Jordan Jenkins
The Fed goes back to the seventies.
On August 26, 2022, while speaking at the Federal Reserve’s annual conference in Jackson Hole, Wyoming, Fed Chair Jerome Powell insisted that the central bank had internalized the lessons of the past in its current fight against inflation. “History shows that the employment costs of bringing inflation down are likely to increase with delay as high inflation becomes entrenched in wage and price setting,” Powell said in his prepared remarks. For this reason, he continued, the Federal Reserve would move to stamp out inflation and “keep at it until we are confident the job is done.” With these comments, Powell completed a hawkish turn in the Fed’s approach to inflation that was one year in the making. As late as September 2021, Powell had suggested that the contemporary surge in prices was largely “transitory”—the soon-to-pass side effect of supply chain disruptions and labor shortages that developed as the economy emerged from COVID-19 lockdowns. These hopes were dashed, however, as inflation continued to accelerate apace through the winter, exacerbated by Russia’s invasion of Ukraine and the subsequent global energy squeeze. Forced to concede that inflation posed a lasting challenge to the economy, Powell was pressured to ensure that the inflation did not become as entrenched as it had when the United States last experienced sustained inflation in the 1970s. His response to this pressure has been decisive: since March of this year, the Federal Reserve has embarked on the fastest monetary tightening since the 1980s, in the hopes that rapidly raising interest rates might cool an overheating economy.
The economic tumult of the 1970s looms particularly large as governments face off against inflation, not least because the parallels between that moment and our own are so easy to identify. Then, as now, a series of unanticipated disruptions to the global economy—the 1973 and 1979 oil crises—triggered a surge in prices. Then, as now, the initial surge in prices exposed and exacerbated secular trends that preceded the disruptions themselves. But reference to the “lessons” of the 1970s often serves an additional, distinctly political purpose for hawkish policymakers and pundits alike. Their shared account of the era at once condemns New Deal-era economists for allowing inflation to persist through the decade and celebrates their neoliberal successors for restoring price stability through brutally tight monetary policy. It’s ultimately unsurprising that Powell’s assertion that the Fed has learned the lessons of history came amidst his turn towards rapid monetary tightening. History, as it’s popularly constructed, would seem to suggest that tight monetary policy is not only necessary in the fight against inflation, but noble as well.
While this conventional historiography suggests that inflation was a neatly-defined policy issue, created and resolved through the actions of governing technocrats, more critical retrospectives point to inflation as a site of incredible contest. The inflation of the 1970s not only reflected the decisions of economic policymakers, but also the competing claims made by workers, consumers, and firms on the fruits of American capitalism. Recovering this forgotten history of contestation suggests an entirely different understanding of inflation, and helps to clarify just what exactly is at stake in Powell’s current anti-inflation crusade.
In March 1976, famed Cambridge economist Joan Robinson was invited to Barnard College to deliver remarks on the peculiar crisis facing the U.S. economy. The United States had not yet fully recovered from the brutal recession of the previous three years, which had pushed the national unemployment rate to a staggering 9 percent and marked an end to nearly three decades of virtually uninterrupted postwar economic growth. More concerning to Robinson, however, was the fact that this downturn had been accompanied by a dramatic increase in the price of everyday goods. In the first year of the recession alone, the cost of a typical basket of household goods increased by 11.1 percent—the largest recorded increase in the official price level since the abolition of World War II price controls in 1946. This sudden inflation was made all the more perplexing by the fact that it violated some of the most basic assumptions of contemporary macroeconomic thought. The Phillips curve, the predominant model for forecasting inflation, assumed that inflation and unemployment were inversely related—meaning that episodes of high unemployment were meant to be characterized by relatively low inflation. With the simultaneous intensification of both, Robinson observed that “all the old rules fail to hold—inflation no longer makes profits buoyant and rising unemployment no longer keeps inflation in check.”
