Friday, October 21, 2011

Nixon, "Stagflation" and the 1973 Energy Crisis

I am coauthor of an updated version of the college American history textbook, currently titled “American Dreams and Reality: A Retelling of the American Story.” Here, I describe the economic chaos caused by American deindustrialization and the 1973 Middle East War.

President Richard Nixon never cared for the wage and price controls he implemented in his first term and, with his re-election secured, he lifted these caps in January 1973. Unfortunately, he unleashed devastating inflation. Worldwide economic growth in 1972 spurred big demand for almost every item while the devaluation of the dollar Nixon imposed reduced the cost of American goods for overseas markets by 10 percent.

The overheated consumer demand boosted wholesale prices by an incredible 20 percent in the first half of the year, resulting in an 8 percent spike in consumer prices. In June, Nixon relented and placed a 60-day freeze on all prices. Not wanting to sell at artificially low prices, some producers responded by holding back goods from the market. This created shortages. Nixon again changed course and began easing price controls. To prevent events from spinning out of control, the Federal Reserve Board increased the prime interest rate from 10 to 12 percent, which cooled down the economy.

The good news did not last. Americans didn’t know it, but they were at the dawn of a new and harder economic reality dominated by de-industrialization, the rise of America as a lower-wage service-sector economy, increasing workplace automation that reduced the number of jobs available, and a decline in union membership along with a deterioration of the average family’s standard of living. Adjusted for inflation, real wages would decline by 2 percent a year from 1973 to the 1990s. Poverty rates had fallen through the 1960s to a low of 11 percent in 1973 but would climb through the 1970s to 15 percent by 1982.

Trade policies in the late twentieth century caused Americans to lose their long-time dominance of the auto industry. Over the decade, imported cars went from representing only 8 percent of the American auto market to 22 percent by 1979. Business owners, meanwhile, fled from regions of the country where unions were strong, wages higher and benefits better, to low-wage areas with low union membership, such as the so-called “right to work” states in the South (those where unions could not, after an election, have a worksite certified as “closed” – open only to union members.) Nearly 36 percent of workers belonged to unions in 1945, but only about 23.6 percent did by 1980. As union membership dropped, paychecks shrank.

THE FIRST ENERGY CRISIS


On shaky ground, the American economy took another major hit in late 1973 when the Arab members of the Organization of Petroleum Exporting Countries (OPEC) staged an oil boycott of the United States following that year’s Arab-Israeli War. The second Middle Eastern war in six years, the so-called Yom Kippur War began when Egypt, Jordan and Syria (along with military units provided by Iraq and Libya) attempted to retake land (the Sinai Peninsula, the West Bank and the Golan Heights) occupied by Israel since the overwhelming defeat of the Arabs in 1967’s Six Day War.

Egypt and its Arab allies launched a surprise attack on Israel on October 6, the Jewish Yom Kippur holiday. Initially caught ill-prepared, Israel lost 50 combat planes and more than 500 tanks in the opening hours of the conflict, and the Israeli political and military leadership worried about national survival. Egyptian forces successfully crossed the Suez Canal and began to retake chunks of the Sinai. Saudi Arabia and other energy-rich Arab states increased the price of oil to frighten Western countries from rushing to Israel’s defense. Frightened about her nation’s survival, Israeli Prime Minister Golda Meir’s cabinet discussed using the nuclear weapons the Israelis had already developed.

Worried that the Israeli use of nuclear weapons would provoke the Soviet Union to use its arsenal to defend its Arab allies, Nixon and Secretary of State Henry Kissinger began airlifting military supplies to help the Israelis. American jets delivered more military equipment and ammunition to the Israelis in 1973 than they had brought to the besieged city of West Berlin during the 1948-1949 airlifts. The tide of the war turned. Israeli troops recovered, surrounded Egyptian forces in the Sinai and reached within 20 miles of the Syrian capital of Damascus. The United States and the Soviet Union brokered a truce. A cease-fire was signed November 11. In retaliation for American aid to the Israelis, the Arab members of OPEC stopped sales of oil to the United States, which created long waiting lines to fill cars with gasoline and caused oil prices to skyrocket.

