Policymakers Must Steer Clear of Gimmicks as Oil Prices Go Up, Lessons from the 1970s for Today’s Crisis
We have been here before. In the 1970s, as the Arab-Israeli war triggered an oil embargo and sent energy prices soaring, US President Gerald Ford urged Americans to combat escalating costs through personal sacrifice. His Whip Inflation Now (WIN) initiative encouraged citizens to grow vegetables in their backyards, form car pools, and use cold water for laundry. WIN badges were churned out by the thousands, and Ford enthusiastically pinned them on the lapels of visitors and officials alike. Even former Beatle George Harrison received one during a White House visit. The exercise, however, was far more about public relations and creating a sense of shared purpose than it was about serious economic policy. It was a gimmick.
Half a century later, as oil and gas prices once again jump due to a major conflict in West Asia—this time triggered by the US-Israeli attack on Iran—Asian leaders are resorting to eerily similar advice. Citizens are being asked to adapt their daily habits: work in short sleeves, ease up on the air-conditioning, skip the elevator and take the stairs. These measures are presented as a collective contribution to weathering the economic storm. Now, as then, such conservation calls are not a substitute for effective monetary or fiscal policy. At best, they represent a short holding pattern, a way to buy a little time while the real decisions are made. At worst, they are a distraction from the hard choices that lie ahead.
Cutting back on energy consumption is one of the first things human beings can control in response to a price shock. It is a natural, instinctive reaction. But the role of such voluntary conservation will be a minor one if the current conflict, which began with an attack on Iran by Israel and the US on 28 February, proves to be prolonged. The International Energy Agency has already rated this as the biggest ever oil-supply disruption, a sobering assessment that dwarfs previous crises. What is needed now are hard, uncomfortable decisions on government budgets and on interest rates. Fiscal bosses and central banks will naturally be reluctant to deviate greatly from the policy paths they had charted before the fighting began. They might get lucky, and the conflict might end soon, as the White House has optimistically suggested. If that happens, the global economic impact may not be huge. Inflation, which policymakers have only recently wrestled down from its post-COVID highs, need not flare up dramatically, and a sharp global downturn could be avoided. The current economic expansion has, after all, withstood the US tariffs imposed almost a year ago.
But it is far better to plan for a prolonged crisis than to simply hope for a short one. Forthright indications from central banks and finance ministries that they will do whatever is necessary to contain inflation and maintain stability is the absolute minimum required to calm markets and maintain confidence. The duration of the conflict will ultimately determine the path of the world economy, and on that path hinge the fortunes of Asia’s export-dependent powerhouses. A protracted war means sustained high energy prices, which means sustained inflationary pressure, which means higher interest rates for longer, which means slower growth.
Despite Asia’s truly impressive financial and commercial advances since the 1973 war that produced the first oil shock, the region remains dependent in significant ways on events far from its shores. This crisis is a necessary, if painful, wake-up call to the “Asia rising” narrative. It is a stark reminder that even the most dynamic and fast-growing economies are not immune to geopolitical turbulence in distant parts of the world. The global economy is interconnected, and a shock in the Strait of Hormuz reverberates instantly in the factory floors of Shenzhen and the trading desks of Mumbai.
There are, however, important differences between the current situation and the 1970s that offer some grounds for cautious optimism. The United States today is the world’s largest oil producer and a net energy exporter, a position of strength thanks to the shale revolution. This dramatically reduces its vulnerability to supply shocks. Most central banks around the world today enjoy a significant degree of operational independence that was rare in the 1970s, when monetary policy was often subservient to political whims. And while inflation did jump sharply in the aftermath of the COVID-19 pandemic, it never reached the double-digit heights experienced half a century ago. The starting point, while challenging, is less dire.
Nevertheless, central banks need to call this moment exactly right. A slew of key monetary authorities are slated to meet this week, including the US Federal Reserve, the European Central Bank, and the Bank of Japan. At this very early stage in the crisis, expressing an absolute, unwavering commitment to containing inflation should suffice. Concrete actions, such as interest rate hikes, can follow later if required. What has no place in this delicate environment is panic, alarmism, or a response that strikes investors as knee-jerk and poorly considered. Only the Reserve Bank of Australia, which has been loudly and persistently fretting about inflation for some months, is currently forecast to hike rates imminently.
