SYNOPSIS: Why aren't we reliving 1979? Largely due to restrained workers and a less dependent economy

According to the script, we were supposed to spend this first year of the new millennium celebrating the glories of the new economy. If things did go wrong, they were supposed to go wrong in some appropriately futuristic fashion — the Y2K bug would shut down the world, or we would have an exotic financial crisis involving e-commerce. (Business Week's economics editor has just published a book titled "The Coming Internet Depression.")

But instead, it seems, we're gonna party like it's 1979. Oil prices have already soared, and the news from the Middle East may send them higher still. Is stagflation about to stage a comeback?

The answer (knock on silicon) is probably not. If oil prices continue to rise, they will cut into the huge gains that the U.S. economy has achieved over the past few years. But there are good reasons to think that a replay of the grim years that followed the 1979 oil crisis isn't likely.

For one thing, so far the shock to the system hasn't been that large, because we were spending so little on oil to begin with. In 1978, before the last oil crisis, the United States spent almost 2 percent of its G.D.P. on oil imports; in 1998 we spent only slightly more than half a percent. The rise in oil prices since then has made the nation as a whole about 1 percent poorer than it would otherwise have been. That's not a trivial number. (Fuzzy yes, trivial no.) But in an economy whose workers become 3 or 4 percent more productive each year it should be a manageable burden.

Of course, "should be" is not the same as "will be." Twenty years ago, the hit to the economy from higher oil prices was only about twice as large as what we're seeing now. But the damage was multiplied many times over, because higher oil prices fed an inflationary spiral: higher prices led to higher wages, which led to further price increases, and onward and upward. To break this vicious circle the Fed raised interest rates, and plunged the economy into the worst recession since the 1930's.

The good news is that it's a different economy these days, and probably much less vulnerable to a wage- price spiral.

What was so deadly in 1979 was the prevalence of "indexation": wage settlements linked to inflation. Many wage contracts contained explicit COLA's — cost-of-living adjustments — that automatically raised wages in tandem with the consumer price index. And even where COLA's weren't written into the contract, the preceding decade of inflation had made workers highly sensitive to rising prices, and employers were quick to raise wages (and their own prices) whenever they saw the cost of living jump. So when a crisis in the Middle East sent oil prices sky-high, and consumer prices followed, it quickly translated into double-digit inflation across the board.

Nowadays, however, explicit COLA's are the exception rather than the norm. Partly this reflects the changing nature of labor relations. Only about one private-sector worker in 10 now belongs to a union, and the unions are weaker, too — which means that they are no longer in a position to get ironclad protection for their members' purchasing power.

Equally important, after a decade of low inflation the implicit indexation that used to be prevalent in our economy — the hair-trigger response to any sign that inflation was about to cut into earnings — has vanished. By and large we have gone back to thinking that a dollar tomorrow is as good as a dollar today; and to some extent believing makes it so.

Does this mean that we are completely safe from an oil-fed economic crisis? Of course not. The biggest danger is that the Fed — or its counterpart overseas, the European Central Bank — will raise interest rates out of fear that 2000 will play like 1979, and in the process provoke a gratuitous recession. But I think the Fed is smarter than that. (I'm not so sure about the E.C.B.)

Still, this crude shock ought to be a warning to us. It shows that a country ought to follow responsible monetary and fiscal policies in good times, because that leaves it better able to handle the bad times when they come. And it shows how dangerous it is to base economic plans on the assumption that the good times will never end. Sound like anyone you've seen on TV lately?

Originally published in The New York Times, 10.15.00