Eyes on the Price
| Author | Prakash Loungani |
| Position | Advisor, IMF Research Department |
| Pages | 52 |
Page 52
The Past and Present of American Affluence Random House, New York, 2008, 336 pp., $26 (cloth).
The U.S. Federal Reserve-"the Fed"-has committed two major blunders in its 95-year existence. The Fed worsened the Great Depression of the 1930s by refusing to inject liquidity into a global economy thirsting for it. And in the 1970s, the Fed permitted the Great Infl ation to unfold by not soaking up liquidity from a global economy drowning in it. The Great Depression looms large in public consciousness, but the Great Infl ation has faded from memory.
Robert Samuelson's book is a successful attempt to reclaim the "lost history" of the Great Inflation, an episode he regards as the U.S. government's "greatest domestic policy blunder [emphasis in original]" in the post-World War II era. But the book is much more than the story of the conquest of inflation; it provides one of the best narratives of U.S. and global economic history since 1960.
From 1960 to 1979, annual U.S. infl ation increased from less than 1/2 percent to nearly 13 1/2 percent. Price increases, says Samuelson, were "like the rain that never stopped." At the time, U.S. citizens protested vehemently against this rise in infl ation. And in public opinion polls of the time, infl ation was described as "more upsetting" than either the Vietnam War or the Watergate scandal.
Samuelson argues that allowing inflation to drift into double digits had devastating consequences for the U.S. economy in the 1970s. High inflation "incontestably destabilized the economy, leading to four recessions of growing severity."
High inflation-and the accompanying high and volatile interest rates-stunted the increase in living standards by lowering productivity growth, causing stagnation in the stock market, and leading to a series of debt crises that affected "American farmers, the U.S. savings and loan industry, and developing countries."
Was the rain that never stopped simply a run of bad luck? No, says Samuelson, it was the "perverse consequence of well-meaning policies, promoted by some of the nation's most eminent academic economists."
In the 1950s and early 1960s, economists came to believe that there was a stable inverse relationship between inflation and unemployment, implying that unemployment could be reduced by...
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