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What goes up Must Come Down?: The Carter Administration
and the Battle against Inflation, 1977-1981
Christopher Lominac
Introduction
Many presidents have quickly found out that the famous Clinton 1992 campaign slogan, “It’s
the economy stupid”, accurately sums up the American peoples’ feelings during tough economic
times; unfortunately for Jimmy Carter, his presidency was a prime example of this situation
where the American people rebelled against the current administration because of poor economic
conditions. There is no question that the tough economic times during the 1980 election played a
big part in Ronald Reagan’s defeat of Jimmy Carter. How then did the economy get to the point
where some used the “misery index” to measure the economy’s poor performance? How much of
this poor performance can be blamed on the Carter administration’s economic policies? What
were the economic policies of the Carter administration? In this paper, we will try to answer
these questions and shine a light on the troubled economic times of the late 1970’s through 1980.
First we will start with Jimmy Carter’s election in 1976 and his initial year of office in 1977
where the Carter administration focused on getting the economy out of a recession through a
Keynesian-style stimulus package. Next we will look at Jimmy Carter’s second, third, and fourth
years as president where the administration began its never-ending battle against its new
economic nemesis, inflation. We will look at the policies the administration used to fight
inflation during these years and look at the theory that drove those policies. Then, to get an
overall view of the effectiveness or ineffectiveness of these policies, we will look at the outcome
of the policies at the end of his administration. Finally, to sum up all of this information and to
obtain a better perspective on the Carter administration, we will look at what actions, if any, that
the administration could have taken to improve the economy, and specifically how the Carter
administration may have fought inflation differently.
The 1976 Election and the First Year in Office
During the 1976 presidential campaign when Jimmy Carter, then governor of Georgia,
successfully defeated President Gerald Ford, Carter had said that he viewed high unemployment
as the main economic problem facing the nation and that he planned to deal with this high
unemployment by expanding the economy through a stimulus package (Leuchtenburg 12;
Schulman 54). By the time Carter actually entered the White House in 1977, he knew he had a
tough job ahead. The economy was in its worse shape in the post-war era of prosperity, with an
unemployment rate of 7.7% in 1976 (Campagna 4; Schulman 52). Still, though, the Carter
administration was hopeful it could achieve some of its macroeconomic goals, which it said were
deregulation, energy conservation, minimum wage increases, and national health insurance to
name a few, but its first priority was to get the economy back on its feet by delivering on its
campaign promise to pass a stimulus package (Schulman 53).
The 1977 stimulus package included things like small permanent tax reductions, a public
service jobs program, stepped-up spending for public works, and a one-time-only fifty dollar
rebate to every taxpayer (Schulman 54). The theory behind the stimulus package was the NeoKeynesian belief that the economy was struggling due to a lack of demand and the best way to
increase aggregate demand was for the government to spend a lot of money, directly and through
tax cuts. This spending presumably would get the economy going again. In fact, the chairman of
Carter’s Council of Economic Advisors (CEA), Charles Schultze, explained the stimulus
package in these exact Keynesian terms (Schulman 54). He told President Carter that the
recession was due to insufficient demand and suggested that boosting consumer spending would
speed economic recovery (Schulman 54). Schultze also assured the president that the stimulus
package would not ramp up inflation to higher levels than where it already was (Schulman 54).
