US STAGFLATION IN 70S

Script

Intro (t nghĩ cái này để t nói thôi k cần đưa vào slide thôi kiểu script riêng
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When people think of the U.S. economy in the 1970s, many things come to
mind:

 High oil prices
 Unemployment
 Recession
 And Stagflation

Why the biggest economy in the world at that time experienced such a depresed
period ?

Overview
Inflation seemed to feed on itself. People began to expect continued increases in
the price of goods, so they bought more. This increased demand pushed up
prices, leading to demands for higher wages, which pushed prices higher still in
a continuing upward spiral. Labor contracts increasingly came to include
automatic cost-of-living clauses, and the government began to peg some
payments, such as those for Social Security, to the Consumer Price Index, the
best-known gauge of inflation.
While these practices helped workers and retirees cope with inflation, they
perpetuated inflation. The government's ever-rising need for funds swelled
the budget deficit and led to greater government borrowing, which in turn
pushed up interest rates and increased costs for businesses and consumers even
further. With energy costs and interest rates high, business investment
languished and unemployment rose to uncomfortable levels.

Issue started to appear

Troubling signs began to emerge in the late 1960s. Unemployment rose by 33%
between 1968 and 1970, while the consumer price index went up by 11%. At the
same time, real wages began to stagnate. Simultaneous inflation and stagnation,
nicknamed stagflation, puzzled economic analysts: usually, when wages fell,
prices fell, and when wages increased, prices increased. But not in the 1970s. As
a result, Americans had less purchasing power, and increasingly expensive
American exports were at a disadvantage in the international market. In 1971,
the United States experienced its first unfavorable international trade balance
since 1893
 United States of America's annual GDP growth from 1970
8
7.3

6 5.6 5.4 5.6

5.2
4.6 4.6

4
Percentage

3.3 3.2
2.6

0.2
0
-0.2 -0.2
-0.5

-2
-1.9

-4
Years

Cause of stagflation
1. THE OLD EMBRAGO

In 1971, Richard Nixon attempted to remedy inflation by imposing a 90-day

wage and price freeze. At the same time, he attempted to boost American
exports by taking the dollar off the gold standard, devaluing the currency.
These measures resulted in a short-term improvement (just long enough to
get Nixon reelected in 1972) but did nothing to address the tangled roots of
the problem.
In October 1973, the United States supported Israel after a surprise attack by
Egypt and Syria in the Yom Kippur War. The oil-rich nations of the
Middle East, already angry with the United States for devaluing the dollar
(the currency used to purchase oil) determined to exact their revenge with an
oil embargo. Led by Saudi Arabia, the Organization of the Petroleum
Exporting Countries (OPEC) announced an oil shipping embargo against
the United States as well as Israel's European allies
 Th
e effects were immediate and dire. The price of oil shot up to $11.65 per
barrel, an increase of 387%. Lines miles-long formed at gas stations. The
United States consumed one third of the world's oil, and its citizens quickly
discovered just how much of daily life depended on cheap oil. Families
living in far-flung suburbs depended on automobiles to get everywhere.
Even after the embargo ended in March 1974, prices for oil remained about
33% higher than they had been before the crisis
The prevailing belief as promulgated by the media has been that high levels
of inflation were the result of an oil supply shock and the resulting increase
in the price of gasoline, which drove the prices of everything else higher.
This is known as cost-push inflation. According to the Keynesian economic
theories prevalent at the time, inflation should have had an inverse
relationship with unemployment, and a positive relationship with economic
growth. Rising oil prices should have contributed to economic growth.

In reality, the 1970s was an era of rising prices and rising unemployment;
the periods of poor economic growth could all be explained as the result of
the cost-push inflation of high oil prices. This was not inline with Keynesian
economic theory.

2. THE NIXON SHOCK

The Nixon Shock was three actions that Nixon took.

- He instituted a 90-day freeze on all wages and prices. He set up a Pay
Board and Price Commission to approve any increases after the 90 days.
Conveniently, it would control prices until after the 1972 presidential
campaign. That's how he planned to control inflation.
- Nixon imposed a 10% tariff on imports. His goal was to lower the trade
deficit and protect domestic industries. Instead, the tariffs raised import
prices.
- He removed the United States from the gold standard. That had kept the
dollar's value tied to a fixed amount of gold since the 1944 Bretton Woods
Agreement.

- The crisis occurred when the United Kingdom tried to redeem $3 billion

for gold. The United States didn't have that much gold in its reserves at
Fort Knox. So Nixon stopped redeeming dollars for gold. That sent the
price of the precious metal skyrocketing and the value of the
dollar plummeting. That sent import prices up even more.

- These last two policies raised import prices, which slowed growth. Then
growth slowed even more because U.S. companies couldn't raise prices to
remain profitable. Since they couldn't lower wages either, the only way to
reduce costs was to lay off workers. That increased unemployment.
Unemployment reduces consumer demand and slows economic growth.
In other words, Nixon's three attempts to boost growth and control
inflation had the opposite effect. 

3. STOP-GO MONTERY POLICY

The Federal Reserve's attempts to fight stagflation only worsened it.

Between 1971 and 1978, it raised the fed funds rate to fight inflation, then
lowered it to fight the recession.1 6  1 7  This "stop-go" monetary policy
confused businesses. They kept prices high, even when the Fed lowered
rates. That sent inflation up to 13.3% by 1979.9   

Federal Reserve Chair Paul Volcker ended stagflation by raising the rate

to 20% in 1980. But it was at a high cost. It created the 1980-1982
recession.