Kenneth D. Gartrell

By: Kenneth D. Gartrell

Never mind what the Fed says ….it is already here in relative terms – likely to arrive this summer in real terms.

Recent news reports raise the spectre of stagflation: an abstract economic concept that arose near the end of the last oil crisis in the mid-1970s. It is supposed to reflect a world of incompatible conditions — that of low real economic growth – mostly in lost jobs — and that of increasing prices – mostly increased oil price fallout and interest rates.

When the misery of the 190s stagflation started to take a deep hold, we elected an unknown and untested President, a.k.a Jimmy Carter out of a desire for “change”. Now, I confess as a person, I like Jimmy Carter. But, his was one of the most failed Presidencies in US history. Jimmy spoke about the American malaise, created the Department of Energy, deregulated the airline industry (well partly), and suffered lots of embarrassment in foreign policy and military action.

I worked then in Cleveland when the misery index (interest rates, unemployment and inflation) peaked. After the catastrophic rise in interest rates, I felt the earth shake in downtown Cleveland. I kid you not the ground shook in the cold winter of 1979 when credit card rates spiked to 22%. Late summer 1980, there was hope in the air. The candidacy of Ronald Reagan was inspiring Americans everywhere. He ended up sooner in the White House and I ended later in a whole new world of opportunity after another stint of graduate school.

This year we have a hope/change candidate. But, is he a Carter or a Reagan?

What happened through the 1970s was, and it is going to happen again, that American consumers changed their behavior. Just one of the happenings of that era was the rise of Japanese cars in America. Never underestimate the power of American consumers or their ability to make rational economic choices and substitutions.

High quality, high mileage cars! How about a Smart or a Hybrid. Do you have any ideas what the same rate of adoption of hybrids will do the price of oil. WATCH.

It was a really good thing! And, by the time the substitutions were done and taxes and regulations were reduced, the shift in the Reagan relocation of defense spending from Midwest machine tools to West Coast electronics and information oil prices cratered from a recent high of $40 a barrel in 1980 to a mere $15 a barrel in 1986. If that happens again there will not be a glut of housing anywhere.

We don’t have some abstract thing going on called stagflation. We have high taxes, restrictive regulations that inhibit capital formation and innovation. Our Court system is far behind as our interstate system. And it has just as many unfixed potholes.

We also have excessively high oil prices born of bad public policy. The way out of this mess could simply not be clearer to anyone who struggled in the 1970s and 1980s.

The relevant political issue is whether we are again going to have a four year Cateresque Presidency or whether it will again be “Morning in America”.

This is not a partisan issue for me. Based on all candidates in the race, the middle on economic issues is to the left in this election. I think it is up to all of us as usual. Politicians do what our markets and we tell them to do.

I can, however, also say this without any hint of an endorsement, that, Mitt Romney is betting on a four-year Democrat President ala Jimmy Carter and he plans to be the Reagan of 2012. He may not be Reagan either — but he is thinking about it. Whatever else I think about Mitt, I don’t think he is stupid and I don’t think he cares who the incumbent will be in the next election. He probably thinks McCain can win the War, redirect the military and lose the economy ala Bush 41. He is probably also betting the Democrats will lose the War and strangle the economy.

Who knows? But, we can only go by what they are telling us policy will be. I really hope we do not have to wait four years for relief. Realistically though, it may not be time yet where we can do all the right things.

Further reading and views – pro and con

The Rise and Decline of Nations: Economic Growth, Stagflation, and Social Rigidities

Structure and Change in Economic History

Our Stagflation Malaise: Ending Inflation and Unemployment