Even though Carter had campaigned on his promise of a stimulus package and said his main
economic concern was high unemployment, he personally was more fiscally conservative and
tended to favor balancing the budget and reducing inflation to ensuring full employment even if
it meant a limit on new government programs (B. Kaufman and S. Kaufman 65; Leuchtenburg
12). Carter believed that keeping a balanced budget and being fiscally responsible were the keys
to political success (Leuchtenburg 19). He thought if his administration could successfully
achieve these goals, the Democratic Party would be the only meaningful political party for the
rest of his life (Leuchtenburg 19). This is why Carter had the one-time-only fifty dollar rebate
taken out of the stimulus package and why he made sure there were no increases to the welfare
program, despite the anger it caused among his staff (B. Kaufman and S. Kaufman 65 and 66;
Leuchtenburg 12; Schulman 54). Inflation, though, had been steadily declining in the last two
years of the Ford administration, and much of Carter’s staff, including Vice President Walter
Mondale, were devoted Keynesians, so any concerns that the president might have had over
inflation were put on the backburner during the first year of his presidency (Schulman 56 and
65). To get a better understanding of the economic conditions during the first year of Carter’s
administration, a table and graph measuring three important economic variables (employment,
economic growth, and inflation) are shown on the previous page (Campagna 66).. The first
economic variable, economic growth, is measured as percent changes in Gross National Product
(GNP). The percent changes in GNP are measured in terms of real 1972 dollars and in the graph
these percent changes in GNP are shown as points on the black line. The second economic
variable is inflation; it is measured as percent changes in the price level. The price level in this
case is measured using the GNP deflator; the different quarterly values of the GNP deflator are
shown as points on the red line in the graph. The third economic variable, unemployment, is
measured using the unemployment rate. The different values of the quarterly unemployment rate
are shown as points on the green line in the graph. The table lists the quarterly, as well as the
overall yearly values of the three economic variables. The graph shows the linear progression of
the quarterly values of the three economic variables, which gives us a visual image of how the
economy was changing throughout the year.
Looking at the table and graph, we can see that the economic growth variable, measured as
the percent change in GNP, was positive, but declined throughout the year. The stimulus package
was passed during 1977, so it could not affect the whole year, but the fact that the rate of
increase in GNP decreased throughout the year suggests that the stimulus package may not have
stimulated the economy as much as the administration was hoping. The other goal of the
stimulus package was to decrease unemployment and we can see from the table and the graph
that the unemployment rate did steadily decline throughout the year, so the stimulus package
may have worked on this front. Finally, the price level went up and down during the year, but as
it appears to have averaged about 6%, no sign of heavy inflation had appeared yet, although that
would soon change.
The Second Year in Office
In the winter of 1977 food and fuel prices began to rise rapidly and almost doubled some
prevailing rates of inflation, but by January 1978 inflation only ranked third on Carter’s
economic priorities list and Carter included inflationary requests of increased spending on
domestic programs and a $25 billion tax cut (Schulman 54, 56, and 57). Unfortunately for
President Carter, his emphasis on lowering unemployment and encouraging economic growth
during his first year in office would lead to a fight with inflation for the rest of his time in the
White House (Schulman 54). Eventually, though, the Carter administration began to see inflation
as a serious problem; they would end up trying different ways to fight inflation like fiscal
restraint, the promise of a balanced budget, pressuring the Federal Reserve for monetary
contraction, regulatory reforms, incomes policy, and credit controls to name a few. Early on,
though, the Carter administration’s primary method for dealing with inflation was “jawboning”
(Schulman 57 and 58). Jawboning was a tactic where the White House and the Council on Wage
and Price Stability (COWPS) would apply public pressure on business and labor leaders to
voluntarily restrain increases in wages and prices below the average of the previous two years
(B. Kaufman and S. Kaufman 119). The economic theory behind these policies is pretty straight
forward, if the administration could get businesses and labor leaders to hold down prices and
wages, they would be directly holding down inflation and keep peoples’ real income stable.
Carter’s tepid voluntary price and wage control efforts failed to restrain inflation. In August
1978, the dollar dropped to a new low against the German mark and the Japanese yen, as
inflation hurtled upward (Schulman 58). It was clear by the summer of 1978 that inflation was
“public enemy number one” for the Carter Administration (B. Kaufman and S. Kaufman 119). In
late 1978, inflation continued to rise and the Carter administration knew that it had to do
something more (B. Kaufman and S. Kaufman 136).
On October 24, 1978, in a nationally televised address to the public from the Oval Office,
President Carter announced “phase-two” of his anti-inflation program and announced a “national
austerity” program where he promised to cut many spending programs (B. Kaufman and S.
Kaufman 136; Leuchtenburg 13). Carter also said that the government would only fill half of its
current vacancies and that the budget deficit in 1979 would be held to $30 billion or less (B.
Kaufman and S. Kaufman 136; Schulman 59). Carter also stated that COWPS would announce
new explicit numerical standards for wage and price increases for major industries and
announced Alfred Kahn as his Special Advisor on Inflation and the new Chairman of COWPS
(Dubofsky 121; B. Kaufman and S. Kaufman 136; Schulman 59).