Saudi Arabia, Kuwait, Iraq and Libya cut off all oil shipments to the United States and reduced their shipments to the rest of the world by 5 percent. About 35 percent of American oil supplies in 1973 came from foreign sources. The embargo hit the United States in a vulnerable spot, as workers since World War II had moved to suburbs farther and farther away from their jobs. About 85 percent of American workers drove to work every day. In Northern Virginia near the national capital, shortages became acute and motorists waited as long as three hours to fill their tanks. Gas prices at the pump quadrupled from 30 cents a gallon to $1.20 (or from $1.46 to $5.82 in 2011 dollars) at the height of what was widely called “The Energy Crisis.” Shortages forced a rationing system on service station owners. Owners of vehicles with license plates ending in even numbers could buy gasoline only on even-numbered days while those with plates ending in odd numbers could refuel only on odd days. Many gas stations limited purchases to ten gallons per customer. Violence broke out at some gas stations.

Nixon tried a patchwork of temporary fixes. In a national address, he asked Americans to voluntarily turn down their thermostats, and asked American companies to stay open for fewer hours. At Nixon’s prompting, the Congress banned gasoline purchases on Sunday and extended daylight saving time from January 6, 1974 to February 23, 1975, controversial because this forced many school children to wait at bus stops in the dark or for their parents to drive them to campuses before sunrise. Furthermore, in 1974 the Congress set a national maximum highway speed limit of 55 miles per hour. The President and the Congress also approved construction of the Trans-Alaskan pipeline, which would cross sensitive wilderness areas. For not the last time, concerns over energy supplies trumped worries over the environment.

OPEC lifted the embargo on March 18, 1974, but the damage to the economy had been done. OPEC set oil prices at $11.65 a barrel, up from $1.80 in 1970. (In 2011 dollars, the increase was from $7.87 to $50.92 a barrel.) High gasoline prices rippled through the economy. Wholesale prices jumped by 18 percent in 1973, and then consumer prices increased an average of 12 percent the following year. The overall inflation rate wobbled between 8 and 10 percent. Meanwhile, from January 1973 to December 1974, the Dow Jones Industrial average dropped 45 percent.



Michael Phillips has authored the following:

White Metropolis: Race, Ethnicity and Religion in Dallas, Texas, 1841-2001 (Austin:  University of Texas Press, 2006)

(with Patrick L. Cox) The House Will Come to Order: How the Texas Speaker Became a Power in State and National Politics. (Austin: University of Texas Press, 2010)

“Why Is Big Tex Still a White Cowboy? Race, Gender, and the ‘Other Texans’” in Walter Buenger and Arnoldo de León, eds., Beyond Texas Through Time: Breaking Away From Past Interpretations (College Station: Texas A&M Press, 2011)

“The Current is Stronger’: Images of Racial Oppression and Resistance in North Texas Black Art During the 1920s and 1930s ”  in Bruce A. Glasrud and Cary D. Wintz, eds., The Harlem Renaissance in the West: The New Negroes’ Western Experience (New York: Routledge, Taylor and Francis Group, 2011)

“Dallas, 1989-2011,” in Richardson Dilworth, ed. Cities in American Political History (Washington, D.C.: CQ Press, 2011)

(With John Anthony Moretta, Keith J. Volonto, Austin Allen, Doug Cantrell and Norwood Andrews), Keith J. Volonto and Michael Phillips. eds., The American Challenge: A New History of the United States, Volume I.   (Wheaton, Il.: Abigail Press, 2012).

(With John Anthony Moretta and Keith J. Volanto), Keith J. Volonto and Michael Phillips, eds., The American Challenge: A New History of the United States, Volume II. (Wheaton, Il.: Abigail Press, 2012).

(With John Anthony Moretta and Carl J. Luna), Imperial Presidents: The Rise of Executive Power from Roosevelt to Obama  (Wheaton, Il.: Abigail Press, 2013). 

“Texan by Color: The Racialization of the Lone Star State,” in David Cullen and Kyle Wilkison, eds., The Radical Origins of the Texas Right (College Station: University of Texas Press, 2013).

He is currently collaborating, with longtime journalist Betsy Friauf, on a history of African American culture, politics and black intellectuals in the Lone Star State called God Carved in Night: Black Intellectuals in Texas and the World They Made.

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