Recently I opened the printed version of THE ATLANTIC and discovered a very interesting article by David Frum entitled, “That 70s Feeling: Trump’s tariffs could cause stagflation for the first time in decades. It may go on for a long, long time.” (The Atlantic, June, 2025: 11-14)
In the 1970s, I was in my first decade of teaching college level economics. I had been trained in the tradition of John Maynard Keynes. Not only did every economics major read his book THE GENERAL THEORY OF EMPLOYMENT, INTEREST and MONEY (published in 1936) but we also studied the major developments that had created the field of Macroeconomics in the years since that book was published. The “story” we learned from Keynes and his followers, which by the time I was an undergraduate in 1960 had come to dominate the first-year textbooks, was that situations like the Great Depression occurred because of a deficiency in aggregate demand. Aggregate demand was the sum of consumer spending, business investment spending, government spending and net exports. (I made this analysis the center piece of a commentary just a few weeks ago when I explored the role of trade deficits in the economy.)
The economics that dominated before Keynes had argued that the interruptions in economic growth that occurred from time to time (they were called depressions in the 19th century --- after World War II they began to be referred to as recessions) were SELF-CORRECTING. Both the experience of the 1930s and Keynes’ analysis showed that that was not the case --- that the economy could be trapped in an extended period of deficiency of aggregate demand such as occurred for the entire decade of the 1930s.
The experience of World War II also showed that just as there could be a deficiency in aggregate demand, there could also be an excess. If the economy were to grow very rapidly -- say, the government ramped up spending in anticipation of a war (such as happened in 1941) and if exports surged (as happened during 1940 while World War II was raging in Europe) and if people went back to work after almost a decade of high unemployment as happened in 1940, then the increase in exports, government spending and new investment spending would put everyone back to work --- and their spending on consumer items would reinforce the trend. However, once everyone was back at work, if the spending continued to increase but there were no more resources to satisfy the rising demand, then inflation would occur --- which is why there needed to be an extensive system of price controls and rationing during World War II.
In other words – the economy could have either too little spending (high unemployment) or too much spending (inflation). That was the theory we learned and taught during the 1960s.
But in 1970s, after an inflationary surge between 1966 and 1969 where spending on the Vietnam War occurred with very low unemployment, something new arrived.
[For a great visual of annual inflation rates see https://fred.stlouisfed.org/series/FPCPITOTLZGUSA]
Inflation was only 1.6 percent in 1965 and it surged to 3 percent in 1966, 4.2 percent in 1968 and 5.5 percent in 1969. President Johnson actually tried to dampen down inflation with a surtax on income in both 1968 and 69 but it clearly did not stop the inflation rate from increasing. The usual solution to too much aggregate demand (which remember is what the economics profession was blaming for the inflation) was an interruption in economic growth --- a recession. And there was one in 1970.
Unfortunately, it didn’t do the job. The rate of inflation increased in 1970 even as unemployment increased as well. The unemployment rate had been below four percent for a number of years in the late 1960s. (Four percent was considered as close to “full” employment as possible and it became the target for the policy-makers during the 1960s.) Economists warned that any persistent rate below 4 percent would trigger inflation--- and they were right. In December 1969, the unemployment rate was 3.5 percent and over the next twelve months as the recession began it jumped to 6.1 percent even as inflation kept rising.
This was something new to those of us trained in modern macroeconomics. We had in effect a new problem without an obvious solution.
As the economy recovered from the 1970 recession, the unemployment rate trended downward but it never even got to four percent before the next recession started in 1974.
[For the unemployment rate with another great visual, see https://fred.stlouisfed.org/series/UNRATE]
The experience of rising inflation in the middle of a recession had seemed --- well, impossible, given the analysis we had been taught and were teaching our students. But there it was staring us in the face. This is where the word STAGFLATION (a running together of the words “stagnation” and “inflation”) became commonplace both in journalism and in economics jargon. (It had actually been coined in 1965 by a British economist but didn’t become part of the American vocabulary until 1970).
Inflation and unemployment at the same time created a dilemma for theorists but also for policy makers. The policy tools could only fight one of the problems at a time. IF you attempt to stimulate aggregate demand by increasing government spending or decreasing taxes, you run the risk of making inflation worse. If you restrain the economy with higher interest rates or reduced government spending, you run the risk of making the recession worse.
