Consumer Price Index for All Urban Consumers increased 0.6 percent in May on a seasonally adjusted basis after rising 0.8 percent in April. Over the last 12 months, the all items index increased 5.0 percent before seasonal adjustment; this was the largest 12-month increase since a 5.4-percent increase for the period ending August 2008” – From a press release by the Bureau of Labor Statistics in June 2021.
As a Democrat, I hate to deliver bad news to President Biden. But I must warn my party of a looming potential economic/political threat that could make the 2010 mid-term “shellacking” look mild. Preliminary indications are that the nation may be in for another bout of inflation.
The historical record shows that when prices rise rapidly, voters blame the federal government and take out their wrath on the party of “Big Government,” i.e., the Democrats. Right now, most voters believe that the Covid-19 pandemic and continuing high unemployment are the nation’s foremost problem. And many economists are more worried about “deflation” (falling jobs, prices and incomes).
But if inflation were to make an unwelcome comeback in the coming decade – especially when combined with already high unemployment – Republicans could win so big that they’d finally complete the across-the-board political realignment Karl Rove dreamed of. And a bout of “hyper-inflation” – over 20% – could wreck the Democratic Party for a generation.
As the nation begins to reopen, it is obvious that businesses are raising prices to make up for revenue lost during the pandemic. The BLS press release quoted above showed that gas prices went up more than 50% this year and many economists and business reporters are worried that those higher costs will soon be included in higher prices of, well, nearly everything. Used cars are up by an astonishing 29%, while general travel costs increased by 11%. Also, bad weather and increasing global population are causing food prices to rise by 5% compared to last year, with the biggest increases coming in the last 90 days. In addition, wholesale prices for materials such as wood and metal products are up by over 30% since Jan. 1. The question is: Are these rising prices just a temporary blip or the start of a “price spiral” like in the 1970s?
‘Something going on’
Responding to the pandemic-induced recession, Federal Reserve Chairman Jerome Powell has pursued a policy of “quantitative easing” to lower interest rates and pump more money into the economy in order to reduce the unemployment rate. Most liberal economists, led by Paul Krugman, keep insisting that the recession and continuing high unemployment (as high as 14% last year) are more to worry about than the possible return of inflation.
But there are some worrisome signs out there. In his June 16 statement, Powell acknowledged “upward pressure on prices from the rebound in spending, as the economy continues to reopen, particularly as supply bottlenecks have limited how quickly production in some sectors can respond in the near term” and how inflation is now over twice as high as his stated goal of 2%. He also said that he believed that recently rising prices were temporary and there would a strong recovery in the jobs market by the end of the year.
Krugman and other liberal economists argue that the “core” inflation rate, which excludes volatile food and energy prices, remains below 3%. Critics reply that the core measurement is irrelevant because everyone needs food and energy to survive. Wharton School professor Jeremy Siegel, who correctly called the high-tech booms and busts of the past generation, says: “Every inflation indicator is up significantly. … There’s something going on out there.”
So, some economists say that permanent inflation is coming, while others say that it is already here. Since I am not an economist by training, I can’t answer those questions. Instead, what follows is a political history of the electoral effects of inflation.
Five times in the 20th century, Democrats presided over inflation crises – in the post-World War I election of 1920, in the post-World War II “Had Enough” Republican landslide of 1946, in the Korean War inflation of 1952, in the Vietnam/Great Society inflation of the late 1960s and the Carter-era wage-price spiral of the late 1970s – and then lost the next election. We may soon find out if history is about to repeat itself.
A formula for GOP wins
In the aftermath of World War I, which the United states fought in 1917-18 under Democratic President Woodrow Wilson, inflation hit 20% and then nearly 22% in the winter of 1920. (All figures cited here come from the website InflationData.com). That fall, Republican Warren Harding won the greatest landslide ever (by 60-34%) and the conservative “Roaring ’20s,” dominated by business, were ushered in.
In the aftermath of World War II, which the United States fought in 1941-45 under Democratic President Franklin Roosevelt, inflation more than quadrupled as war-time price controls were lifted. Republicans won big in the midterm election of 1946, using the slogan, “Had Enough?” The campaign sent Richard Nixon and Joseph McCarthy to Washington.
In the early 1950s, the costs of the Korean War helped cause the inflation rate to jump from an average of 1% in 1950 to nearly 8% in 1951. Combined with anger over the stalemate in Korea and various Truman administration scandals, Republicans led by Gen. Dwight Eisenhower won the presidency for the first time since 1928 – and a majority in both Houses of Congress.
In 1964, President Lyndon B. Johnson defeated Republican Barry Goldwater with a record 61.1%. Political observers like Samuel Lubell (author of the prize-winning “The Future of American Politics”) wondered if we were in for decades of one-party Democratic governance. But the costs of the Vietnam War and LBJ’s “Great Society” programs helped push up prices from an average of 1% in 1964 to over 4% in 1968.
