Book Notes (Double Feature!): The Great Inflation and Its Aftermath, by Robert Samuelson

What the heck is inflation? And why is it important? Does it matter for my daily life – getting a job, finding good schools, or figuring out what roads to fix?

In the second part of this two-part review, I look at two books that detail the historical development of money and federal policy and why they are relevant for understanding today’s economic climate.  In a time when many people are having in finding or keeping work – the 99’ers, as 60 minutes described them last week – understanding where money comes from and how economies work is critical not just for policymakers – but for everyone.

In book two, “The Great Inflation and Its Aftermath” (by Robert Samuelson), Samuelson looks at federal policies in relation to the Great Inflation of the 1970s. Ferguson and Samuelson both offer relatively conservative approaches for understanding federal policy and provide a framework for understanding how local economic decisions fit into the larger political picture.

Book 2: The Great Inflation and Its Aftermath: The Past and Future of American Affluence

The Great Inflation describes more recent U.S. economic history — the rise and fall of double-digit inflation in the second half of the 20th century — demonstrating that economic growth is fundamental to quality of life and that government intervention can often have complex, unintended results.

Samuelson tells the story of the “new economics” of the post-World War II era in the form of the Phillips Curve, which was the idea that higher inflation could be traded for lower unemployment, or vice versa. Under this doctrine, the Kennedy administration attempted to exchange higher inflation for lower unemployment. By striving towards “perfect employment” (the idea that only 4% of the working world would be out of a job at any given moment — considered perfect because it accounts for people changing jobs or between jobs but who aren’t permanently unemployed) – Samuelson details the consequences of striving to have too much of a good thing: rapidly increasing prices, also known as inflation.

Over time, however, the Johnson, Nixon, and Carter administrations experienced stagnated growth and ballooning inflation; keeping unemployment below four percent was unattainable because the cost was ever-increasing inflation. Inflation – the rapid rise in the cost of goods and services in a relatively short time  – is considered an economic evil because it erodes your consumer purchasing power. Over time, your dollars buy less – and your confidence in the marketplace is weakened. Thus, the view that good economic policy promoted “full employment” led to spiraling inflation and eroding prices, consumer confidence, and morale.

The Reagan administration effectively curbed inflation, Samuelson argues, when the Federal Reserve suddenly increased interest rates, sending the economy into a deep recession that lasted through 1984. While ultimately ending the consequences of inflation, the Reagan administration was blamed for inducing a painful recession. Which is worse – inflation or a recession?  Samuelson suggests that the social cost of inflation was likely greater than the effects of the recession.

Samuelson further argues that too much meddling — i.e., “efforts to remedy obvious economic shortcomings” or “the curse of good intentions” — can actually make matters worse. Sweeping reform or change is difficult to pull off successfully. The only certainty of capitalism and democratic governments, says Samuelson, is uncertainty, and the misinformed policies of several administrations led to greater and greater inflation. After “the Great Inflation” ended, the U.S. entered an age of unprecedented affluence, followed by massive economic expansion and income growth.

Quite interestingly, Samuelson concludes by predicting that the U.S. economy will soon enter a period of “affluent deprivation,” defined as a “period of slower economic growth that doesn’t satisfy what people regard as reasonable private wants and public needs.” Published in 2008, Samuelson’s predictions about the state of the economy are perhaps visible today.

Conclusions?

Both books iterate that the complex cog of capitalism has historically functioned rather well despite the cyclical recessions inherent in the system. The authors suggest that too much governmental interference often has unintended consequences, regardless of how virtuous the intentions.

The good (and bad) news is that the future is uncertain; we don’t know the complex outcomes of our economic, social, and political developments. “So many factors (technology, management, competition, workers’ skills) influence productivity (so that) the future is always uncertain,” writes Samuelson. He suggests that “skepticism ought to qualify and restrain our reformist impulses,” and our planning approaches and methodologies should likewise be cautious and pragmatic. Policymakers hoping to promote or “fix” economic conditions must consider an important question: What are the unanticipated consequences?

Samuelson’s The Great Inflation highlights a topic relatively ignored in both economics as well as policy. Yet The Great Inflation suffers from an overly narrow approach to history, and the story of inflation fails to include the influence of Alan Greenspan in the 1990s and the technology/finance bubbles and bursts at the turn of the century. Inflation is still relevant and pervasive, affecting home prices, businesses, and finance today. In all of these areas, Samuelson’s message — be cautious of too much governmental influence — is still an important one.

The two books in this review are highly relevant in that they provide a historical context for understanding federal legislation and the current economic crisis, although perhaps neither book offers quite enough detail to set the stage for concrete policy or decision-making in today’s world. Read Samuelson’s book for an interesting perspective on a relatively ignored topic in recent history – inflation and the influence of changing inflation on economic policy in the 1950s through 1990s.

___

These articles are adapted from a longer review written in 2009 for The New Planner, a publication by the American Planning Association.

The Great Inflation and Its Aftermath: The Past and Future of American Affluence, by Robert J. Samuelson. Random House, 2008