[For a very brief description of how President Gerald Ford tried to deal with first inflation and then unemployment in 1974 and 1975, see Meeropol, Surrender, How the Clinton Administration Completed the Reagan Revolution (U Mich Press, 2000 pbk): 53]
President Nixon tried to cure stagflation by increasing government spending to fight the 1970 recession and imposing wage and price controls in 1971. However, the problem was not really “cured” until a very restrictive monetary policy by the Fed caused a deep and long recession in 1982 and 1983. Until then, the economy suffered from high levels of inflation for the entire decade and a couple of very deep recessions. For one example, the recession of 1974-75 saw unemployment climb to NINE percent in May of 1975. Inflation peaked at 11 percent in 1974 and was still at 9.1 percent in 1975.
After the 1974-75 recession, inflation resumed its upward trajectory, peaking in 1980 at THIRTEEN point FIVE percent. That caused the Fed under the leadership of Paul Volcker to clamp down on the economy. We endured a double-dip recession both briefly in 1980 and more deeply in 1982-83. By the time the recession was over in 1983, the inflation rate was down to 3.2 percent and except for a brief period in 1989 and 1990, it never got above 4 percent till the post-COVID inflation. The reason we have stopped talking about stagflation is because of the conquest of inflation in the early 1980s.
Now here comes David Frum who argues that the Trump tariffs might bring back the era of stagflation. Here is his reasoning. The stagflation of the 1970s was caused by big jumps in oil prices which had the impact of raising prices (inflation) and raising costs to businesses and consumers. The rise in costs was called a “supply shock” and that is what produced the recession in 1974-75. The shock of another oil price rise in 1979 is what caused inflation to accelerate leading to the brief recession of 1980 and the follow on deep and long recession of 1982-83.
Frum predicts that to the extent that the rise in US tariffs push up prices, this will have the same impact as the big jumps in oil prices in the 1970s. He writes, “Trump’s tariffs are like a hundred self-inflicted oil shocks, all arriving at the same time.” The price increases are obvious. Yes, it is possible some companies will “eat” at least some of the cost of importing goods by shaving their profit margins, but some have already indicated they cannot “eat” all those increased costs. So there is the price increase impact of tariffs.
The other part of the problem is that many of the goods subject to the tariffs are important inputs into final products --- many American manufactured goods have components bought from overseas. This will raise costs to many American businesses who may respond by cutting back on investment plans. Frum continues to argue: “Disadvantages and uncertainties compound. The tariff protected American car of the future will be assembled from steel, glass, plastic, fabric and electronics all of them tariffed at 10 or 20 or 125 percent …No American business – no business that serves the American market – will commit to any capital expenditure under these conditions.”
After I recorded this commentary, the US Court of International Trade ruled that Trump’s justification for imposing his tariffs (a 1977 law giving Presidents powers to do so in emergencies) did not pass constitutional muster --- that only Congress had the right to make such sweeping changes in our tariff laws. [For details see https://www.nytimes.com/2025/05/28/business/trump-tariffs-blocked-federal-court.html]
This ruling adds a whole new element of uncertainty to future tariff policy as this ruling will undoubtedly go to a Court of Appeals and ultimately to the Supreme Court. Will the current rates of tariffs set my Trump be permitted to stay in place while this issue is adjudicated or will all rates revert back to January 19 of this year? We don’t know and neither do all the businesses making investment decisions. Score one for Frum’s argument about investment.
Interestingly, despite his reasoning about uncertainties being strong, as of now, none of the major forecasting organizations are predicting a recession any time this year --- while he surely is.
And he might very well be right. Uncertainties give businesses lots of reasons to at least postpone investment decisions.
On the persistence of inflation I am not so sure. The reason the inflation of the 1970s persisted was not just because of the big jumps in oil prices. These may have started the ball rolling but once prices had started to rise, wages tried to catch up. This is a problem known as the wage-price spiral and it was at work until the deep recession of 1982-83.
So the danger is an on-going spiral after the tariffs jolt prices upwards. (But only IF the tariffs are actually in place --- see the NY Times article above.). Here, the Federal Reserve has shown it is aware of that danger and is holding off cutting interest rates for now. Frum has raised a very interesting issue and I propose to watch for signs of stagflation very carefully in coming months.
Michael Meeropol is professor emeritus of Economics at Western New England University. He is the author with Howard and Paul Sherman of the recently published second edition of Principles of Macroeconomics: Activist vs. Austerity Policies.
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