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Brian Lehrer: It's the Brian Lehrer Show on WNYC. Good morning again everyone. Now to the continuing discussion on inflation and what to do about it, you've seen the rising prices in your own life. You may have heard the 6.8% annual inflation rate stat at the end of last year, which hasn't been seen since 1982, exactly 40 years to get back to this point. You also might have seen warnings of a recession in an otherwise worsening economy, so what to do about it?

Well, according to my next guest, the economic landscape of 1981 and '82, the last time there was inflation this bad is in some ways the mirror image of 2021, looking ahead to 2022. What can we learn from that era long ago when Ronald Reagan was president that could be applied today. Here to explain is Neil Irwin. This comes from one of his last pieces in The New York Times, he just changed jobs and left The Times, called How the 2020s Economy Could Resemble the 1980s. He has since started a new job at

Axios as their Chief Economics Correspondent. Neil, welcome to WNYC and congrats on your new role.

Neil Irwin: Thank you, Brian.

Brian Lehrer: How is the US economy today? A mirror image of where it was in the 1980s? We will talk what's going on today of course because that's our central focus, but we'll also explore some history in this conversation, which I think will be interesting for some folks who lived through it and really interesting for some folks who didn't. Why do you use the term mirror image for today's economy compared to the early 1980s?

Neil Irwin: People forget just how bad the employment situation, how bad the recession in early 1980s really was. If you look back to December 1981, January 1982, that's 40 years ago right now, you had extremely high unemployment and rising. You also had high inflation, but inflation was coming down.

The reason I believe this is kind of the opposite situation. We have inflation that's high and rising and you have unemployment that's been coming down very rapidly. You have a very strong labor market right now. Essentially it's the mirror image in the sense that if things change quickly, like they did in the early 1980s, then you do have a situation in which inflation starts to come down but it might take a while, and that's where we stand.

Brian Lehrer: That's where we stand. What did we have in the 1970s? People who were alive then may remember was some derision, high inflation in the short presidency of Gerald Ford. That was really 1974 to '76, I guess, after Nixon left the office because of Watergate, and Gerald Ford seemingly bumbling Whip Inflation Now buttons that people were supposed to wear that didn't whip inflation now, but what caused the inflation of the 1970s?

Neil Irwin: The way you have to look at it is, is not just those couple of years, in the late '70s or early '80s, but as part of a long process that spread out over 15-17 years dating back to the mid-'60s. What happened is you had this process where a bunch of price pressures were building in the economy, wages were rising very rapidly, and that was kind of passing through.

It's called the wage/price spiral, where employers are paying more to their workers, workers have more money to spend on goods, but that productivity isn't rising fast enough, and so you have this kind of circular process where prices keep rising. You had some shocks, the gold standard was abandoned in 1971. You had oil shocks in the mid-'70s, and all those things kept building on themselves and creating this self-sustaining process that led inflation from quite low levels in the mid-1960s to 10%, 12% by the late '70s, early 1980s.

This became a broader crisis of confidence. It creates a sense of society being [unintelligible 00:04:08] of things being out of control, the competence of government being in question, kind of national unity being in question. It really is a process and a problem that goes deeper than just, "Oh, milk is more expensive at the grocery store."

Brian Lehrer: You wrote about the Federal Reserve at that time pulling off a delicate economic pivot and that the way that the Fed might do that now is different from what was done four decades ago. What did the Fed do back then? I'll do a little bit of spoiler here. Interest rates, I mean compared to what we know, people who are living through recent years, even recent decades with very low interest rates in support of economic growth. When you look back to this history and see what interest rates were in the 1980s, on purpose as government policies, it can make your head explode.

Neil Irwin: It really does. We have this inflation building throughout the '70s. Eventually Jimmy Carter points Paul Volcker to lead the Federal Reserve. Volcker applies essentially shock therapy to the US economy, raises interest rates very dramatically up to, you hear stories, mortgage rates of 20%, 25%, things like that.

That was a real effort to essentially change the entire framework of the economy, to convince businesses and consumers that we're not going to let this inflation happen anymore. It caused a severe recession. Again, there were technically two recessions in the very end of the '70s and in 1981-'82. I was very young then, I was a child, but people who lived through that in their working years will tell you, it was a really difficult time to be an American worker. We reached 10% unemployment, highest since World War II at that time.