Combined with anger over the stalemate in Vietnam, race riots and anti-war turmoil, Republicans led by Eisenhower’s vice president, Richard Nixon, narrowly won the White House – just four years after being consigned to the ash heap of history.
The age of stagflation
After the Republicans lost the Watergate-influenced elections of 1974 and 1976, they were reduced to barely one-third of the seats in both Houses of Congress. Many pundits wrote off the party’s future – The New Republic joked that “GOP” really meant “Groggy Old Party.” But Ben Wattenberg, a former speechwriter for President Johnson, commented that there was “nothing wrong with the Republican Party that 20% inflation couldn’t cure.”
Democrat Jimmy Carter presided over an inflation rate that increased from 6.5% in 1977 to over 11% in 1979. In the winter of 1980, the inflation rate hit 18%, very close to Wattenberg’s 20% trigger line. With prices soaring, Carter was forced to allow Federal Reserve Chairman Paul Volcker to sharply raise interest rates, thus guaranteeing a recession just in time for his 1980 re-election campaign.
Announcing the hike in interest rates, Volcker openly stated that, “The standard of living of the average American has to decline if inflation is to be reduced.” Carter ended up with the worst of both worlds: simultaneous rising inflation and unemployment, dubbed “stagflation” (economic stagnation plus inflation). Not exactly a winning hand: Combined with 8% unemployment that summer, the “misery index” reached 30%, the highest since the Depression of 1929-32.
And adding injury to injury, higher wages pushed many workers into higher tax brackets, further reducing their disposable incomes. The net result of this stagflation was a 14% reduction in the average family’s income in 1979-80, thus allowing Ronald Reagan to ask the devastating question in the debate, “Are you better off than you were four years ago?” For most Americans, the answer was no. In November 1980, Reagan, who had twice before been rejected by Republicans for their nomination, won a 44-state landslide – and Republicans won control of the Senate for the first time since 1954.
So, the historical record is clear: Rising inflation rates are disastrous news for Democrats, leading directly to defeat. Lubell, in the final years of Truman, called inflation “The Democratic Breaking Point.”
In his survey of Democratic neighborhoods that were going for the Republicans in the early 1950s, Lubell found “The anger against rising prices and higher taxes was as violent among low income voters as in the middle class. With this anger over inflation went a resentment against all forms of government spending.” Among working class voters, Lubell noted that the combination of rising costs plus higher taxes “had the effect of a wage cut, pushing them below the getting-along margin.”
Lubell also wrote, and these words leap off the page more than 50 years later: “Inflation brings stiffened opposition to all government spending: It lifts the political prestige of business, which is associated in the public mind with economy and opposition to government.” In short, high inflation turns many moderate voters into temporary fiscal conservatives. Sounds like the 1980s to me.
Alienating the poor
Besides generally angering the middle class, rising prices turn off the working class elderly who physically cannot take another job to make ends meet (there goes Florida!). They also depress the turnout of the urban poor who live either on fixed incomes or low wages.
For example, Hubert Humphrey lost the 1968 election to Nixon by less than 1%. Black turnout in the Northern cities was down compared to four years earlier, and the loss of these normally Democratic voters cost Humphrey dearly in states like Illinois, Ohio, New Jersey and Missouri.
In 1980, low turnouts from inner city voters turned what was heading toward a narrow if solid 5-6 point victory Republican victory into a landslide. Every study by the Census Bureau has shown that higher income persons have higher voting turnout. Inflation just makes the gap worse by alienating the poor.
Inflation also massively disrupts the Democratic coalition because the middle class demands spending restraint while liberals oppose budget cuts in “people programs.” One reason Ted Kennedy challenged Carter for the Democratic nomination in 1980 was a fight over social spending. The intra-party bloodletting almost guaranteed Carter’s defeat.
Since rising prices create a cruel dilemma for Democratic presidents, the best way to deal with it is to make sure it doesn’t start in the first place. Like war in Central Europe, there are no good options once it starts. With turmoil caused by the pandemic and continuing above-average unemployment, the last thing Biden needs is an inflation crisis.
Recently, columnist George Will, a Reagan fan who was against Donald Trump, called Trump “the real Republican curse.” But forget about The Donald. If the misery index crosses 20% and starts heading for 30, as it did in 1932 and 1980, Republicans could nominate a ticket of Ted Cruz (who was actually born in Canada) and Rep. Matt Gaetz (now embroiled in scandal) and still win.
For the good of the nation and the political health of the Democratic Party, let’s hope that inflation, like another 1970s phenomenon, is as dead as disco. (Though I will admit I still like the Bee Gees).