INFLATION FROM 1960S THROUGH 1980S.   Term Paper ID:23010 Click to get this paper

Essay Subject: Causes, effects & trends, focusing on Reagan years & impact of his policies on drop in inflation.... More...

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Paper Abstract: Causes, effects & trends, focusing on Reagan years & impact of his policies on drop in inflation. Paper Introduction: Inflation, the tendency of prices to increase from year to year (or, to put the same thing in different terms, the steadily declining purchasing power of the dollar) has for some years been a preoccupation of Americans, in their daily lives and in public policy. Middle-aged Americans can remember a time when a family of four could eat out for ten dollars, and a new car could be bought for $2500. In general, consumer prices when John F. Kennedy was President stood at little more than one-fifth their present-day level. After some years of near stability in the 1950s and early to mid 1960s, prices began to increase in the later 1960s. By the end of the 1970s, prices were increasing by ten percent or more each year. For consumers, it seemed that every trip to the grocery store meant paying more for the same products. Wage and Text of the Paper: The entire text of the paper is shown below. However, the text is somewhat scrambled. We want to give you as much information as we possibly can about our papers and essays, but we cannot give them away for free. In the text below you will find that while disordered, many of the phrases are essentially intact. From this text you will be able to get a solid sense of the writing style, the concepts addressed, and the sources used in the research paper. In general, consumer prices when JohnF. 492). (Ofcourse, this same decrease is welcome news to first-time homebuyers.)Nevertheless, inflation reminds in the background of our economic life.Presidents of both parties are anxious when the Federal Reserve Boardincreases interest rates at the first sign of a boom, lest inflation be re-ignited. People foundthemselves pushed into higher tax brackets, though they were no better off,and for unskilled workers, the real value of the minimum wage dropped by athird. Policy-driven reasons for inflation in the late 196 s and early197 s can be identified, however. However, the CPI is computed based on a "market basket" of goods, asbought by a typical consumer--and that market basket was defined in termsof consumers' buying patterns as measured in the period 1982-1984. Statistical Abstract of the United States (1995). The net effect was a dramatic increase in the federaldeficit, which ballooned from a Carter-era high of $7 billion to upwardsof $15 billion. percent from 1982 through 1989. Secrets of the Temple: How the Federal ReserveRuns the Country. Thus,to take one example, relatively few people were buying personal computersin the early 198 s. J. Indeed, of the entire national debt, now some $4trillion, three-quarters has been accumulated since 1981. However, a well-known fallacy of logic is post hoc, propter hoc--thatis, the assumption that because one event follow another, the second eventwas necessarily caused by the first. From 1982, in contrast, oil prices went into a long-term decline.The high oil prices of the 197 s, and the widespread belief that oil priceswould go higher still, led to a burst of oil exploration, drilling, and newproduction, the end result being an oil glut. In short, the rate ofinflation, after rising gradually from very low levels in the early 196 s(the annual increase in the CPI was less than 2 percent in every year from196 to 1965), reached explosive levels at the end of the 197 s. D1, D6. Or was he the beneficiary (and Carter the victim) of outsideforces beyond any president's control? What's Behind Inflation and How to Beat It.Englewood Cliffs, NJ: Prentice-Hall. Thus, by1983, the cost of living for a typical American family had tripled from its1967 level. The same is true, in greater or lesser degree, across a broad rangeof consumer buying patterns. Moreover, the reduction in inflation from the early 198 s on may havebeen even more dramatic than appears from the above figure. Moreover, in the late 197 s and early 198 s, the Federal ReserveBoard took decisive if harsh action to quell the inflationary psychologythat had by then infused the economy (Greider, 1987). In recent years, inflationary pressure has greatly subsided as afeature of daily life. (1996). Overall, after tripling between 1967 and1983, consumer prices rose by 5 percent from 1983 through 1994, the CPI inthat year being 148.2 from 1983's 99.6. After some years of near stability in the 195 s and early to mid196 s, prices began to increase in the later 196 s. By 1983, the annual rate of inflation had dropped below fivepercent, and since that time