It was painful, but it did the job. It really did result in a change in inflationary expectations. It resulted in labor unions being willing to not demand such enormous raises, changed the kind of the psychology throughout the American economy of inflation. We then had really 25 years in which inflation expectations and inflation reality was falling arguably too low in the last 10-15 years.

Brian Lehrer: How high did interest rates get at the hand of the Fed in the 1980s?

Neil Irwin: Their target rate, I don't know it off the top of my head. It was 18% or something like that, but just stuff that's really out of the realm of people who have mainly been living their economic lives in the last decade, things that you just can't even imagine.

Brian Lehrer: Right.

Neil Irwin: You had people buying houses, and what might seem like a reasonable price for a house, doesn't seem so reasonable when you're paying 20%, 25% for your mortgage rate.

Brian Lehrer: 20%, 25% for mortgage rates, 18% as a benchmark target rate by the Fed, bank accounts or money market accounts that were paying double-digit percentages in interest rates. It's inconceivable from today's perspective. Were there particular winners and losers in that kind of an interest rate environment?

Neil Irwin: Before that, I'll correct myself, I just looked it up, the discount rate the Fed sets peaked at 14% in August 1981.

Brian Lehrer: Okay.

Neil Irwin: Yes, there are winners and losers in an inflationary environment. The traditional story that economists tell is if you're a creditor, if you're somebody who people owe money to, you're a loser, because people are paying you back with money that's worth 10% less than what you lent them. If you're a debtor, it's in theory better because you're still earning. Let's say you owed a lot of money on a home mortgage that you had taken out in the '60s and 1980 rolls around, your wages have risen a lot because of inflation, so paying off those debts becomes a lot easier. In reality, everybody is kind of on both sides of these things in different ways. It's also the mix of things you buy matters a lot.

If you're somebody who drives a gas-guzzler, and oil prices spike and gasoline prices spike, that's a bigger deal for you, say you have a long commute than somebody who walks to work or takes the subway. These things are variable by individual, but I think, again, there is this sense that people feel [unintelligible 00:08:45], even people who are on nets, do fine in an inflationary environment, really don't like it. We see that in the public opinion data, both right now and back in the '80s, you see it in the psychology of inflation.

Brian Lehrer: Did it work to tame inflation?

Neil Irwin: It did. Again, quite a steep price. It was a very severe recession, but we did have this environment where inflation went from being a foremost problem in the early 1980s to by the '90s kind of an afterthought and really not a central concern. In many ways, the economic policymakers since Volcker have enjoyed the benefits of the credibility that the Federal Reserve and the overall monetary system attained during his leadership. If you're Alan Greenspan, Ben Bernanke, Janet Yellen, J. Powell, you are still enjoying the dividends of the credibility that inflation won't become a severe problem that Paul Volcker helped attain.

Brian Lehrer: Listeners, if you have questions or stories, if you were around in the '70s and '80s for that period of high inflation and high interest rates to whip inflation, how do you recall that era?

How did it impact your finances or your family's finances maybe to this day and what do you think the government should do about inflation now that we have the worst inflation since the early 1980s or what question do you want to ask about it? 212-433- WNYC, 212-433-9692, or tweet @BrianLehrer for Neil Irwin, now Chief Economics Correspondent for Axios, maybe so the last two articles that he wrote for The New York Times before he left there, just in the last few weeks about this topic.

Do we see already, well, I guess one of the questions about inflation right now is whether it's transitory, because of the pandemic creating insane conditions, supply shortages, everything, that will just ease as the pandemic eases or whether it's a symptom of more longer-term inflationary pressures that are really going to have to be dealt with more long-term economic policy. How do you see? Are you on what some people call team transitory or team persistent?

Neil Irwin: I don't love that framing, it became very popular among people who've talked about economics on Twitter over the last year. I thought, last summer, for example, the evidence this was going to be transitory was pretty reasonable, and we even saw that with some things. For example, lumber prices spiked in the spring and came down in the summer, but the longer this has gone on, the more I think there's real evidence that there's some psychology shifting and some changes in the economy happening that if we're not careful could prove more lasting.

