The Great Inflation and Its Aftermath: The Past and Future of American Affluence
It’s a giant gap in our history. The Great Inflation, argues award-winning columnist Robert J. Samuelson in this provocative book, was the worst domestic policy blunder of the postwar era and played a crucial role in transforming American politics, economy, and everyday life–and yet its story is hardly remembered or appreciated. In these uncertain economic times, it is more imperative than ever that we understand what happened in the 1960s and 1970s, lest we be doomed to repeat our mistakes.From 1960 to 1979, inflation rose from barely more than 1 percent to nearly 14 percent. It was the greatest peacetime inflationary spike in this nation’s history, and it had massive repercussions in every area of our lives. The direct consequences included Ronald Reagan’s election to the presidency in 1980, stagnation in living standards, and a growing belief–both in America and abroad–that the great-power status of the United States was ending. The Great Inflation and Its Aftermath traces the origins and rise of double-digit inflation and its fall in the brutal 1981-82 recession, engineered by the Federal Reserve under then-chairman Paul Volcker and with the staunch backing of Reagan.
But that is only half the story. The end of high inflation triggered economic and social changes that are still with us. The stock market and housing booms were both direct outcomes; American business became more productive–and also much less protective of workers; and globalization was encouraged.
We cannot understand today’s world, Samuelson contends, without understanding the Great Inflation and its aftermath. Nor can we prepare for the future unless we heed its lessons. This incisive and enlightening book will stand as the authoritative account of a watershed event of our times.
Praise for The Great Inflation and Its Aftermath
"Newsweek and Washington Post columnist Samuelson is one of the rare journalists who debates politics and economics with a healthy skepticism toward conventional wisdom. Politicians would do well to study [the errors] the past that teach that choosing quick fixes only delays and worsens the inevitable.”– Booklist
"If you want to understand the economic events of the last half century, you should read. . . Robert Samuelson's The Great Inflation and Its Aftermath: --U.S News & World Report.
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Editorial Reviews
From Publishers Weekly
Samuelson, a columnist for the Washington Post and Newsweek, presents a highly readable and thought-provoking discussion of the crippling inflation that hit the United States from the mid-1960s to 1982, resulting in four recessions. According to the author, the culprit of inflation was the collective failure of communication and candor by the nation's economists; their bad advice became bad policy as both parties in the White House propagated economic ignorance that led to the Great Inflation. The memory of the Great Depression led to a full employment obsession—among other dangerous myths and stereotypes that were the major barrier to economic convalescence—culminating in a stalemate that was only lifted during the accidental alliance between Reagan and Federal Reserve chairman Paul Volcker. While business cycles seem milder now (The Great Moderation), the author argues that the cycle could repeat. The book's detailed sketches of the working of the Federal Reserve, stock market and corporate America give a comprehensive picture of the economy, which Samuelson describes as a social, political, and psychological mechanism encompassing ideas and values as much as trade and finance. (Nov.)
Copyright © Reed Business Information, a division of Reed Elsevier Inc. All rights reserved.
About the Author
Robert J. Samuelson is a columnist for Newsweek and The Washington Post. He began his journalism career as a reporter for the Post in 1969. He is the author of The Good Life and Its Discontents: The American Dream in the Age of Entitlement, 1945-1995 and Untruth: Why the Conventional Wisdom Is (Almost Always) Wrong, a collection of his columns. He lives in Bethesda, Maryland, with his wife, Judy Herr. They have three children.
Excerpt. © Reprinted by permission. All rights reserved.
Chapter 1
The Lost History
I
History is what we say it is. If you asked a group of scholars to name the most important landmarks in the American story of the past half century, they would list some or all of the following: the war in Vietnam; the civil rights movement; the assassinations of John Kennedy, Robert Kennedy and Martin Luther King, Jr.; Watergate and President Nixon’s resignation; the sexual revolution; the invention of the computer chip; Ronald Reagan’s election in 1980; the end of the Cold War; the creation of the Internet; the emergence of AIDS; the terrorist attacks of September 11, 2001; and the two wars in Iraq (1991 and 2003). Looking abroad, these scholars might include other developments: the rise of Japan as a major economic power in the 1970s and 1980s; the emergence of China in the 1980s from its self-imposed isolation; and the spread of nuclear weapons (to China, India, Pakistan and others). But missing from any list would be the rise and fall of double-digit U.S. inflation. This would be a huge oversight.
We have now arrived at the end of a roughly half-century economic cycle dominated by inflation, for good and ill. Its rise and fall constitute one of the great upheavals of our time, though one largely forgotten and misunderstood. From 1960 to 1979, annual U.S. inflation increased from a negligible 1.4 percent to 13.3 percent. By 2001, it had receded to 1.6 percent, almost exactly what it had been in 1960. For this entire period, inflation’s climb and collapse exerted a dominant influence over the economy’s successes and failures and much more. 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. Although no one would claim that inflation’s side effects were the only forces that influenced the nation over these decades, they counted for more than most people including most historians, economists and journalists think. It’s impossible to decipher our era, or to think sensibly about the future, without understanding the Great Inflation and its aftermath.
Stable prices provide a sense of security. They help define a reliable social and political order. They are like safe streets, clean drinking water and dependable electricity. Their importance is noticed only when they go missing. When they did in the 1970s, Americans were horrified. During most of these years, large price increases were the norm, like a rain that never stopped. Sometimes it was a pitter-patter, sometimes a downpour. But it was almost always raining. From week to week, people couldn’t know the cost of their groceries, utility bills, appliances, dry cleaning, toothpaste and pizza. People couldn’t predict whether their wages and salaries would keep pace. People couldn’t plan; their savings were at risk. And no one seemed capable of controlling inflation. The inflationary episode was a deeply disturbing and disillusioning experience that eroded
Americans’ confidence in their future and their leaders.