One thing ought to be immediately apparent to all observers: for the time being, rate cuts are entirely off the cards. The era of easy money is firmly behind us. The duration of any pauses in rate hikes is likely to be much shorter than previously anticipated. Bond markets have already sold off significantly on fears that a prolonged conflict will reignite inflationary pressures. In Europe, there is serious and growing talk among officials about the lessons of 2021-22, when rates were widely perceived to have been too slow to rise in response to post-pandemic inflation. This concern is legitimate, given the ECB’s primary mandate of price stability. But tightening too hastily in response to a supply shock risks tipping a fragile economy into recession. The balance is delicate. A growing number of economists now predict that the Bank of Japan will lift borrowing costs in April, much sooner than previously expected. Further rate reductions by the Fed anytime in the near future are increasingly difficult to justify.
A whole generation of central bankers grew up with the moral of the 1970s deeply entrenched in their professional DNA: that policy was indecisive and too slow to act in the years after the Yom Kippur War, allowing inflation to become embedded. But what would have been the ideal approach at that time? As former Fed Vice Chair Alan Blinder notes in his book, *A Monetary and Fiscal History of the United States, 1961-2021*, hindsight is always clearer than foresight. Blinder points out that the term “supply shock” wasn’t even popularized until later that decade. And inflation wasn’t the only scourge; the 1973-75 recession was a nasty one, causing misery that spread well beyond America’s borders. There were no easy answers then, and there are none now.
Ultimately, back in the 1970s, what was needed was a set of clear-sighted, consistent monetary and fiscal settings that recognized the fundamental shift in the global economic order. Ford wore his WIN badge himself, a symbol of his personal commitment. When it came to George Harrison, the Beatles guitarist returned the favour with a button that said ‘Om,’ a mantra for inner peace. The 38th occupant of the White House tried valiantly to set an example, but the global economy didn’t get very far on lapel pins and gardening tips. Today, central banks and finance ministers need far more than gimmicks. Even if, as Harrison famously sang, all things must pass, the substance of policy has rarely mattered more. The time for symbolic gestures is over. The time for hard, clear-eyed, and decisive action is here.
Questions and Answers
Q1: What was the “Whip Inflation Now” (WIN) initiative, and why does the author consider it a gimmick?
A1: The WIN initiative was President Gerald Ford’s 1970s response to soaring oil prices, encouraging Americans to conserve energy by growing vegetables, carpooling, and using cold water for laundry. The author calls it a gimmick because it was more about public relations and creating a sense of shared purpose than a serious substitute for effective monetary or fiscal policy.
Q2: According to the article, what is the primary risk of relying on conservation calls (like using less AC) during an energy crisis?
A2: The primary risk is that such measures are a distraction from the hard, necessary policy decisions. At best, they are a short holding pattern. They are not a substitute for the “hard decisions on budgets and interest rates” that are required to manage inflation and maintain economic stability during a prolonged supply shock.
Q3: What are the key differences between the 1970s oil shock and the current crisis that offer some grounds for optimism?
A3: The article identifies three key differences:
-
US Energy Independence: The US is now the world’s largest oil producer and a net exporter, unlike in the 1970s.
-
Central Bank Independence: Most central banks today have far greater operational independence from political pressure.
-
Lower Starting Inflation: While post-COVID inflation was high, it never reached the double-digit levels of the 1970s.
Q4: What immediate action does the author recommend for central banks in the early stages of the crisis?
A4: The author recommends that central banks express an “absolute, unwavering commitment to containing inflation” through clear communication. This should suffice for now. Concrete actions, like rate hikes, can follow if required. Panic or knee-jerk responses must be avoided.
Q5: What is the author’s concluding message about the substance of policy versus gimmicks?
A5: The author concludes that the time for symbolic gestures (like lapel pins) is over. The current crisis requires “clear-sighted, consistent monetary and fiscal settings” and “hard, clear-eyed, and decisive action.” The substance of policy has rarely mattered more than it does now.