We're seeing workers are very empowered and are quitting their jobs at high rates and demanding wages, but that's all great, but it's not keeping up with the kind of inflation we're seeing in the economy. The wider that spreads, the more we could see employers start to really pass those higher costs onto consumers in a way that becomes that wage/price spiral we talked about a minute ago from the 1970s. One more thing I'll just add for the historical comparison, the inflation of the '70s involved a lot of one-time shocks too, things that were supposed to be transitory.

Again, going off the gold standard in 1971, the energy and oil shocks of the mid-'70s. Sometimes when you have those shocks at a time when there are already deeper forces brewing and deeper economic trends brewing, they just reinforce and strengthen those underlying trends. That's what I think Jerome Powell, the Fed, and other economic policymakers are keeping really close eye on. Yes, maybe the supply constraints and the backlogs at ports are a temporary thing and those will go away one of these days, but have they accentuated forces that are setting in place kind of different pricing behavior than we've seen over the last 15 years and will that have lasting consequences?

Brian Lehrer: Do you find inflation morally complex at all? Like, we've certainly had guests on this show who are very happy that wages are starting to rise because labor is in demand and people are being more choosy after the great resignation as it's called and all of that during the pandemic. Since the 1970s, we've seen this decades-long pattern where the rich have gotten richer and the middle class has stagnated and shrunk. Now for the first time in a long time there's upward pressure on wages, which would be a reason for progressives to cheer, that of course however is part and parcel of inflation.

How do you come down on the moral complexity of that? Because we want working and middle class people to do better than they've been doing, but then we say we don't want inflation, but they're related.

Neil Irwin: They are. I think to economists, those are two sides of the same coin. If wages are rising, workers are empowered, that's all great and it's fantastic, after a long time when people do not see raises, it's great they're seeing them. On the other side, if companies are able to just pass those costs straight through to prices, people don't really end up better off. If we're in an environment where companies are able to hold onto their profit margins, and again, pass on higher wages, yes, you might be making more, but if your groceries cost more, everything you buy costs more, you're not really in better shape than where you started.

What you want to see is wage gains that are higher than inflation. You want people's wages to rise faster than things they buy.

Brian Lehrer: Right.

Neil Irwin: The tricky thing is you don't know, that comes down to corporate power and what ability companies have to pass along price increases. We don't really know how this is going to shake out as this evolves. We're seeing all the evidence of very strong wage gains, especially at the lower end of the spectrum. People have agency, they have a sense of power, they're quitting their jobs record rates. At the same time, so far, all the supply constraints that we've talked about involved the pandemic are creating the higher prices. We don't know which is going to prove more powerful over the course of 2022, that's the key thing to watch.

Brian Lehrer: I read an article in The Guardian and one in New York Magazine advocating price controls, something the government in this country is generally resistant to, but price controls, maybe the wages can go up, but the government can say, "You cannot charge more than X or X percent for your goods and services compared to the baseline." What do you think about that?

Neil Irwin: Well, they tried that in the '70s, and they didn't stick with it. It was a set of policies that came with a lot of problems. The question is, if you can arrange these price controls in ways that you manage to come at the cost of business profit margins, that's one thing. Shareholders will complain, companies will complain, but there, you could end up with a situation where you are able to [unintelligible 00:16:21] profit margins and have workers better off. The alternative is that price controls come at the cost of supply and quantity.

That means if I sell cars and I'm told I can't raise the prices of those cars above a certain level, maybe I just make fewer of them and there are too few relative to demand. If those cars or whatever it is are priced below the market clearing level, you'll have shortages and people not able to get the things they want. We've seen this year, kind of shadow inflation, forms of inflation that show up as shortages still make people angry. In the '70s, that took the form of people lining up at the gas station and you'd only buy gas every other day, things like that.

