Monday, January 5, 2009

History on Fast-Forward

George Santayana’s observation that “Those who cannot remember the past are condemned to repeat it” remains true, but the repeats have been put on fast-forward. For the past year the economy has given me a sense of déjà vu, as if I’ve lived through the past year in another time. In fact, in my early adult life I did live through the events of the past year. It is just that back then—the 1970’s—economic trends took a little longer to play out.

Consider the spectacular rise and subsequent collapse of gasoline prices over the past year. After hitting a high in July 2008 of just over $4 per gallon of regular in the United States, gas prices have fallen to an average near $1.60 as of last week. Similar price action took place before when, in terms of inflation-adjusted 2007 dollars, gas prices went from nearly $2 per gallon in 1978 to over $3 per gallon by 1980. A fall to $1.50 per gallon followed, but it took nearly 5 years. It was not until 1985 that inflation-adjusted gas prices undercut the prices in the late 1970s.

Nominal price and real price in 2007 dollars of a gallon of gas

The causes of the 1970s oil bubble were much the same as ones that caused the 2008 bubble—wars and instability in the mid-east, massive federal deficits that weakened the dollar, trade deficits with other nations.

Then, as now, the economic and political effects of price movements of this magnitude were profound. The price run-up resulted in a severe recession, steep rise in unemployment, depressed stock market, and nationwide disenchantment with its political leadership.

U. S. auto companies had built their business model on selling large gas-guzzlers that suddenly no one wanted. Plummeting auto sales threatened the financial stability of the big three automakers. By 1979, Chrysler Corporation appeared on the verge of bankruptcy. Its chief executive arrived in Washington begging Congress for a bailout in order to save American jobs.

The ruling party in the Whitehouse was decisively voted out of office and a charismatic new president took over, brimming with confidence and optimism and promising change. On February 19, 1981, shortly after taking office, the new president had a question-and-answer session with news editors about his program for economic recovery. He stated in regards to the energy crisis: “The best answer, while conservation is worthy in itself, is to try to make us independent of outside sources to the greatest extent possible for our energy.”

But, when gas prices fell and stock prices rose, the events of the 1970s were quickly forgotten. Everyone resumed their old habits and considered the decade an aberration. Even though no one did anything to solve the underlying problems, no one planned for a repeat of the events of that decade.

It will be interesting to see what happens in the coming year, but I would not become complacent about low gas prices remaining. Oil prices started to rise this week as mid-east fight flared. It is the same war that was fought in the 1940s, and the 1970s being fought today. The same political rhetoric about energy self-sufficiency is coming from the mouths of a new generation of politicians. A new line up of auto company executives beg Congress for bailout money and promise that they have finally learned the lessons of a generation ago.

None of the problems in the 1970s were actually solved or are they being solved now. History repeats itself but this time on fast-forward.

Joseph Ganem is a physicist and author of the award-winning The Two Headed Quarter: How to See Through Deceptive Numbers and Save Money on Everything You Buy

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