Alfred Kahn, an economics professor at Cornell, who had helped deregulate the airline
industry and marked a serious turning point on how seriously the administration viewed inflation
(B. Kaufman and S. Kaufman 136; Schulman 59). He summed up his view of inflation by saying
inflation, “… was not just an economic problem, but a profound social problem- a sign of a
society in some degree of dissolution, in which individuals and groups seek their self-interest and
demand money compensation and government programs that simply add up to more than the
economy is capable of supplying.” (Schulman 60). The economic theory and tactics behind the
administration’s anti-inflation policies remained the same, though: directly hold down prices
through voluntary controls and hold down government spending so that the government did not
contribute to increases in aggregate demand and inflation. The inflation rate continued to grow
faster than the administration had expected, however, (food prices were up over 10% for the
year), and Kahn warned the president that his anti-inflation program was indeed coming apart as
it was clear by the end of 1978 that the administration was losing its battle against inflation (B.
Kaufman and S. Kaufman 137, 138, 167, and 168).
On the next page is a table and graph of the same three economic variables as before, but for
the year 1978 (Campagna 74). We can see from the table and graph that economic growth in
1972 dollars was sporadic throughout the year. In the first quarter it was slightly negative,
increased up to 8.7% in the second quarter, and then averaged out around 4% for the rest of the
year, but overall, the economic growth rate was lower in 1978 than 1977. Unemployment in
1978 appears to have stabilized, as it almost stayed at a constant 6% throughout the year, which
suggests that Carter’s policies to deal with unemployment may have been successful. Finally,
inflation, which became Carter’s public enemy number one in 1978, is definitely higher in 1978
than in 1977. In particular the second quarter experienced a high spike in inflation, but even after
the second quarter the inflation rate was still relatively high, so it does not appear that Carter’s
anti-inflation program had a significant effect.
The Third Year in Office
For the Carter administration and its battle against inflation, 1979 would prove to be an
unkind year. In 1979, with OPEC II, OPEC decided to launch a new round of oil price increases
that caused oil prices to double (Cecchetti, McClain, McKee, and Saks 137). This led to some
measures of inflation reaching double-digit levels and insured any chance that Carter’s voluntary
price and wage programs once had at stabilizing inflation were gone (Schulman 60). The rising
inflation sunk Carter’s approval rating to all-time lows. It was clear that the administration’s
anti-inflation policies had to take a new route, and they did, under the name of Paul Volcker
(Schulman 60).
In 1979, Jimmy Carter appointed Paul Volcker as Chairman of the Federal Reserve Board (B.
Kaufman and S. Kaufman 175). Volcker replaced G. William Miller as Fed Chairman (Schulman
61). Under Miller’s watch, the money supply grew faster than at any time since World War II,
but Volcker had a contrasting view to his predecessor (Schulman 61). Volcker sought to deal
with inflation by drastically tightening the money supply through open-market sales of treasury
securities and allowing the money markets to determine the interest rate (B. Kaufman and S.
Kaufman 175). Interest rates immediately sky-rocketed to around 15%, the dollar stabilized, and
the economy stalled (Schulman 61).
The theory behind Volcker’s policies was more on the classical side than the Keynesian side.
If we take the equation of exchange, MV=PY, where M is the money supply, V is the velocity of
money (how fast money is used or “turned over”), P is the price level, and Y is national income
level, and if we assume that V and Y are fixed in the short-run, than by lowering the money
supply M it should be possible to lower the price level P. This idea, or an idea similar to this, was
the basic thinking behind tightening the money supply to lower inflation.
Toward the end of 1979, inflation was still a persistent problem, though, and the economy
was beginning to stall, too. In November 1979, Alfred Kahn wrote to the president in a
memorandum that, “… the time has come to admit to ourselves that our present anti-inflation
program has failed” (B. Kaufman and S. Kaufman 203). In-fighting within the administration
also became a problem as Carter received differing advice from different people (B. Kaufman
and S. Kaufman 204). Carter’s CEA Chairman, Charles Schultze, felt that low industrial
productivity was a major cause of inflation and wanted the president to spend $6-$8 billion on a
“productivity package” for new technologies (B. Kaufman and S. Kaufman 204). Alfred Kahn
thought the president should fight inflation using selective credit controls, but as the in-fighting
continued, inflation kept rising (B. Kaufman and S. Kaufman 204).
