Recessions are part of the natural business cycle: When economies overheat, they eventually cool down. But the economic crisis after 1973 was unsettling because, for the first time in the nation’s history, the rising tide of unemployment had failed to extinguish inflation. Millions of workers lost their jobs, yet wages and prices continued to rise. The term stagflation (a combination of stagnation and inflation) was coined to describe this anomaly. In 1971 an inflation rate of 5 percent had so alarmed President Nixon that he had imposed a price freeze. By 1975 inflation had soared to 11 percent and by 1979, it peaked at a whopping 13 percent; unemployment ranged from 6 to 10 percent, nearly twice the usual postwar level.
The skyrocketing price of oil caused many to champion nuclear energy. But on March 28, 1979, the failure of a cooling system caused the Three Mile Island nuclear reactor to overheat and generate radioactivity in the Harrisburg region. The reactor was shut down five days later.
Carter had promised to fight inflation by reducing government spending and balancing the budget and to stimulate the economy by cutting taxes, policies that were very much like those of Nixon and Ford. He advanced an admirable if complicated plan for conserving energy and reducing the dependence of the United States on OPEC oil. This plan would raise the tax on gasoline and impose a new tax on “gas guzzlers,” cars that got relatively few miles per gallon. But in his typical fashion he did not press hard for these measures.
The federal government made matters worse in several ways. Wages and salaries rose in response to
Inflation, but taxes went up more rapidly because larger dollar incomes put people in higher tax brackets. This “bracket creep” caused resentment and frustration among middle-class families. “Taxpayer revolts” erupted as many people turned against expensive government programs for aiding the poor. Federal borrowing to cover the deficit pushed up interest rates and increased the costs of all businesses that had to borrow.
Soaring mortgage rates made it more difficult to sell homes. The housing slump meant unemployment for thousands of carpenters, bricklayers, and other construction workers and bankruptcy for many builders. Double-digit interest rates also hurt small businesses seeking to expand. Savings and loan institutions were especially hard-hit because they were saddled with countless mortgages made when rates were as low as 4 and 5 percent. Now they had to pay much more than that to hold deposits and offer even higher rates to attract new money.
Bad as inflation was in the mid-1970s, it got worse in 1979 when further instability in the Middle East nearly tripled the price of oil, which now reached $34 a barrel. This sent gasoline far over the $1 a gallon price barrier many had thought inconceivable. Within months Ford stock, at thirty-two in 1978, plummeted to sixteen; its credit rating with Standard and Poor’s fell from AAA to an ignominious BBB. Chrysler, the third largest automaker, tottered near bankruptcy and then fell over the edge, saved in mid-fall only by a $1.2 billion federal loan guarantee. From 1978 to 1982, the jobs of one in three autoworkers were eliminated.
World History
