How Jimmy Carter inadvertently shaped the 21st century economy

From nearly the moment he left office, Jimmy Carter’s presidency has been associated with what not to do when it comes to economic policy. And more than 40 years later, his record served for some as a cautionary tale for President Joe Biden, who encountered the highest inflation since the late 1970s and early 1980s during his first term in office.

Carter’s magpie approach to curbing inflation — some deregulation there, some energy policy here and asking Congress to do more — never had the opportunity to succeed, leaving his selected chair of the Federal Reserve, Paul Volcker, to implement a policy during Reagan’s administration that was unthinkable to the president who appointed him: inducing a recession in order to choke off inflation.

Inflation

The overwhelming fight of Carter’s presidency was inflation. Inflation had risen dramatically in the late 1960s and the mid-1970s, and had started to pick up again when Carter took office in January 1977. When Carter took the oath of office, annual inflation was running at about 5.2 percent, and when he left in 1981, it was 11.8 percent, having peaked at 14.6 percent in 1980.

Before he took office, Carter’s campaign had floated “standby” controls on wages and prices — authority to implement explicit government caps on how quickly prices or wages could rise. Wage and price controls were familiar to the American public — Nixon had implemented them in 1971, and they were in effect in some respect until 1974 — but in meetings after the election and before he took office, his economic advisers put the kibosh on the idea. When this decision was announced in December 1976, the New York Times said it was an “180‐degree turn from the position he had taken throughout the Presidential campaign.”

It wasn’t just on inflation controls where Carter displayed less liberal instincts than some of his advisers. He said in an oral history interview that he, Bert Lance (his first director of the Office of Management and Budget) and Michael Blumenthal (his first Treasury secretary) “were more conservative than anybody else among my advisers” in explaining why he called off a plan to issue $50 tax rebates in the months after his inauguration, angering his Democratic allies in Congress.

Carter would not be the first Democratic president to enter office with allies wanting immediate new spending. Both Barack Obama and Biden passed stimulus bills within months of entering office, the latter of which some economists, even prominent Democrats, blame for helping stoke inflation. Carter would eventually sign a stimulus bill in May 1977, a move that some of his advisers later thought was a mistake. Unemployment was over 7 percent when Carter came into office, but it had been declining since 1975, when it reached 9 percent.

When inflation did start substantially rising again in 1978 (jumping from 6.8 percent to almost 14 percent), Carter again did not pursue full wage and price controls, instead setting out guidelines for wages and prices. “Inflation has, therefore, been a serious problem for me ever since I became president. We’ve tried to control it, but we have not been successful. It’s time for all of us to make a greater and a more coordinated effort,” he said in an October 1978 speech.

The resulting policy, Eizenstat said in an oral history interview, consisted of “partial austerity, enough to make all the constituencies mad without accomplishing the result.” It hedged in enforcing wage and price controls, instead setting out guidelines that, Eizenstat said, were an effort to prompt Congress into passing a more comprehensive tax plan to fight inflation that was never seriously pursued.

“It was the timing of things that were totally outside anybody’s control. The external forces that were at work, the elements of oil shortages and increasing prices. But those are realities that a president has to deal with. He can’t just wish them away, so he has to deal with them,” Lance said in an oral history interview.

Global distractions

It didn’t work. Inflation would peak at over 14.5 percent in the spring of 1980, and Carter would go on to lose reelection to Reagan.

Eizenstat said the revolution “from both the domestic and foreign policy perspective was the watershed event of the Carter administration. … It led to the gasoline line crisis, and to a 120 percent increase in world prices between February of ’79 and February of ’80, which was another shock to the economy similar to the one it received in 1973-74 with the first Arab oil embargo.”

“I think we would have gotten at the inflation problem had it not been for the uncontrollable oil price question,” Carter said in an oral history interview.

Hindsight

But it wouldn’t be Eizenstat, Marshall or Carter who was around to make those decisions. A combination of bad luck and scattered responses to events had doomed Carter’s reelection campaign, putting Reagan in position to oversee an eventual decline in oil prices, a massive increase in interest rates, and an end to the Great Inflation that bedeviled three of his predecessors and would make Volcker into a figure admired by both Republicans and Democrats (though still despised by some in organized labor) as the man who beat inflation.