By the time of Robinson’s remarks, neoliberal economists who blamed inflation on the New Deal state’s fiscal irresponsibility and advocated monetary austerity as the only way forward were well on their way to forming a new governing bloc within policymaking institutions. Robinson, however, argued that inflation simply exposed the “class war” inherent to capitalist economies. Inflation, she held, was but a symptom of a broader struggle in which “workers must struggle to keep their share in the product of industry and corporations must struggle to prevent them from increasing it.” Consequently, any credible solution to the “great unsolved problem” of inflation would need to determine which class forces emerged victorious. The failure of New Deal policymakers lay not in their fiscal irresponsibility, but in their “bastard Keynesian” conviction that this foundational contradiction of the capitalist economy could be resolved through mere welfarism of labor-management accord.
Robinson’s account of the class politics of inflation illuminates what conventional historiography has more often neglected: the 1970s saw the most intense period of labor mobilization in the United States since the end of World War II. Across the nation, millions of workers went on strike and agitated for higher wages, expanded benefits, and improved working conditions—often over the protests of more moderate union leadership. As historian Robert Brenner has observed, these rank-and-file actions were helped along by historically low unemployment of the 1960s and early 1970s, which simultaneously empowered workers to demand material concessions from their employers and left employers hard-pressed to find replacement labor.
Robinson’s account also illuminates the ways in which the central bank-led resolution of inflation of the 1970s aimed to settle this class struggle. As inflation persisted through the decade—reinflamed by the doubling of global oil prices that followed the Iranian Revolution—President Jimmy Carter faced mounting pressure to restore economic order. He eventually responded by tapping inflation hawk Paul Volcker to lead the Federal Reserve in August 1979. Just two months later, Volcker would announce a series of policy moves that sent interest rates skyrocketing to 20 percent. The stated logic of this drastic anti-inflation program—known as the “Volcker shock”—was clear: higher interest rates would make it more costly to borrow, restricting the supply of money and cooling an overheated economy. But Volcker was just as interested in reimposing labor discipline as he was in reimposing monetary discipline. As workers demanded and secured material concessions from their employers through the 1970s, firms raised prices to offset increased labor costs and preserve profits. Central bankers feared that workers, after seeing that their real purchasing power had stagnated or fallen despite nominal wage gains, would demand yet higher wages, triggering a self-reinforcing wage-price spiral. Thus, in Volcker’s view, to bring inflation under control, labor unrest needed stamping out.
His policies accomplished this by triggering the most brutal recession since the Great Depression. The sudden ascent of interest rates to historic highs rapidly contracted the American economy. By October 1982, the national unemployment rate had climbed to 11 percent. The devastation was especially concentrated in Black and working class industrial communities, some of which saw unemployment rates in excess of 20 percent at the height of the crisis. This critically undermined the economic conditions on which the labor militancy of the previous decade depended. With unemployment now pushed to unfathomable highs, workers were encouraged to accept work wherever they could find it—irrespective of the terms of employment. This material assault on the conditions of worker power was coupled with an all-out political assault on organized labor, after the election of Ronald Reagan in 1980. Volcker, for example, heartily endorsed Reagan’s 1981 decision to fire striking air traffic controllers, praising the fact that the recently inaugurated president “took on an aggressive, well-organized union and said no.” Thus, while Volcker would likely cringe at Robinson’s invocation of class war, he proved as committed a class warrior as any. Through his policies, the grand distributional struggle that helped to propel inflation forward was unambiguously resolved in favor of capital.
