Inflation in California—Lessons From 1979 and 2021

A customer shops for meat at a Safeway store in San Francisco, Calif., on Oct. 4, 2021. Justin Sullivan/Getty Images

Commentary

If you were too young to remember the 1970s inflation in California, you have no idea how bad things still could get—if inflation in 2021 keeps rising. Some recent news items:

• On Tuesday, the U.S. Department of Labor reported producer prices soared 8.6 percent over the past year;
• On Wednesday, it reported inflation in October jumped at a 6.2 percent annual rate;
• Also on Wednesday, China reported its producer price index went up 13.5 percent over the previous year. That inflation soon will be hitting all the imported items Americans buy from Walmart and Amazon. The U.S. trade deficit with China in September hit $40 billion a month, a new high, as imports to the U.S. continued to rise.

For some perspective on how bad things could get if the high inflation continues, look to the year 1979. Although I’m from Michigan, I spent May 1978 to April 1979 in Monterey learning Russian at the Defense Language Institute. The Army provided “three squares and a cot,” but I saw what my local civilian friends were suffering. And my rusting 1970 Buick LeSabre slurped gas at a low 11 mpg.

Gas prices, just 31 cents a couple years earlier, tripled to close to $1, what was called “gouge at the pump.”

In Monterey and all California, housing prices rose accordingly, bringing higher taxes with them. Grandmothers with fixed incomes were being ejected from their homes because they couldn’t pay their property taxes. The frustration levels with big government had reached a boiling point.

As a 2020 analysis in the Journal of Policy History recounted, “The revolt began more than a decade before Prop. 13 as approval rates for local levies and bonds reached all-time lows. This local revolt was not limited to whites, nor did it portend rising conservatism. Instead, it was rooted in lower- and middle-income Americans’ frustrations with steep rises in unfair, regressive taxes during the post-World War II decades.”

I was there in June 1978 when voters passed Proposition 13 with 63 percent of the vote. It rolled back property tax rates to those assessed in 1976. And it limited property taxes to 1 percent of assessed value, plus a maximum increase of 2 percent per year. My friends were so relieved. They could keep their homes.

Iranian Revolution

Although taxes were limited, prices for homes and everything else kept going up. Then the 1978–79 Oil Shock hit. As recounted by Federal Reserve History, “The Iranian Revolution began in early 1978 and ended a year later, when the royal reign of Shah Mohammad Reza Pahlavi collapsed and Sheikh Khomeini took control as grand ayatollah of the Islamic republic. In conjunction with the revolution, Iranian oil output declined (pdf) by 4.8 million barrels per day (7 percent of world production at the time) by January 1979. However, this supply disruption may not have been the most important factor pushing oil prices higher. Rather, the Iranian disruption may have prompted a fear of further disruptions and spurred widespread speculative hoarding.”

It’s not an exact equivalent, but President Joe Biden’s restriction of domestic energy production the past nine months has had a similar effect, also causing fear about future production. It’s Economics 101: Cut supply and prices rise.

I remember at the DLI campus there was a student from the Shah’s Imperial Iranian Air Force. DLI also trained the service members of allied nations. I didn’t know him personally or what language he was taking, but I remember him because he wore a blue uniform with a steeply sloping service cap, “furazhka” in the Russian tongue we were learning. Then one day in early 1979 he was in civilian clothes. I have no idea what happened to him. But it was nice they kept him on to complete his course.

One of my fellow Russian students had traveled around Iran a couple years earlier on some college project. He said he was impressed with their new interstate highway system, much like America’s. I pointed out maybe that wasn’t such a great idea because even the 1950s–60s-era U.S. highway system cost an incredible amount of money and added to social unrest by dividing communities. And the United States in the 1950s and 60s was the most fabulously wealthy country the world had seen, with a large middle class.

I also pointed out the inflation of the 1970s had helped oil-producing nations bring in a lot of extra cash, but that was bound to run out and the global inflation finally would hit hard, with much less oil money to make up the difference. That would cause even more problems, which were already being felt in the United States.

There is no excuse for what the ayatollahs have done for 42 years after the Iranian Revolution. But social disturbances commonly are reasons for a populace getting upset and siding with those who overthrow an established order, at least until the new rulers’ oppression gets really bad.

European Inflation

After cryptanalysis training at Goodfellow Air Force Base in Texas and Ft. Devens in Massachusetts, in September I shipped off to Frankfurt, West Germany, to join the 856 Army Security Agency Company; soon enlarged and renamed the 533 Combat Electronics Warfare Intelligence Battalion.

That fall 1979 I was shocked how the sergeants told me they had to go on food stamps to feed their families. The dollar’s value had dropped sharply against the deutschemark, making it more difficult for the troops to take care of their families. The dollar kept shrinking.

President Jimmy Carter was so proud he gave the military a 7 percent raise, one of the biggest ever—except inflation was 13 percent. So it really was a 6 percentage-point pay cut. Our unit was heavily understaffed; because who would put up with that?

Policy analysts were saying the world would run out of oil. In California, Gov. Jerry Brown branded it an “era of limits.”

Then Ronald Reagan won in November 1980. The Iranian Hostage Crisis, in which the Ayatollah Khomeini’s revolutionary regime had kept 52 American diplomas hostage for 444 days, ended on Inauguration Day 1981.

Soon, Reagan cut taxes while beefing up military procurement, replacing our junky old jeeps and trucks and tanks with new ones. As I recounted here previously, he ended energy price controls. Along with Federal Reserve Board Chairman Paul Volcker, he cut inflation. Soon, the dollar was rising sharply against the deutschemark, helping G.I.s’ purchasing power in Frankfurt.

No analogy is perfect. But I hope the lessons of California in 1979 demonstrate how inflation and other problems are man-made, as is their continuation. Meaning today, in California and the United States in 2021, we can fix them.