In this moment, it's come in the form of, if you need a new refrigerator, you go to Home Depot, maybe they're out of stock. Maybe they only have a really expensive model and you wanted something cheaper, just a lot less selection, a lot less choice, people don't like that. The question is if you try and do something involving price controls, are you able to have it come out of profit margins or is it coming out of supply and quantity? If that's the case, it's not going to be too popular, and no matter what, it's going to involve the government being kind of heavily involved in pricing decisions that you'll get a lot of pushback from businesses.

Brian Lehrer: We're talking with Neil Irwin, Chief Economics Correspondent for Axios, about his New York Times article from the other week called How the 2020s Economy Could Resemble the 1980s, mostly about inflation and the policy options for dealing with it. Hank in Monmouth County remembers the 1980s. Hi Hank, you're on WNYC.

Hank: Hey, thank you. Yes, my question was, I got married in 1983, and before we got married, we saved all our money, and we had a savings account, so we had a high interest rate. It allowed us to buy our first home. What I see today is everybody is in the stock market and of course back in those days, once the stock market went up, everybody went into it and then we had the collapses. My point is, if everybody is forced to go into the stock market without an interest rate on their monies, it kind of puts you at the mercy of the financial institutions, which they make money if you lose and they make money if you win.

Brian Lehrer: Hank, thank you so much for what I think is a very important point. I think a lot of seniors struggle with that today. They don't want to take the risks of the stock market, nevermind the kind of political interest that some people might have and not supporting Wall Street, but the risks inherent with the financial markets, even because you can't get a decent interest rate from a bank anymore, and so people are kind of forced into that, whether they want to be or mot in order to keep up with inflation. For some people, like Hank was describing, that old high interest rate environment was better, it was more secure.

Neil Irwin: Yes. I understand where the sentiment comes from. When you could get 10% on your savings accounts, that sounded great. I will say, like if you're earning 10% on your savings account, but inflation is 12%, you're still losing ground year after year. It just looks like the numbers are getting bigger. That said, we do have very low-- economists talk about real interest rates, meaning what are interest rates adjusted for expected inflation. Right now, those have been extremely low. Think about over the last year, basically zero interest rates on any kind of savings account, things like that.

Zero percent combined with 6%, 7% inflation, so you're getting a negative 7% real return, inflation-adjusted return. That's really losing ground at a rapid pace. It's no wonder the people are unhappy with that and don't like their options. We can talk about the reasons, real interest rates, inflation-adjusted interest rates are so low. It involves global forces, it involves wealth inequality, it involves demographics, a lot of things going on, but it is just the reality of the economy right now. There's no doubt if you're a saver and you don't want to take risk, you want your money to be safe, you are going to be losing the economic ground, and that's kind of the nature of the economy we're in right now.

Brian Lehrer: Alan in Waynesville, North Carolina. You're on WNYC with Neil Irwin. Hi Alan.

Alan: Good morning. Good morning, gentlemen. Here's my question. I do remember when in the 80's, I used to get 10% on my savings and a toaster to top it off, but my question is as follows, and it may not have any relationship, but do you see any kind of a relationship between what's going on now and what's happening with this cryptocurrency where people are going into this not realizing that this is something that is unknown, that is totally could be just a total Ponzi scheme.

Neil Irwin: I think there's clearly a connection between these very low inflation-adjusted interest rates that we're seeing and the interest in not just Bitcoin but the entire range of cryptocurrencies. I think people are-- Clearly a subtext of that has been feckless, they're out of control, they're allowing inflation to take off. I want to be in something that's not dependent on the government. That's not tied to a central bank." That's clearly part of the ideology of a lot of the people who are heavily invested in these these currencies. Is it a Ponzi scheme? Is it a bubble that will pop? Time will tell.

There's clearly some good bit of bubbly activity out there. How much of it's real and how much of this becomes the future of currencies and the future of transactions is still up for grabs and still something we don't know. I think there is absolutely a connection between the sense that economic policy has allowed this inflation to get out of control and interest in this entire sector.

Brian Lehrer: Scott in SoHo, you're on WNYC with Neil Irwin. Hi Scott.