The Volcker shock initiated the secular decline of virtually all measures of worker bargaining power, from union density of real wage growth to the labor share of national income. These trends have persisted virtually uninterrupted into the present: national union density fell to just 10.3 percent in 2021, the lowest since the Bureau of Labor Statistics first began collecting union membership statistics in 1983. The recent string of union victories at retail giants like Starbucks and Amazon and successful strikes at corporations like John Deere and Kellogg have inspired hopes that the pandemic represented a turning point in the prospects of organized labor. There are certainly reasons for optimism—labor unions currently enjoy their highest approval rating among the American public since 1965, and union organizers have won more NLRB elections in 2022 than at any point in the past 20 years. However, that the scale of current labor militancy is considered exceptional is a testament to the long-term devastation of organized labor. In 1974, an estimated 1.7 million workers went on strike; in the first half of 2022, an estimated 78,000 did. The epochal class struggle of the 1970s this is not.
Nevertheless, like Volcker, Fed Chair Jerome Powell appears poised to aggressively stamp out what traces of labor resurgence exist. In recent statements, Powell has repeatedly suggested that the labor market is currently too favorable to workers,that labor’s increased bargaining power is pushing up labor costs and fueling inflation. One of the explicit aims of the Federal Reserve’s monetary tightening is to “soften” labor market conditions by pushing up the unemployment rate—a dulled rerun of what Volcker did to smash organized labor in the 1980s. All signs suggest that Powell will be successful in this. Projections suggest that the Fed’s current interest rate hiking spree will push up the unemployment rate from its current 3.5 percent to 4.4 percent over the next year. This not only threatens to send an additional million American workers into precarious unemployment, but also to undermine the tight pandemic-era labor market conditions that granted workers some bargaining power and facilitated many of the organizing successes of the past two years. Convincing workers to sign a union card or vote to go on strike will no doubt be a harder sell if they face an active recession and a heightened risk of unemployment. Powell claims that the long-term benefits of taming inflation outweigh whatever short-term costs might fall upon workers, asserting in his Jackson Hole speech that “without price stability, we will not achieve a sustained period of strong labor market conditions that benefit all.” But Powell declines to note that the “strong labor market conditions” that accompanied the pre-pandemic price stability he champions nonetheless allowed for unprecedented wage stagnation and skyrocketing inequality. Therein lies the problem. As historian Samir Sonti notes, “The half century during which inflation figured significantly in U.S. politics was also the half century during which economic inequality was systematically reduced.” Price stability, it seems, also comes at a cost.
If inflation necessarily implies a distributional struggle between capital and labor, what might it take for workers to prevail? The alternatives to labor-crushing tight monetary policy might elude us now, but as Robinson spoke in 1976, they were both evident and precedented. When Volcker moved to tame inflation, he did so by targeting the wage or demand component of the wage-price spiral—constraining the ability of workers to make inflationary material demands by heightening the live threat of unemployment. An alternative resolution to the wage-price problem, one advocated by Robinson at various points in her career, would involve moving to directly constrain prices through a system of price controls. Under such a system, material concessions won by workers could not simply be passed off as higher prices and corporate profits could become grounds for labor contestation. In recent decades, price controls have been effectively demonized—so much so that economist Isabella Weber was ruthlessly condemned late last year for suggesting that they might have a role to play in the current fight against inflation. But the demand for price controls was one echoed by militant unionists and consumer organizations alike throughout the long 1970s. Partially in response to these demands, President Richard Nixon imposed an economy-wide freeze on prices in August 1971—though the scheme was controversially coupled with a freeze on wages, and thus quickly lost the support of organized labor.
There is no significant political coalition currently agitating for such a response to the inflation. Organized labor, though on an upswing, is not nearly strong enough to force the transformation of American political economy that is likely required to push price controls onto the policy agenda. Moreover, President Joe Biden—the self-proclaimed “most pro-union president” in American history—has repeatedly committed to “respect the Fed” above all else, even as their anti-inflation program threatens to reverse the gains made by the labor movement under his administration. History marches along, but the politics of inflation appear helplessly stuck in the myths and pathologies of the neoliberal era. Destabilizing this status quo will no doubt be a herculean task. At the very least, however, it will require confronting the historical narratives that were, in many ways, intentionally built to foreclose the possibility of an alternative.