On the next page is a table and graph of the three key economic variables for the year 1979
(Campagna 86). We can see in the table and graph that the economic growth rate slowed
significantly compared to the previous two years and was even significantly negative in the
second quarter. Unemployment, though, appears to have stayed constant at around 5.8%. As we
have discussed, however, we can definitely see that inflation was significantly higher. Using
other measures of inflation, like CPI, inflation reached even higher levels, around 14%, so it is
clear Carter’s anti-inflation problems were struggling (Campagna 86).
The Fourth Year in Office
In early 1980, Carter’s reelection year, inflation continued to rise to about 18% by some
measures in February. By April, 7.3 million people were unemployed (B. Kaufman and S.
Kaufman 206; Schulman 61). The nightmare of stagflation, the combination of high rates of
inflation and stagnant economic growth had come true (B. Kaufman and S. Kaufman 207).
President Carter one more time attempted a new policy to fight inflation. On March 12, 1980,
Carter announced his new plan to fight inflation by balancing the budget, curbing credit-financed
spending, expanding the monitoring abilities of COWPS, and imposing a “gasoline conservation
fee” on imported oil (B. Kaufman and S. Kaufman 207). The revised budget included significant
cuts like a freeze on federal civilian employment and cuts in many welfare programs, although
overall the budget still increased by $41 billion (B. Kaufman and S. Kaufman 208; Leuchtenburg
13; Schulman 62). The basic economic theory behinds\ these policies was the same as the theory
behind most of Carter’s previous anti-inflation programs: stop inflation by holding down
aggregate demand in both the private and public sectors.
By mid-1980, it appeared that one of the Carter administration’s anti-inflation policies, a
combination of the policies, or maybe just dumb luck, finally began to kick in as inflation finally
slowed down some (B. Kaufman and S. Kaufman 216). Unfortunately for President Carter, just
as he appeared to finally get inflation under control, the economic nemesis of his administration,
another economic problem arrived, high unemployment and a recession (B. Kaufman and S.
Kaufman 221). In fighting inflation, some of the administrations policies, like tightening credit,
had worked a little to well as the second quarter of 1980 saw the steepest drop in GNP American
history (Schulman 62). Carter immediately tried to combat the recession by removing consumer
credit restrictions and encouraging the Fed to increase the money supply but is was too little too
late for President Carter (B. Kaufman and S. Kaufman 221). In November 1980, the American
people showed President Carter their view of his economic policies by failing to reelect him,
instead electing the contender, Ronald Reagan. Inflation may have finally been under control, but
it did little good for Carter as 1980 came to close, and his days as president came to an end.
To get a better idea of the economic conditions of 1980, a table and graph of three key
economic variables are provided on the previous page (Campagna 94). One thing that jumps out
of the table is the overall negative growth rate in GNP for the year. We can see in the graph that
this is because the extremely negative growth rate in the second quarter (the lowest in American
history at the time) due to the credit restrictions that were put in place to stop inflation
(Schulman 62). Even with the other three quarters showing positive growth rates, the second
quarter’s extremely negative growth rate led to an overall negative growth rate for the year. We
can also see that the unemployment rate steadily rose throughout 1980 from about 6.2 to 7.5%.
This was also up about a percent point and a half from the previous year’s average
unemployment rate of 5.8%. Finally, it appears inflation stayed at a steady rate of about 9% for
the year, which is still somewhat high. This figure is somewhat deceiving though, because if we
had used CPI (Consumer Price Index) as a measure of inflation instead of the GNP deflator, it
would appear that inflation declined from 16% to 10% throughout the year (Campagna 94). This
means the consumer definitely felt that inflation was finally coming under control, but this came
at a high price as we can see in the extremely negative growth rate of the second quarter and the
overall negative growth rate for the year.
Conclusion
In the 1976 election and in Carter’s first year in office in 1977, the administration’s main
economic concern was high unemployment and the slow growth rate of the economy. To deal
with this, they took the Keynesian prescription of a stimulus package, but by 1978 they had a
new economic enemy. In 1978, the Carter administration began its battle against high inflation
by introducing COWPS and voluntary price controls to hold back price and wage increases.
