Stagflation is an economic state in which inflation and recession occur simultaneously. Inflation occurs when the prices of goods and services increase at a rate higher than the increase in the value of currency. Thus, the value of currency falls. A recession occurs when there is a significant decline in the economy for a period of at least six months. In an attempt to stimulate the economy, the federal government put more currency into circulation by lowering interest rates and increasing borrowing. However, this strategy caused inflation, which lowered Americans' buying power. Wages rose briefly but could not keep up with the rise in prices. At the same time, unemployment began to rise. In response the government issued wage and price controls to keep prices and wages down, in an attempt to make goods more affordable and increase the ability of employers to hire and retain employees.
To compound the problem, a brief oil embargo resulting from a conflict in the Middle East in 1973 caused oil prices to quadruple. Because the increase in oil prices made it more expensive to manufacture and ship goods, there was a 10 percent increase in the prices of goods in 1974. Unemployment continued to rise, and by May 1975 the unemployment rate had reached 9 percent. Although the employment situation improved, stagflation continued into the early 1980s.
Decline of Manufacturing in the Rust Belt
The term Rust Belt refers to areas in the Northeast, Midwest, and Great Lakes region that suffered a marked decline in manufacturing in the late 1970s. The decline was rooted in the trade practices of the 1950s, when there was little competition and subsequently little incentive to be innovative. As a result of these practices, the automobile and steel industries in the region had come to be dominated by only a few companies. Successful lobbying by these manufacturers enabled them to stifle competition. The lack of competition allowed automobile manufacturers to avoid spending money to update production methods and develop products that would be competitive with foreign manufacturers. At the same time, strong labor unions were able to keep workers' wages high, and steel imported from countries without minimum wages became cheaper to import.When foreign imports hit the market in larger numbers and foreign manufacturers began setting up factories in southern states, jobs in the Northeast and Great Lakes region were lost, and the economy declined. Chrysler, the third-largest automobile manufacturer in the United States, was able to avoid bankruptcy in the 1970s only through loans guaranteed by the government. Between 1950 and 1980 the share of manufacturing jobs in the Rust Belt compared to the rest of the country fell by 34 percent.