it has exceeded that level in only one year,199 , when it reached 5.4 percent (Statistical Abstract, 1994, Table 761,p. The StatisticalAbstract of the United States (1995, Figure 15.2, p. Indeed,it is worth noting that the Reagan years, though less inflationary than theworst years of the 197 s, still saw rather high levels of inflation,averaging 4. (Domestic spending was reduced, but this was offset by increasedmilitary spending). By the end of the197 s, prices were increasing by ten percent or more each year. This, asnoted, is nearly as much as prices increased in the 12 years from 1983through 1994 inclusive. In some walks of life there havebeen price decreases--not always welcome, for example by Californiahomeowners whose homes are worth less now than in the late 198 s. Thus, theoverall effect of Reagan's economic policies was to increase the level ofinflation. D6). We should not be surprised to find thatboth spikes in oil prices were quickly followed by bouts of double-digitinflation. Of these years, the most inflationary were 1979, 198 , and 1981, ineach of which years the CPI rose at double-digit levels, respectively 11.3percent, 13.5 percent, and 1 .3 percent. The ultimate causes of general inflation are poorly understood. (1979). New York: Simon & Schuster. Instead, governmentdeficits increased, creating inflationary pressure. The CPI hasrecently come under considerable criticism for overstating rates ofinflation in general (Kristof, 1996). Interest rates wereforced up to unprecedented levels, in effect making money more expensive.The medicine was extremely disagreeable, producing deep back-to-backrecessions in 198 and 1982, but--combined with the long-term collapse ofoil prices--it effectively quelled inflation (Greider, 1987, pp. Thus, it has been argued, the CPI mayoverstate annual inflation in recent years by up to two percent (Kristof,1996, p. "What to do about inflation"became a popular subject of popular books, e.g., George Jackson Eder'sWhat's Behind Inflation and How to Beat It (1979). Onelong-standing explanation is the wage-price spiral; as workers win wageincreases, employers must raise their prices to pay them, and rising pricesin turn lead workers to demand still further wage increases, continuing thecycle. In short, there is no good reason to believe that the economicpolicies of the Reagan Administration contributed to the reduction ofinflation. LosAngeles Times (January 21), pp. From 1989through 1991, covering Jimmy Carter's last two years in office and RonaldReagan's first year, the CPI rose by 39.3 percent -- that, is, pricesincreased by two-fifths in the course of just those three years. Other things being equal, deficit spending tends to be inflationary--as it had been in the Vietnam-war era of the late 196 s and early 197 s,though the deficits then were actually very much smaller. Greider, W. The fact that inflation declinedwhile Reagan was in office does not itself prove that his policies causedor even contributed to that decline. (The specific numerical values of the CPI need notconcern us here; they are measured against an arbitrary benchmark. The remainder of this discussion will be devoted to an examination ofthe patterns of inflation in the 197 s and 198 s, and to an evaluation ofthe role of Reagan's economic policies with respect to inflation. Had it not been for these policies, the drop in inflation from1982 on would almost certainly have been more rapid than it was. If this overstatement wereconsistent from year to year, the relative rates of inflation in differentyears would remain unaffected; there simply would have been somewhat lessinflation overall. References Eder, G. Middle-aged Americans canremember a time when a family of four could eat out for ten dollars, and anew car could be bought for $25 . Computers are much more widely purchased today, theyare cheaper, and they are vastly more powerful than those of more than adecade ago. Kennedy was President stood at little more than one-fifth their present-day level. 551-56). However, any overstatement is likely to have been far lessfor inflation figures in the late 197 s and early 198 s, since those areyears close to the benchmark from which the CPI is calculated, whenconsumers had similar purchasing patterns. We will return to thisargument below, but it is at least plausible that all the above factorscontributed to the first years of rising inflation. Washington, DC:Department of Commerce, Bureau of the Census.