Inflation continued to rise, though, and in 1979, Carter appointed Paul Volcker as the new Fed
Chairman, who sought to deal with inflation by drastically tightening the money supply. In 1980,
Carter decided to fight inflation by giving COWPS more powers and putting controls on the
credit market, and inflation finally began to slow down, but so did the economy. In late 1980,
unemployment rose and the economy stalled as Jimmy Carter lost his bid for reelection.
In the end, inflation finally did start to come down, so in one sense it may be possible to argue
that the Carter administrations policies were successful, but overall, I would say that the
administrations policies were unsuccessful. The main way the administration attempted to
control inflation was through its voluntary price and wage control programs, but these programs
did not have much of an effect (Viscusi 152 and 153). Since the programs were voluntary, there
were no legal sanctions attached to violations of the wage and price standards, and the
administration did not really use the programs for high-level jawboning, instead, they used “bad
publicity” as the punishment for violations of wage and price standards. As time went on, this
“bad publicity” became less and less effective (Viscusi 155). Even though Carter personally
seemed to want to fight inflation, many members of his party and the constituents of his party did
not care about the fight against inflation, so it seemed that the president tried to manage both of
these sides and took a half-hearted approach to fight inflation in the form of voluntary programs.
Both economically and politically, I think it would have made more sense if the Carter
administration took on inflation aggressively early, even if it caused a recession, and dealt with
the consequences. I think they then could have ignited the economy again before 1980, and
Carter then may have even been able to win reelection.
1977
Time Period/Economic
% Change in GNP
% Change in Price Level
Unemployment Rate
Variable
(measured in real 1972
(measured with GNP
(measured as a
$)
deflator)
percentage)
Year
4.9
5.6
7.0
Quarter 1
7.5
5.3
7.5
Quarter 2
6.2
7.1
7.1
Quarter 3
5.1
4.8
6.9
Quarter 4
4.2
6.2
6.6
Plot of GNP % Change, Price Level % Ch, Unemployment Rate
Variable
GNP % Change
Price Lev el % Change
Unemploy ment Rate
7.5
7.0
Percent
6.5
6.0
5.5
5.0
4.5
4.0
1
2
3
Quarter
4
1978
Time Period/Economic
% Change in GNP
% Change in Price Level
Unemployment Rate
Variable
(measured in real 1972
(measured with GNP
(measured as a
$)
deflator)
percentage)
Year
3.9
7.4
6.0
Quarter 1
-0.1
7.2
6.2
Quarter 2
8.7
11.0
6.0
Quarter 3
2.6
6.9
6.0
Quarter 4
6.1
8.1
5.8
Plot of GNP % Change, Price Level , Unemployment Rate
12
Variable
GNP % C hange 1978
Price Lev el % Change 1978
Unemploy ment Rate 1978
10
Percent
8
6
4
2
0
1
2
3
Quarter
4
1979
Time Period/Economic
% Change in GNP
% Change in Price Level
Unemployment Rate
Variable
(measured in real 1972
(measured with GNP
(measured as a
$)
deflator)
percentage)
Year
2.3
8.8
5.8
Quarter 1
1.1
9.3
5.7
Quarter 2
-2.3
9.3
5.8
Quarter 3
3.1
8.5
5.8
Quarter 4
1.4
8.7
5.9
Plot of GNP % Change, Price Level , and Unemployment Rate in 1979
10
Variable
GNP % C hange 1979
Price Lev el % Change 1979
Unemploy ment Rate 1979
8
Percent
6
4
2
0
-2
1
2
3
Quarter
4
19
% Change in GNP
% Change in Price Level
Unemployment Rate
Variable
(measured in real 1972
(measured with GNP
(measured as a
$)
deflator)
percentage)
Year
-0.2
9.0
7.1
Quarter 1
3.1
9.3
6.2
Quarter 2
-9.9
9.8
7.3
Quarter 3
2.4
9.2
7.5
Quarter 4
3.8
10.7
7.5
80
Time Serie
10
5
Data
Time Period/Economic
0
-5
-10
1
Works Cited
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Cecchetti, Stephen G., David S. McClain, Michael J. McKee, and Daniel H. Saks.
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