An earlier inflation-employment conundrum

America’s unemployment now stands at a 54-year low of 3.4%, a useful reminder that our POST-COVID economy is similar to the post-world War II economy of 1947-1949. Much like today, that generation faced a tricky combination of high inflation and low unemployment. Our predecessors brought inflation down without significantly breaking the economy. Should we follow the same roadmap?

In January 1948, the unemployment rate fell to, yes, 3.4%. Inflation raged, with the Consumer Price Index (CPI) having hit 19% the previous April as war-time price controls came to an end. Many believed that the actions required to cool down the economy and defeat inflation would bring a recession. Nearly everyone remembered the pain of the Great Depression.

The economy was challenged by rapidly rising demand for houses, automobiles, and other consumer goods. These had been pushed to the side during the war, but with peace came demand, thanks to a huge buildup of wartime savings and good jobs and returning veterans going to work. Meanwhile, war-ravaged Europe and Asia were attempting to recover and rebuild. U.S. producers, including farmers, faced soaring demand and supply-chain challenges in getting goods where they needed to go.

Similarly, Americans today have purses still partly packed with stimulus money following the war against COVID and associated shutdowns. Shoppers are eager to replace the family clunker and move to better housing. But there are also supply-chain challenges and not enough workers to fill every job. Meanwhile, we still worry about inflation (though it’s tumbled from 9.1% last June to a still-problematic 5.0% as of March).

Today, the debate centers each month on whether the Federal Reserve Board should again raise interest rates to throw cold water on inflation (and the economy), stand pat, or ease up. As yet, the near-universal desire to both meet the inflation challenge and avoid recession have not led to a presidential call for nationwide hearings or a White House conference devoted to finding a better path. Perhaps it’s because we’re understandably leery of more political infighting or of amateurish political pressure on the Fed.

But that’s just what happened in 1948 when, prodded by President Harry Truman—a Democrat working with a Republican-controlled Congress—political leaders attempted to coordinate taxation, spending, regulatory and monetary policy to improve the situation. The effort included two special sessions of Congress to address inflation.

While Truman unsuccessfully pushed for price controls and there were other counterproductive and conflicting actions taken, largely coherent policies emerged considering the circumstances. These included tougher monetary policy with higher interest rates, increased taxes, and lower government spending (rather than the expensive stimulus we’ve been “given”).

It was a bumpy road— maybe a case of muddling through—but inflation fell from 19.0% in January 1947 to 12.0% in June 1948 to only 1.26% by 1950. The victory involved a short, mild recession with a 1.7% fall in real GDP, but could not be called a case of breaking the economy to break inflation.

Truman, importantly, held to the Employment Act of 1946, which called for “maximum employment, production and purchasing power.” The Act established the Council of Economic Advisers and the Joint Congressional Committee (the latter consisting of seven members each from the House and Senate), charged with monitoring economic activity. Unlike later presidents, Truman provided a report from the Council every six months, and each was first reviewed and criticized by the Joint Congressional Committee so that Congress might have its voice.

Many analysts today suggest that the Fed will keep tightening until something breaks and then will focus on repairing the economy. Perhaps this is the best we can hope for in such a politicized era where partisanship does not stop at the economy. But it’s unfortunate that we don’t try for Truman’s more collaborative approach.

An independent Fed, which is protected to some degree against politics, will play its role. However, a special session of Congress devoted to finding the best way forward could offer reasoned recommendations and help get the government on the same page. And it might be a good idea to have the Joint Congressional Committee review and criticize the president’s economic report and make those comments part of the now-annual Economic Report of the President.

A change, after all, might do us all some good.