----------------------- 9 Had it not been forReagan's large deficits, the decline of inflation would have been morerapid. More generally, before we canunderstand why inflation went down in the 198 s, we must understand why itwent up from the late 196 s through the 197 s. 492; also Table 674, p. In addition to this frustrating individual impact on ordinaryfamilies, inflation put pressures on the American economy as a whole.Investment was shifted from the production of good and services to suchthings as purchasing real estate, which was believed to be a hedge againstinflation. D6). The dramatic inflation of the mid and late 197 s, however, has areadily identifiable external cause: the "oil shocks" associated with theArab oil embargo of 1973-74 and the Iranian revolution of 1979-8 . Inflation, the tendency of prices to increase from year to year (or,to put the same thing in different terms, the steadily declining purchasingpower of the dollar) has for some years been a preoccupation of Americans,in their daily lives and in public policy. What isrelevant is the relative number as compared from year to year.) By 1983,relative prices had increased by half again, the 1983 CPI standing in thatyear at 99.6 (Statistical Abstract, 1994, Table 761, p. Kristof, K. Wage and salary increases were eaten up by thesehigher prices; families' real income, in terms of what they could afford tobuy, often went down even as dollar income went up. In order to evaluate inflation, we must first know how much therewas, when and why it happened, and why after peaking in 198 , it droppedoff sharply in the years that followed. But what part was played by the Reagan Administration's economicactions at the same time? The Vietnam war was unpopular, so it wasjudged impractical to raise taxes to pay for it. This indicatesthat oil prices increased by some 55 percent in 1974, and by about 4 percent in both 1979 and 198 . Onthe other side of the coin, admirers of Ronald Reagan claim as one of hismost important domestic achievements the "beating" of inflation, whichindeed dropped sharply during his term in office. Productivity may be a factor here; rapidproductivity increases paid for real wages increases in the early 196 s,but productivity growth has been more sluggish--so that nominal wageincreases created inflation instead of greater real worker incomes. The essential feature of "Reaganomics" was asharp reduction in taxes without any corresponding reduction in governmentspending. Reform effort aims to tame powerful index. This would appear tobe consistent with an argument that the taxing and spending policies of theReagan Administration, which came to office in early 1981, can be said todeserve credit for ending the period of runaway inflation. Oil isa fundamental raw material in our economy, and increases in fuel costsrapidly translate into increases in prices of all sorts. The reduced price and greater purchasing of computers iscounter-inflationary, in that people are spending less to get more, butthis counter-inflationary effect is not reflected in the CPI (Kristof,1996, p. 431). The explosive inflation of the 197 s had been driven by abackground of inflationary psychology and accelerated by oil priceincreases. Thus, the oil-price engineof inflation in the 197 s went into reverse gear in the 198 s. DidReagan-era policies, in fact, play a substantial role in the reduction ofinflation? A combination of strong Federal Reserve measures and thecollapse of oil prices ended the inflationary pressures in the early 198 s,and inflationary psychology gradually receded. Forconsumers, it seemed that every trip to the grocery store meant paying morefor the same products. These factors lie almost wholly beyond the reach of governmentpolicy. News of vigorous economic expansion caused the stock market todrop, because investors feared that rapid growth would only trigger moreinflation, eroding the value of their assets. Jimmy Carter waswidely viewed as an unsuccessful President--and lost his bid for re-election in 198 --largely because of the runaway inflation of the time. 488) provides agraphical representation of the pattern of fuel-oil costs. In summary, then, inflation rose sharply in the 197 s, peaked around198 s, and has dropped sharply back since that time. So dominant has been the part that inflation played in the Americaneconomy in the past generation that it has come to be viewed somewhat asthe Depression was viewed by an earlier generation. However, wage increased rapidly in the low-inflation early 196 s,had have been generally stagnant in both the high-inflation 197 s and thelower-inflation 198 s. Although prices have not returned to the stabilityof the early 196 s, annual price increases are now at only a third or afourth of the level of the late 197 s. After 1981, the rate of inflationmoderated. From 1967 through 1977, theConsumer Price Index (CPI), the broad measure of the prices paid byAmericans for a broad range of consumer goods, nearly doubled, from 33.4 in1967 to 6 .6 in 1977. (1987). If this paper is not what you are looking for, you can search again: Search for: or Click here to request an essay written just for you.