Outline of Short- and Long-Run AntiInflation Strategy,” October 17, 1979, SSF-PHF, box 152, and Heller, Memorandum to the
President, “Recession, Inflation, and Policy,” January 3, 1980, SSF-PHF, box 163, JCPL.
See too, the view of former Kennedy CEA member and MIT economics professor Robert
Solow, “All Simple Stories About Inflation Are Wrong: Lessons for Our Economy,”
Washington Post, May 18, 1980, G1.
38
Consulted by the Carter White House in mid 1979, Walter Heller and Arthur Okun urged a
payroll tax cut that could help avoid recession and curb pressures for inflationary wage
demands. Both also counselled accelerated depreciation allowances to aid business but
advised that companies receiving over a psecified level of benefit (either $500, 000 or $1,
000, 000 per year) would in return have to specify compliance with the wage-price
guidelines. See Stuart Eizenstat, Memorandum to the President, “Results of Consultations
with Private Economists and Businessmen,” July 25, 1979, SSF-PHF, box 140, JCPL.
39
Klein to Senator Edmund Muskie, August 7, 1978, copy in James Wright Papers, Box 721,
TCU. Klein was particularly dismissive of the claims made for Laffer curve theory by its
policy entrepreneurs. “One can criticize academic economists for being pedantic, slow to
come to decisions, and often equivocal, but they have to be our final authorities in cases like
this. For all their mistakes, they can tell the difference between good and bad arguments.”
40
Krippner, Capitalizing on Crisis [quotation p. 103]. See too: Gerald Davies, Managed by
the Markets (New York: Oxford University Press, 2009); and Iwan Morgan, “Monetary
Metamorphosis: The Volcker Fed and Inflation,” in Journal of Policy History, forthcoming,
September 2012.
41
Otto Eckstein and Christopher Probyn, “Do Budget Deficits Matter?” Data Resources U.S.
Review (December, 1981): 1. 12. See too: Stephen Brooks, “A Balanced Budget, 1972-1978:
What Would Have Happened?” Allan R. Sanderson, ed., D.R.I. Reading in Macroeconomics
(New York: McGraw-hill, 1981, esp. p. 244-251, and George Guess and Kenneth Koford,
“Inflation, Recession and the Federal Budget Deficit (or, Blaming Economic Problems on a
Statistical Mirage),” Policy Sciences 17 (December 1984): 385-402. The latter examined data
from 17 advanced economies to test what effect deficits had on inflation, GNP, and private
investment for 1949-1981. The study concluded, “Deficits are never a statistically significant
determination of inflation for the United States. But deficits increase GNP ... supporting the
Keynesian position.... Possibly Keynesian policies work better in the United States than
elsewhere. Similarly deficits increase investment ... implying that crowing in may work in
the United States.” [p. 399]
20 42
See,
for example: William Poole, “Burnsian Monetary Policy: Eight Years of Progress?”
Journal of Finance 34 (May 1979), 473-96; Robert L. Hetzel, “Arthur Burns and Inflation,”
Economic Quarterly (Federal Reserve Bank of Richmond), 84 (Winter 1988), 21-44; William
A. Niskanen, Reaganomics: An Insider Account of the People and Policies (New York:
Oxford University Press, 1988), 156-61; and Thomas Mayer, Monetary Policy and the Great
Inflation in the United States: The Federal Reserve and the Failure of Macroeconomic
Policy, 1965-1979 (Cheltenham, UK: Edward Elgar, 1998). 43
Washington Post, November 6, 1980; Walter Mondale interview: “The Re-education of
Walter Mondale,” New York Times Magazine, November 8, 1981, 67; Al From,
Memorandum to Anne Wexler, July 11, 1980, WHSOF-Susan Clough, Box 37; JCPL;
Cambridge Survey Research, Summary report of states, October 1 and 8, 1980, ibid, box 39.
44
Judith Stein, Pivotal Decade: How the United States Traded Finance for Factories in the
1970s (New haven CT: Yale University Press, 2010). See too, Melvin Dubofsky, “Jimmy
Carter and the Politics of Productivity,” in The Carter Presidency: Policy Choices in a PostNew Deal Era, ed. Gary M. Fink and Hugh Davis Gaham (Larwnece: university Press of
Knasas, 1998), 95-116; and Greta R. Krippner, Capitalizing on Crisis: The Political Origins
of the Rise of Finance (Cambridge MA: Harvard University Press, 2011).
21