A Rerun From the 1970s? This Economic Episode Has Different Risks

History doesn’t repeat, they say, but it often rhymes. And the latest economic headlines feature an uncanny tonal resemblance to those of the early 1970s.

General Motors workers are on strike, seeking more of the spoils of their employer’s successes. The president of the United States is pressuring the Federal Reserve to lower interest rates, hoping for a booming economy as he seeks re-election. And now, violence in the Middle East is pushing up global oil prices.

At first glance, at least, it seems similar to an era of gas lines and “stagflation.”

In each of these situations, though, there are big underlying differences between the early 1970s and now. Understanding those differences is important in properly understanding the world economy in 2019 and the risks posed by this combination of events.

The G.M. strike, which began late Sunday with about 50,000 autoworkers walking off the job, could turn out to be the most important clash between labor and management in years.

Mr. Trump’s methods and tone are unconventional, and the scale of the interest rate cuts he seeks is out of line with what most mainstream economists think would make sense. But his general idea — that interest rates need to be adjusted downward to keep the economic expansion on track — is relatively mainstream.

And Mr. Powell and the Fed are likely to act on that logic Wednesday afternoon, delivering a second rate cut in two months.

The latest tumult in the Middle East delivers further complexity for the Fed and other economic policymakers. An attack over the weekend that incapacitated much of Saudi Arabia’s oil production infrastructure caused a 13 percent spike in the price of West Texas Intermediate crude oil to start the week (prices fell some on Tuesday, reflecting optimism that Saudi output would return to normal quickly).

The stagflation — stagnant growth combined with inflation — of the 1970s was caused in large part by repeated disruptions to global oil supplies, which led to soaring prices and gasoline shortages in the United States.

If a major conflict were to break out in the Middle East, such as between Iran and Saudi Arabia, the impact on the world economy would be severe. But the United States is well insulated from more moderate swings in energy prices like those evident so far, and could even benefit from them.

First, on the demand side, the “energy intensity” of the American economy has declined precipitously since the 1970s, meaning that each dollar of economic output takes less energy to create.

Second, American oil and natural gas production has risen, especially in the last few years. That means that while higher energy prices may hurt consumers, they have a countervailing positive impact on oil-producing parts of the United States and the industries that serve it, like those that sell equipment for energy exploration.



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