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FMC Program Segments 1960-2000

The Changing Economy: 
Inflation, Stagflation, and Deregulation
Alfred Kahn and Paul Volcker


BEN WATTENBERG: In the 1970s, weak economic growth, mounting unemployment rates and rising inflation combined to create something new: Stagflation. OPEC made matters worse. The gas crunch forced Americans to sit in long lines at the pump, fuming for fumes. 

But changes were underway that would lead America out of its economic malaise. Case in point: Airlines. Through the 1970s, the industry was heavily regulated by the Civil Aeronautics Board, which fixed prices and limited the entry of new airlines into the system. With competition thus strangled, consumers paid high prices and planes flew half-empty. 

Carter and Kahn If it ain't broke, don't fix it. If it is broke, enter Alfred Kahn, a popular economics professor from Cornell University. In 1977, Jimmy Carter named Kahn the new head of the Civil Aeronautics Board. Fred Kahn told one airline official, "I really don't know one plane from the other. To me, they're all marginal costs with wings." 

ALFRED E. KAHN (Chairman, Civil Aeronautics Board, 1977-78): If I new what was the most efficient configuration of routes in the airline system, then I could continue to regulate. But since I can't tell you whether it's going to be a Delta kind of operation or it's going to be more like the Eastern shuttle, which is just back and forth, or Southwest Airlines, which was then just back and forth between Houston and Dallas, does it make sense to leave it to an ignorant person like me to tell airlines how they can best configure their routes? 

BEN WATTENBERG: Kahn began to clear the thicket of airline regulations. Though free-market conservatives had long supported deregulation, they now had some unlikely allies. 

ALFRED E. KAHN: Senator Kennedy, an old-time liberal, found himself working with the National Association of Manufacturers. It was an eye-opener that you could be an old-time liberal and, consistently with that, be in favor of competition and that that would be beneficial to the public. 

BEN WATTENBERG: In 1978, Congress passed the Airline Deregulation Act, putting the Civil Aeronautics Board out of business. The new law allowed airlines to compete in the setting of fares and routes, which also encouraged new companies to enter the market. Fred Kahn had deregulated himself out of a job and showed how deregulation could help the average consumer. Since 1978, the price of the average fare has declined nearly 40 percent after adjusting for inflation. In that same period, the number of airline passenger miles flown has nearly tripled. 

CHRISTOPHER DEMUTH (President, American Enterprise Institute): It not only lowered prices, but it made it possible for airlines to experiment with new innovations and types of services that hugely expanded the market, so that millions of people who had never traveled by airline before now do so routinely. 

ALFRED E. KAHN: We had an explosion in the amount of air travel. It has meant, you may put it in the favorable way, the democratization of air travel. You may put it in an unfavorable way, from a patrician's standpoint. I mean, I had a complaint from a former student of mine, who is very well-to-do, about the hippie who was sitting next to him, unshaven, and he claimed he smelled. And I wrote back and said, "Well, I'm waiting to hear whether there are any complaints coming from the hippie." 

BEN WATTENBERG: That's the liberty of mobility, democratization by deregulation. Success with airlines led to deregulation of trucking, natural gas, electric power, telecommunications, banking, railroads, deregulation of old industries and non-regulation of new ones, like computers and the Internet, helped spur economic efficiency and growth. It provided savings for the average consumer. It set in motion what would come to be known as the new economy. Yet before that was to happen, there was one other economic problem to be solved, a big one. 

In the 1970s, inflation eroded the value of the dollar. A dollar in 1970 would be worth only 47 cents just 10 years later. Since incomes rarely keep up with inflation, many people became poorer just standing still. 

ALFRED E. KAHN: There is something demoralizing to a country, to its people, to find that even though they get pay raises once a year, then to find for the next 364 days that the value of their money is going down and down and down. It creates a divisiveness among classes, a tendency to cast blame on villains, on profiteers, or on evil labor unions. It's divisive of society. It also promotes a feeling, sort of justifiable, that this society is out of control. 

BEN WATTENBERG: In 1978, President Carter appointed Fred Kahn to the job of so-called inflation czar, but without a czar's power. Inflation continued to rise. During a tour of a Boston food market in 1979, Kahn summed up his feelings. 

ALFRED E. KAHN: Principally, disappointment that prices have taken off so badly. It's a consolation to feel that it isn't really my fault. 

And ultimately, the only way of inserting the necessary discipline is monetary restraint. And I remember Paul Volcker saying to me, he said, "Fred, that program is simply not working. I'm the only one in town who has the weapon that can be used, and sooner or later I'm going to have to use it." 

BEN WATTENBERG: In 1979, President Carter had appointed Paul Volcker as chairman of the Fed. Volcker, a dedicated public servant, had been a Federal Reserve economist, a Nixon Treasury official, and president of the New York Fed. At 6'7", Volcker was a giant in the world of greenbacks. But jolly he wasn't.

economy cartoon

PAUL VOLCKER (Former Federal Reserve Chairman, 1979-1987): Inflation is thought of as a cruel and maybe the cruelest tax, because it hits in an unexpected way, in an unplanned way, and it hits the people on a fixed income hardest. And there's quite a lot of evidence, contrary to some earlier thinking, that it hits poorer people more than richer people. 

BEN WATTENBERG: Difficult times call for difficult actions. So as they say on Wall Street, Volcker slammed on the brakes. 

PAUL VOLCKER: We'll take the emphasis off of interest rates and put the emphasis on the growth in the money supply, which is at the root cause of inflation; too much money chasing too few goods in the old proverbial way of putting the inflationary process. So we'll attack the too-much-money part of the equation and we will stop permitting supply from increasing as rapidly as it was. 

BEN WATTENBERG: So Volcker's Fed sold bonds. Less money in circulation pushed interest rates up to 19 percent in 1981. That plunged America into its deepest economic downturn since the Great Depression. 

PAUL VOLCKER: I would get asked the question a lot about "How can you conduct a policy that appears to throw people out of work, anyway?" But I also felt that in the long run, there wasn't any question that the economy was going to operate better in the context of price stability. 

BEN WATTENBERG: The recession was painful, but inflation declined from its high of 13.5 percent in 1980 to 1.9 percent in 1986, and remained low and fairly level throughout the 1990s. Since 1983, America has produced positive economic growth in 67 out of 71 quarters. This prosperous economy helped set the stock market on a vigorous bull run. 

Since 1981, the Dow Jones Industrial Average has increased from 875 to more than 10,000. New investors poured into the hot market, encouraged by the advent of IRAs, Keoughs and 401(k)s. By the end of the century, America had become a nation of owners. A majority of Americans, 52 percent, owned stocks. Call it what you will -- super-capitalism or Marxism turned on its head. Somewhat suddenly, everyday people owned a large part of the means of production. 

What does everyday life look like in this new economy? For that, we return to Middletown.

     Photo Credits:
   President Carter and Alfred Kahn. Courtesy of Alfred Kahn.
   Economy cartoon. Courtesy of Ed Gamble.

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