Markets & Finance

The Economy: Back to 1979?


Energy and inflation shocks provide eerie echoes of 1979. Here's how we can avoid a trip back to Carter country

Pop quiz for all you political junkies out there: Who said this?

"Our excessive dependence on OPEC has already taken a tremendous toll on our economy and people.… It's a cause of the increased inflation and unemployment we now face. This intolerable dependence on foreign oil threatens our economic independence and the very security of our nation. The energy crisis is real. It is worldwide. It is a clear and present danger to our nation. These are facts and we simply must face them."

Was it President George W. Bush? John McCain? Barack Obama? Hillary Clinton?

Well, get out your bell-bottoms—or at least that cardigan sweater—if you guessed President Jimmy Carter. On July 15, 1979, the 39th President made these remarks sitting in front of a fireplace dressed in a cardigan. The fireside chat later became known as the "malaise" speech, although he never actually used the word. However, he did talk about a crisis of confidence:

"It is a crisis that strikes at the very heart and soul and spirit of our national will. We can see this crisis in the growing doubt about the meaning of our own lives and in the loss of a unity of purpose for our nation."

No Way Around Sacrifice

What would solve that crisis of confidence? What the philosopher William James called the "moral equivalent of war": the goal of energy independence. The nation, according to Carter, needed to make "the most massive peacetime commitment of funds and resources" and to "mobilize American determination and ability to win the energy war." Carter said he could "not promise that this struggle for freedom will be easy" and stated forcefully that there was "simply no way to avoid sacrifice." Whew!

Several aspects of Carter's speech stand out. First, his florid language highlights how different today is from 1979. Americans are paying through the nose for gasoline, but there are no gas lines. We all complain about the high cost of energy, but it's mostly measured in terms of squeezed household budgets—not in a loss of national will. Being smart about energy usage isn't an act of patriotism, it's seen as common sense personal finance.

Yes, some politicians are lobbying for the return of the windfall profits tax on oil companies that Carter called for in the speech, but there's little groundswell of support three decades later. Even proposals for a gasoline-tax holiday can't get much support.

Still Pursuing Energy Independence

To be sure, the language of war and sacrifice is commonplace now in the years following September 11. But it's directed at the occupations in Iraq and Afghanistan, where soldiers (and their families) are taking real risks and making real sacrifices.

Still, as the old saying goes, history may not repeat itself but it frequently rhymes. For instance, it was during this speech that Carter announced the creation of the Energy Dept., which quickly evolved into a massive, hidebound bureaucracy. And it was after September 11 that President Bush created another giant, dysfunctional bureaucracy, the Homeland Security Dept.

It's also striking how much hasn't changed in three decades. Politicians are still calling for "energy independence" even though the economy is now more dependent on foreign oil than ever—certainly much more than in 1979. The economy remains vulnerable to the price manipulations of OPEC nations and other oil producers.

And Carter's desire for the creation of alternative energies—"from coal, from oil shale, from plant products for gasohol, from unconventional gas, from the sun"—still resonates. (Although coal is less popular now, thanks to concerns about global warming.)

And while "malaise" seems to be off-limits for politicians and commentators alike, the national mood does appear to be unusually sour in a crucial election year. You can't turn on cable TV without hitting on a show worried about cultural decline and rampant individualism.

Carter's Ideological Shift

That said, the most intriguing aspect of Carter's 1979 chat may be that it was a transitional speech marking an ideological shift in how to run an economy. With the benefit of hindsight, it appeared to be the last gasp of government-centered domestic economic policy.

Carter's concrete proposals largely reflected the "managed capitalism" approach of the 1950s and 1960s. It was a time when capitalist competition was restrained, Big Business developed a close relationship with government, and unions gained power within companies and the corridors of Washington. It worked remarkably well for a while, but the belief in the wisdom of government elites to smartly organize an economy foundered on the rise of international competition, the Vietnam War, the oil shocks of the 1970s, a plunge in productivity, the hallowing out of American manufacturing, a series of currency crises and, most importantly, runaway inflation.

Aspects of his talk contain hints of the ideology that replaced managed capitalism: A strong belief in free markets and deregulation. Think Ronald Reagan, Margaret Thatcher, and the economics department at the University of Chicago. According to the free-marketeers, economic problems would disappear if government backed off and let the magic of markets work. And indeed, the unleashing of free-market capitalism in the 1980s and 1990s nurtured entrepreneurial innovation and business productivity.

The Ultimate Energy Hybrid

But the wheel of history has a habit of turning whether we like it or not. Now, like Keynesian liberalism before it, the credit crunch has exposed the ideas that have held sway in Washington as also bankrupt. "The current conservative, free-market cycle that commenced with the Reagan presidency, with all its achievements, seems to have long since foundered in the oil seas of gross excess," writes Charles Morris, author of The Trillion Dollar Meltdown: Easy Money, High Rollers, and the Great Credit Crash.

Indeed, the shift toward reregulating the financial system could spill over into how we treat oil. Imagine, for instance, a call to raise energy taxes significantly. High prices would encourage technological innovation. But instead of government directing the innovations, Silicon Valley, Route 128, the Beltway high-tech corridor, and maybe even the oil companies themselves would seize the opportunities to coin money by going green.

Think of it as the ultimate energy hybrid—the kind of bold government action favored by the Man from Plains coupled with the reliance on market forces championed by his critics. Carter may not have the last laugh, but he might smile at the thought.


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