How Inflations Shaped Economics in Today's U.S.
The Good: A useful reprise of the economic and political history of the past half-century.
The Bad: There's lots that's familiar here—and too much pessimism.
The Bottom Line: Resonance between events of the past and those of today makes for stimulating reading.
The Great Inflation and Its Aftermath:The Past and Future of American AffluenceBy Robert J. SamuelsonRandom House; 309 pp.; $26
Some years, like some poets and politicians and some lovely women, are singled out for fame far beyond the common lot, and 1929 was clearly such a year. Like 1066, 1776, and 1914, it is a year that everyone remembers." These opening lines to economist John Kenneth Galbraith's 1954 classic, The Great Crash 1929, echo today. We all sense that 2008 is another demarcation year—especially in the U.S.—as we experience the worst financial crisis since the Great Depression, a $700 billion federal bailout of the financial system, the quasi-nationalization of the country's nine largest banks, and the election of its first African American President.
Yet Robert Samuelson, economics columnist for Newsweek and The Washington Post, wants us to cast our minds back to the Great Inflation, which cursed the nation from the late 1960s through the early '80s. A case of bad timing? At first glance, perhaps. But The Great Inflation and Its Aftermath: The Past and Future of American Affluence is a useful reprise of the economic and political history of the past half-century. Even more important, it's a timely reminder that, every once in a great while, the economy is transformed in tandem with politics and society. "Inflation and its fall shaped, either directly or indirectly, how Americans felt about themselves and their society; how they voted and the nature of their politics; how businesses operated and treated their workers; and how the American economy was connected with the rest of the world," writes Samuelson.
REAGAN EMBRACED RECESSION
Unfortunately, much of the book's material and argument will be familiar to most business readers. What's more, Samuelson's is a Washington-centric story that underestimates the role of innovation in propelling economic growth and change. And the volume's underlying economic pessimism isn't persuasive: Americans, says the author, need to overcome their Pollyannaish "entitlement" mentality and reduce expectations. But there's potentially a very different takeaway: Through thick and thin, the U.S. economy and political system have shown themselves to be remarkably resilient.
There's much resonance between the events that Samuelson describes and current developments. The author notes that Ronald Reagan might not have gained the Oval Office were it not for the widespread economic discontent caused by inflation. (Sound familiar?) The consumer price index (CPI) had reached double digits in the late 1970s, and it appeared that President Jimmy Carter and his Administration could do nothing to stop the rise in prices. Reagan, who understood that a recession was necessary, never wavered as Federal Reserve Board Chairman Paul Volcker squeezed the life out of the economy. By the time Reagan left office, fears of inflation had subsided, disinflation had set in, and productivity and economic growth were on the upswing. Both Volcker and Reagan "believed, mostly as a matter of faith, that high inflation was shredding the fabric of the economy and of American society. The country could not thrive if it persisted," writes Samuelson. "Buttressed by these beliefs, they broke with the past."
As inflation subsided, long-term interest rates fell from double-digit levels to the low single digits. The drop in rates helped fuel strong increases in consumer spending and asset values. The overall economy became more stable and productive, the author notes, but inequality and worker insecurity rose. The business cycle moderated, but finance became increasingly reckless and bubble-prone. And inflation fears never really subsided, as each upward squiggle in the CPI was greeted with widespread horror. Indeed, as he completed his book this past summer, Samuelson says he himself wasn't sure if the recent uptick in inflation was "a prelude to something much worse or simply an unfortunate aberration."
Samuelson believes in the power of ideas, but he doesn't put much stock in the thoughts of economists. He says they peddle optimism instead of hard-nosed realism to an entitlement-besotted populace. Take the experience of the '50s through the '70s. Then, he says, economists sold the Keynesian notion that the business cycle could be fine-tuned into insignificance, wrongly assuring the populace and policymakers that the problem of unemployment could be solved. Instead, the country ended up with roaring inflation. The same over-optimism, many observers believe, characterizes the profession's embrace of deregulation and free markets. Want to see the effects of free-market prescriptions? Read today's headlines, they say.
But Samuelson regards economists as having more power than they really do. Hence his worries about the reform ideas now gaining currency, including notions of how to bolster the economic security of the middle class, provide universal health coverage, and curb global warming. The fervor bothers him because it fails to account for the rising cost of the welfare state, enormous household debt burdens, and the "twilight of Pax Americana."
To be sure, those are critical, even discouraging, matters. But the lesson of the Great Inflation isn't that we must adopt hair-shirt economics. Quite the opposite: Ronald Reagan wasn't a pessimist. Neither was Paul Volcker, despite his dour demeanor. Although they came out of that period, the early entrepreneurs of Silicon Valley and the pioneers of the Internet were undaunted. No one doubts that the current economic downturn will be painful or that unemployment will skyrocket. But we shouldn't sell the economy short or underestimate the ability of America's entrepreneurs and political leaders to adapt.