Scott: Yes, hi. I wanted to ask what's the real effect on poor people or the lower-income people with this? Because I can tell you filling up my gas tank went from $30 or $32 up to $47. I do that once a week. If you do the math, it adds up pretty quick and also energy prices. My home energy price is already up 25%. I'm looking at already another $3,000 a year right off the top just for energy. I'm curious why we're not talking about that. I thought we were supposed to be helping the poor, and it looks like this is not really helping the poor because if you're making $35,000 a year and you're paying $3,000 more on gas prices or energy prices, that's a big hit.

Brian Lehrer: Right, but inflation is not a government policy. Neil, I don't know how you'll respond to his--

Neil Irwin: Look, I think the thing that is, if you talk to lower-income people, people kind of scratching by, you see how precarious their finances often are. As you say, if you're making $30,000 a year and trying to pay for food, transportation, get to work, housing, all that, you just don't have a lot of cushion in there if the price of something rises.

I think more affluent people, there tends to be a lot more buffers, a lot more ability, you probably are saving at a higher rate. If the grocery bill is higher, you can cut back on some luxuries without it being too big a deal. Whereas people who are just scraping by have less of those buffers. I will say one thing to keep in mind, what we're seeing is wages are rising fastest at the lower end of the spectrum.

For example, restaurant workers are seeing extremely rapid wage increases, something like 9%, 10%. Whereas white collar professionals, fields like financial services or real estate, communications, these are fields where wages have not been rising as fast. That's kind of a good news, is that people who are working at retail jobs and in restaurants, in hotels and food service, things like that, they are seeing bigger pay gains, but it's not clear for any individual, that still might not be enough to cover higher cost of living. For each individual, it can be a very different story.

Brian Lehrer: As we come toward the end of the segment, politically, do you see Biden and today's Fed chief Jerome Powell doing anything specific? They obviously want to resist the super high interest rates of the 1980s that we've been talking about. Is there an anti-inflation policy and also politically, it seems like the Republicans are saying you should make inflation the heart of your economic policy, and Biden is trying to make the longer-term economic inequality through the Build Back Better program the heart of his policy.

Neil Irwin: It's a very delicate balance for both the Fed and for the Biden administration. The Fed has started to pivot to being more focused on inflation and trying to move toward raising interest rates sooner rather than later. It looks like in the first half of the year, we'll probably see interest rate increases. That's a real change from where they were as recently as the first week of November, they made, it's called a hawkish pivot toward tighter money. They are focused on this now. They're trying to turn the dial very gingerly.

They don't want to kill the economy and kill the recovery. They don't want to cause the recession, but they do want to pull in these inflationary pressures that have been building. Biden, the White House has done a lot of things on kind of the micro level. For example, there were all these port backlogs. They convened things with the longshoremen and the ports and the retailers and the shippers and tried to clear out some of those knots in the ports, for example. Lots of micro things like that. They are casting Build Back Better as a long-term plan that will actually create disinflationary forces. I think it's-- Whether you believe that story or not, the politics are very delicate.

Joe Manchin, the key senator who will basically decide what gets through or doesn't, has been very clear that he thinks inflation is a first-order problem and that the government should not be doing anything that might cause more inflation. Look, this is a political mess for Biden. It's a very challenging environment for Democrats heading into midterms in November. You see it in the public opinion polls, you see it in economic confidence polling. This is really weighing on people, and if it doesn't change soon, that will probably continue.

Brian Lehrer: Do you have an opinion as an economics reporter about whether Build Back Better would be inflationary because it's a lot of government spending, so that would push up prices or whether it would be anti-inflationary in the way that Biden argues?

Neil Irwin: I think it's not a strong force either way over time, how it all nets out, the economists can build models and try and guess, but the thing to remember about Build Back Better, it's over 10 years, it's spread out over many years. It's not as big for any one year as the headline number suggests. It includes, as the Biden people will point out, it does include measures that ought to be disinflationary in theory, but at the same time, if you're pushing more money into the economy, that's also more money floating around, bidding up the price of goods and services. I know I'm ducking the question, but I really think it's an ambiguous story that people shouldn't have excess confidence in their view.

Brian Lehrer: Neil Irwin, chief economic correspondent at Axios now, after just leaving The New York Times reporting on the economy there. Thanks so much for joining us. Good luck in your new gig.

Neil Irwin: Thank you, Brian.

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