During the 1960s, the primary goal of economic policy was to encourage growth and keep unemployment low. But by the early 1970s, the economy started to suffer from stagnation, high unemployment, and inflation, coupled with stagnant economic growth. This presented economic policymakers with a new and perplexing dilemma since unemployment and inflation usually do not coexist.

The problem with stagflation was the pain of its options. To attack inflation by reducing consumer purchasing power only made unemployment worse. The other choice was no better. Stimulating purchasing power and creating jobs also drove prices higher. Not surprisingly, economic policy during the 1970s was a nightmare of confusion and contradiction.

By 1971, pressures produced by the Vietnam War and federal social spending, coupled with the increase in foreign competition, pushed the inflation rate to 5 percent and unemployment to 6 percent. President Richard Nixon responded by increasing federal budget deficits and devaluing the dollar in an attempt to stimulate the economy and to make American goods more competitive overseas. Nixon also imposed a 90-day wage and price freeze, followed by a mandatory set of wage-price guidelines, and then, by voluntary controls. Inflation stayed at about 4 percent during the freeze, but once controls were lifted, inflation resumed its upward climb.

In 1974, during the first oil embargo, inflation hit 12 percent. Gerald Ford, the new president, initially attacked the problem in a traditional Republican fashion, by tightening the money supply by raising interest rates and limiting government spending. In the end, his economic program proved to be no more than a series of ineffectual wage and price guidelines monitored by the federal government. In the subsequent recession, unemployment reached 9 percent.

When Jimmy Carter took office in January 1977, unemployment had reached 7.4 percent. Carter responded with an ambitious spending program and called for the Federal Reserve (the Fed) to expand the money supply. Within two years, inflation had climbed to 13.3 percent.

With inflation getting out of hand, the Federal Reserve Board announced in 1979 that it would fight inflation by restraining the growth of the money supply. Unemployment increased, and interest rates rose to their highest levels in the nation's history. By November 1982, unemployment hit 10.8 percent, the highest since 1940. One out of every five American workers went some time without a job.

Along with high interest rates, the Carter administration adopted another weapon in the battle against stagflation: deregulation. Convinced that regulators too often protected the industries they were supposed to oversee, the Carter administration deregulated air and surface transportation and the savings and loan industry. The effects of deregulation are still hotly contested. Rural towns suffered cutbacks in bus, rail, and air service. Truckers and rail workers lost the economic benefits of regulation. Travelers complained about rising airfares and congested airports. Cable TV viewers resented rising rates. Champions of deregulation, however, argued that the policy increased competition, stimulated new investment, and forced inefficient firms either to become more efficient or to close down.

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