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Deja vu? Why it feels like the '70s again

An oil shock and specter of inflation bring the world to another turning point

TOKYO -- Kenneth Rogoff, a professor of economics at Harvard University and a former chief economist at the International Monetary Fund, listed many similarities between the 1970s and today in a syndicated opinion piece titled "Back to the Seventies?" in late August.

Among them:

-- In the U.S., a president who challenges institutional norms is followed by "a thoroughly decent person": Richard Nixon by Jimmy Carter in the '70s, and Donald Trump by Joe Biden today.

-- Humiliating defeats abroad: the wars in Vietnam and Afghanistan.

-- Massive global supply shocks: the '70s oil shocks and supply disruptions amid the COVID-19 pandemic.

-- Rising inflation following huge fiscal spending and monetary relaxation.

About three months after Rogoff pointed this out, such countries as Japan, the U.S. and the U.K. decided to release oil from their strategic reserves in the wake of soaring crude prices.

As supply chain disruptions have grown more serious, the United Nations Conference on Trade and Development warns that surging container freight rates could push up global consumer price levels by 1.5% between now and 2023.

Federal Reserve Chair Jerome Powell, who brushed off rising prices as "temporary" this summer, has changed his view and begun pushing ahead with an exit strategy for monetary easing.

Unknown is whether the current inflation spike will lead to what was called a "wild price spiral" in Japan back in the '70s. There are economists forecasting that supply chain disruptions will take a breather in mid-2022 and that inflation will be brought under control.

Inflation is not the only interesting parallel between the '70s and now. There is also a perception that the world is at a turning point.

The '70s started with the "two Nixon shocks" of 1971. Nixon's announcement that the U.S. would end the convertibility of the dollar into gold brought about the collapse of the gold standard and threw financial markets into uncharted waters.

Rapprochement between the U.S. and China, symbolized by Nixon's visit to Beijing, drove a wedge between China and the Soviet Union in the Cold War and subsequently brought great change to the world.

Sharp hikes in crude oil prices by petroleum-producing Middle Eastern countries sent shock waves through the world.

The 2020s started with the coronavirus pandemic, which has fundamentally shaken up not only medical care, but also the economy and society. Online meetings and remote work have become part of the new normal and radically altered corporate activities and lifestyles.

And the "decarbonization revolution" is driving behavioral changes by businesses and consumers as forcibly as the energy crises of the '70s. Soaring crude prices are attributable to rapid decreases in investment in oil production facilities accompanying the decarbonization push.

Economic policies also came to a turning point in the '70s. The decade was trying time for central banks. A Federal Reserve chaired by Nixon appointee Arthur Burns lost market trust for dragging its feet on tightening monetary policy. Inflation remained out of control until after Paul Volcker took the helm of the U.S. central bank in 1979.

In fiscal policy, it became clear that "big government" since the era of New Deal programs to fight the Great Depression in the 1930s had hit a dead end. Questions arose over fiscal rigidity resulting from ballooning social spending and constraints on private companies' competitiveness caused by government regulations. At the time, popular interest in environmental problems was stimulated by "The Limits to Growth," a 1972 report for the Club of Rome.

Following the chaotic '70s, U.K. Prime Minister Margaret Thatcher formed her government in 1979 with an eye toward curing the "British disease." In 1981, Ronald Reagan took office as president of the United States, arguing that "government is the problem," and kicked off a shift to "neoliberalism" that pursued growth led by private-sector initiatives under a "small government" whose involvement was minimized.

Now, Japanese Prime Minister Fumio Kishida has set up a council for the realization of a new form of capitalism, calling for a departure from neoliberalism. The Ministry of Economy, Trade and Industry has established a subcommittee within the Industrial Structure Council, an advisory panel to the METI chief, to study new industrial policy. The ministry had begun to consider the formation of new industrial policy even before the Kishida government took power.

To counter Chinese state capitalism, the U.S. and Europe have embarked on fiscal spending for such purposes as hosting chip factories from an economic security standpoint. Japan should also adopt new industrial policy, METI's thinking goes.

Japan weathered the energy crises through energy conservation efforts by the public and private sectors and measures to cope with depressed industries, according to Chalmers Johnson, an American Japanologist who analyzed the roles of bureaucrats in the Ministry of International Trade and Industry, METI's predecessor, during the high-growth era in his 1982 book "MITI and the Japanese Miracle."

But Japanese industrial policy was criticized amid intensifying trade frictions with the U.S., according to Johnson.

METI possibly sees moves to reevaluate neoliberalism as a good opportunity to revive industrial policy. Major countries have resorted to large-scale economic measures, such as introducing emergency relief benefits, to address the unprecedented crisis caused by the pandemic.

Now, with governments' ability to meet such responsibilities as procuring COVID-19 vaccines under scrutiny, the question is whether the age of big government will return.

But the real economy is creating conditions that do not permit reckless fiscal spending.

Former U.S. Treasury Secretary Lawrence Summers had called for boosting fiscal spending, such as infrastructure investment, under price stability and low interest rates to overcome long-term stagnation. But around this past spring, he warned that massive spending could accelerate inflation. The Biden administration's spending is expected to be cut from initial plans.

Kishida has announced an economic stimulus package amounting to 55.7 trillion yen ($487 billion). But the government cannot afford to continue with such a huge spending spree forever.

"New capitalism" should not mean a return to big government. What is needed now is "smart government" to foster an environment in which private-sector funds flow into investment, consumption and wage increases in Japan. If the Kishida cabinet chooses to engage in pork-barreling with an eye on elections, then its agenda will be undeserving of the name "new capitalism."

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