The Bear’s Lair: The 2010s were worse than the 1970s

As we move through the 2020s, the 2010s, the decade between the financial crisis and the COVID outbreak, come into perspective. In terms of monetary, fiscal and regulatory policy in the United States and throughout the rich world, it was extreme, worse than the 1970s in its disregard for free-market first principles. The main difference in outcomes was that the 2010s saw no significant inflation. That has now changed, and the prognosis going forward may well be worse than the hardships of the early 1980s.

Let us begin with regulation, so often the neglected culprit for periods of unexpected economic gloom. The 1970s have a strong case for superior unpleasantness here, being the fons et origo of much modern U.S. regulation. President Nixon, an otherwise highly admirable man, completely failed to realize the damage that new uncontrolled regulatory government departments could do, so was far too dilatory in resisting them. This made him a majoritarian consensus President, the winner of 49 states in his reelection bid in 1972, and a fat lot of good that did him!

Nixon’s list of new regulatory agencies was long and damaging. It included the National Environmental Policy Act of 1970 establishing the Environmental Protection Agency, probably the most economically destructive legislation by any government anywhere (Russian Empress Catherine II’s 1767 “Nakaz” forbidding industrialization because of its threat to jobs, is its nearest competitor). The Clean Water Act extended the EPA’s reach to every puddle in the United States and much mildly damp land, while the Endangered Species Act of 1973 ensured that every time a stray cat strolled across a new industrial development, a hearing had to be held and a study produced. Finally, the Occupational Safety and Health Act established another bureaucracy with its massive complex of regulations, impeding small business further and assisting the large corporations who could afford the internal lawyers to “game” the regulatory system.

Thus, while Social Security (1935) and Medicare (1965) were individually more economically costly programs, the Nixon regulatory morass was unique in its attack on the U.S. economy in that it poured both government and private sector money down a series of ratholes. It is unsurprising that U.S. productivity growth, which had averaged 2.8% per annum in 1948-73, fell to an average of 1.8% per annum in the next three decades, and that the U.S. economy began at this time to fall behind its rich country competitors, hobbled by statism and bureaucracy though they also were.

While the early 1970s may have represented the absolute nadir of U.S. regulatory policy, in economic policy they have been somewhat maligned. Nixon had inherited a bad inflationary situation from Lyndon Johnson, who had bullied Fed chairman William McChesney Martin into an over-expansionary monetary policy that allowed Johnson to fund his mostly idiotic social programs and definitively idiotic war without raising interest rates.

Nixon’s response was in 1971 to abandon the Bretton Woods nominal gold peg for the dollar. This was not an “anti-Gold-Standard” move; Bretton Woods had been designed by Keynes and a bunch of Soviet spies in 1944 to look like a Gold Standard, but to contain none of that benign system’s controls on profligate government. In practice, Bretton Woods was a thoroughly pernicious system; it merely hobbled Britain and later the United States by pegging their currencies at too high a level, while preventing private individuals from trading gold at its nominal price and thereby providing a proper control mechanism on government that might prevent inflation. The new system to which Nixon moved in 1971-73, freely floating international exchange rates, had the potential to work adequately (though not as well as a true Gold Standard) – it did however require the world’s central banks to be fully committed to avoiding inflation and quelling it when it appeared.

They were not so committed, to say the least. Fed chairman Arthur Burns was fooled by the apparent quiescence of inflation during Nixon’s “price controls” period of 1971-72 (expect President Biden to try that trick again in 2024 if he needs it) and expanded money supply much too rapidly, causing inflation to become entrenched. The recession of 1974-75 and President Ford’s noble attempts to rein in public spending quieted it again and brought it below interest rates, but the expansionist President Carter and his equally expansionist Fed chairman G. William Miller saw matters get out of control in 1978-79. Then came Paul Volcker, and after three years and considerable pain, the problem was solved.

It should however be noted that 1970s monetary policy was by modern standards not all that expansionist – interest rates were in the high single digits for most of the decade, and only occasionally fell significantly below inflation. Consequently, there was no general asset bubble – indeed, stock prices fell in real terms through the decade.

Contrast this with the 2010s. As in the 1970s, the 2010s, at least under the Presidency of Barack Obama, was heavy on regulation, much of it in the environmental area to guard against “climate change.” The Dodd-Frank Act of 2010 greatly increased the regulation of financial institutions and established a new agency, the Consumer Financial Protection Bureau, set up to be outside Congressional supervision, whose sole purpose was to harass the consumer lending sector.

On climate change, Obama attempted to pass legislation in 2009, but it failed in the Senate; he then decreed that the EPA could regulate carbon dioxide emissions as if that gas were a pollutant. He signed the 2015 Paris Agreement, deliberately structured so as not to need Congressional ratification, committing the United States to further emissions reduction. Draconian mileage standards were imposed for U.S. automobiles, much increasing their cost to U.S. consumers. Vast subsidies were handed out to electric automobile producers, most of which ended in scams. Overall, Obama did not succeed in creating any single agency as damaging as the EPA, but he imposed micro-regulations throughout the economy, killing U.S. productivity growth altogether by the end of his term in office.

It was in monetary policy that the 2010s broke the mold. Whereas in the 1970s Fed chairmen Burns, Miller and of course Volcker were fully committed to the free market, the 2010s Fed chairmen, Bernanke, Yellen and to a lesser extent Powell, as well as their international counterparts, believed that a benign central bank could support the economy by printing endless amounts of money and keeping interest rates near zero. Towards the end of the decade, they began scheming for a cryptocurrency “digital dollar” that would allow the regime to abolish cash balances altogether and subject ordinary people to arbitrarily large negative interest rates.

Had consumer price inflation surged in 2011-13, as it did in the early 1970s, this pernicious doctrine would have been stopped in its tracks. Regrettably, inflation appeared, but in asset prices rather than consumer prices, which were carefully excluded from reported price index calculations. This had the effect, not only of removing the incentive that might force central banks to correct their mistakes, but of providing a gigantic “asset price lobby” of all those who had overextended on house purchases or saved insufficiently for their retirements, for whom a rise in interest rates would mean financial ruin.

Since 2021, as inflation has appeared, the world’s central banks have begun to correct their egregious central planning error of the 2010s, but the squawks against raising interest rates are already becoming loud, from consumers as well as from spending-happy bureaucrats. There can be little doubt that the world’s central banks will shortly “wimp out,” heading back towards zero interest rates and allowing inflation to gather momentum, becoming ever more destructive. Any Paul Volcker of the future will need to fight political forces far stronger than those facing the original.

In summary, the 1970s were highly damaging, and took away the halcyon period of rapid economic growth and rising prosperity that we had previously enjoyed. The 2010s were somewhat less damaging in regulation, but their monetary policy was far more dangerous, because it created an “asset price bubble lobby” that will work very hard to prevent the policy’s correction. Overall therefore, the 2010s were more destructive.

(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)