At 99 years of age, former president Jimmy Carter can still teach us a lesson about inflation, interest rates and GDP growth.
On October 1st, 2023, Jimmy Carter celebrated his 99th birthday. He is by far the oldest former president still alive, with his sons and grandsons attributing his good health to constant exercise and a good diet. The presidency of Jimmy Carter, however, could teach us something more urgent and more grounded to the current times.
Jimmy Carter was president between 1976 and 1980. He succeeded Republican Henry Ford, the former vice-president who took office after Richard Nixon resigned in disgrace. Many hopes were placed on Jimmy Carter, but he could not have become president in a more difficult time.
Other than the political debacle caused by Nixon, the 1970s started with a severe energy crisis caused by OPEC’s oil production cut. The Organization of Petroleum Exporting Countries (OPEC), de-facto led by Saudi Arabia, contested the American protection of Israel and decided to disrupt its oil supplies.
Jimmy Carter tried to solve this crisis with the National Energy Act. He created the US strategic oil reserve so that the United States would never be unprepared for a similar disruption again.
Carter also invested heavily in energy differentiation, focusing on renewables and nuclear power at a time when climate change was very low on the political agenda. He also implemented a windfall tax on oil companies’ profits, as the American public was convinced the crisis had been caused by their greed and not by governmental inaction.
Stagflation and rate crisis
During his presidency, Jimmy Carter also faced a stagflation stemming from the energy crisis. Inflation was going rampant and GDP growth was disappointing. Stagflation is an economists’ worst enemy, as it strictly limits their maneuver space.
High inflation is usually fought by lowering GDP (with higher interest rates), and low GDP is usually solved by increasing inflation. When high inflation and low GDP happen simultaneously, economists scratch their heads at which one to solve first.
Unfortunately for Carter, stagflation reached its peak in 1980, in the middle of his presidential campaign against Ronald Reagan. Inflation and short-term interest rates reached 18% in March 1980, and the United States entered another recession shortly thereafter.
The recession essentially ensured Carter’s defeat at the election, ushering in the Reagan era.
So what can we learn from Carter’s presidency? Both the energy crisis and stagflation are battles being fought by current President Joe Biden, and his presidency might be at stake too.
But while Carter successfully battled the energy crisis, he failed to address the ensuing economic downfall quickly. Interest rates take time to have significant effects, and addressing inflation months before the election ensured his defeat.
During the current crisis, interest rates have already reached their peak, more than one year before the 2024 election. The United States might be spared from a recession and Biden might have a chance at re-election, but it will be a close and uncertain call until the end.
Argomenti
