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History Explained: Stagflation in the 1970s

In the 1970s, the United States faced an economic malady that it hadn’t previously experienced: stagflation. Stagflation is when inflation rates and unemployment rates are both high—in other words, prices keep rising, even while the economy stagnates or falls into recession. Stagflation is uniquely difficult to shake because curbing inflation usually requires encouraging consumers and companies to save money rather than borrowing, which also slows economic growth. On the other hand, encouraging spending that would help grow the economy can also increase inflation, worsening a stagflation crisis. Stagflation in the U.S. was caused by globalization and outsourcing of goods, combined with an overreliance on the automobile.

After increasing Middle East tensions throughout the 1970s boiled over and led to the Fourth Arab-Israeli War, the Organization of Arab Petroleum Exporting Countries (OAPEC) placed an embargo on countries supporting Israel, including the United States. This embargo sparked the stagflation crisis in the U.S., during the presidency of Jimmy Carter. As many people know, in today’s U.S., there is a vast reliance on automobiles. At this time, the Interstate Highway System was relatively new and it gave people the opportunity to live further away from work in new suburbs. However, once the OAPEC embargo hit, gas prices soared. Prices became so high that they interfered with logistics and prevented many people from going to work. And it didn’t end with workers. Transportation of almost everything was reliant on oil/gas powered vehicles at some point. This meant that everyday goods could not be sent out as cheaply as they had been. These factors caused increased unemployment, even while prices rose across the board.

The stagflation crisis of the 1970s may have been sparked by a war, but it was also caused by deeper changes to the global economy. U.S. aid and investment helped encourage developing countries to build their economies around certain sectors; Western countries then outsourced much of their own production further away to these countries. For example, some Asian countries focused their goods on automobiles at the time. Currently, Taiwan is the main country for microchips in cell-phones. At that time, Middle Eastern countries centered their economies around oil production. The US was— and still is—a major customer of the OAPEC countries for oil. Therefore, when the embargo hit, the US supply of oil drastically decreased, causing the transportation crisis mentioned before. This led to one of the worst economic crises since the Great Depression.

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