There were widespread consequences. Without double-digit inflation, Ronald Reagan would almost certainly not have been elected president in 1980 and the conservative political movement that he inspired would have emerged later or, conceivably, not at all. High inflation incontestably destabilized the economy, leading to four recessions (those of 1969-70, 1973-75, 1980 and 1981-82) of growing severity; monthly unemployment peaked at 10.8 percent in late 1982. High inflation stunted the increase of living standards through lower productivity growth. And high inflation caused the stock market to stagnate the Dow Jones Industrial Average was no higher in 1982 than in 1965 and led to a series of debt crises that afflicted American farmers, the U.S. savings and loan industry and developing countries.
If inflation’s legacy were nothing more, it would merit a sizable chapter in America’s post-World War II narrative. But there is much more. Declining inflation--"disinflation"--led to lower interest rates, which led to higher stock prices and, much later, higher home prices. This disinflation promoted the past quarter century’s prosperity. In the two decades after 1982, the business cycle moderated so that the country suffered only two relatively mild recessions (those of 1990-91 and 2001), lasting a total of sixteen months. Monthly unemployment peaked at 7.8 percent in June 1992. As stock and home values rose, Americans felt wealthier and borrowed more or spent more of their current incomes. A great shopping spree ensued, and the savings rate declined. Trade deficits--stimulated by Americans’ ravenous appetite for cars, computers, toys, shoes--ballooned. Paradoxically, this prolonged prosperity also helped spawn complacency and carelessness, which ultimately climaxed in a different sort of economic instability and the financial turmoil that assaulted the
economy in 2007 and 2008.
The very belief in the permanence of economic growth undid economic growth. Initially triggered by falling inflation and interest rates, the upward march first of stock prices and then of home values induced speculative dizziness. People began to believe that prices of stocks and homes could only rise. Once that intoxicating mind-set took hold, prices rose to silly and perilous heights, leading to "bubbles" that burst in 2000 (for stocks) and 2007 (for homes). Home loans were extended to buyers with weak credit and with little or no requirement for down payment. The presumption that homes would always be worth more tomorrow than today provided a false sense of security to the lenders and rationalized credit standards that, with hindsight, seemed self-evidently doomed. When these "subprime" mortgages began to default in large numbers, the homebuilding boom ended, housing prices fell, financial institutions--banks, investment banks--suffered large losses on securities backed by mortgages, and the economy tipped into (or teetered on the edge of ) another recession.*
The significant point for our story is that the economy’s present problems are yet another unappreciated consequence of inflation and its subsequent decline. The immediate cause of the housing collapse lay in lax lending practices; but the backdrop and inspiration for those lax practices were the expectations of perpetually rising real estate values that were sown in the climate of disinflation and falling interest rates. So it is with much else about our economic system that we now take for granted: The connections to inflation are there, but we simply refuse to see them. Take, for example, the way companies treat workers. In the first decades after World War II, government and big business joined in an unwritten alliance. Government promised to control the business cycle, to minimize or eliminate recessions. Big companies pledged to raise living standards and provide economic security for worker--safe jobs, adequate health insurance and reliable pensions.
But when inflation overwhelmed the government’s commitment to manage the business cycle, the implicit social contract broke down. The 1980s became a watershed in changed corporate behavior. If companies couldn’t raise prices, they would (and did) cut costs. Layoffs, "restructurings" and "buyouts" for early retirees became more widespread and acceptable. "Capitalism," a word that had essentially disappeared from common usage in the early postwar decades, reentered the popular vocabulary. The result was a paradox: Although the overall economy grew more stable after 1982, individuals’ sense of insecurity increased, because companies were less bound by the norms of earlier postwar decades to preserve jobs and shield workers from disruptive changes. The "new capitalism" controlled inflation in part by breeding anxiety that kept wages and prices in check. It also tolerated greater inequality-- growing gaps between the rich, the middle class and the poor.
Or consider "globalization": the thickening integration of national economies through trade, finance and information flows. Although we don’t connect that with inflation, we should. Had the U.S. economy remained as in the 1970s, beset by seemingly intractable inflation and ever-worsening recessions, America’s confident championing of globalization in the 1980s and 1990s wouldn’t have happened. American leaders wouldn’t have attempted it; and even if they had, no one would have listened. The restored stability and vitality of the economy, which stemmed from disinflation, empowered U.S. leaders to pursue internationalist policies. The same forces also gave the dollar a new lease on life in its role as the primary global currency used in international business. That companies and individuals thought they could rely on the dollar to buy and sell goods and as a store of wealth promoted both trade and cross-border finance.
Inflation is an example of how economics affects almost everything else, and the American story of the past half century can’t be realistically portrayed without recognizing its central role. Much of what we take as normal and routine either originated in the inflationary experience or was decisively influenced by it. The great shopping spree, the reemergence of capitalism and increased globalization are three examples. But we have now come to the end of this period. Just what the next economic cycle will bring is an open question that, in some ways, will involve dealing with the sequels of many of the effects of the Great Inflation. The great shopping spree has ended. What will replace it? Globalization seems threatening to many Americans, as does the new capitalism. Will we shape these forces to our advantage or find ourselves whipsawed by them? Can we maintain acceptabl...
Customer Reviews
The Great Inflation and its Aftermath
I was very disappointed in this book and wish I had never bought it.
While Samuelson does make some strong points, he is definitely an economics neophyte, especially when he discusses capitalism.
If you enjoy the writings of Thomas Sowell or Walter Williams, you'll too be very disappointed. My recommendation: don't waste your time or money on this book.
Great inflation, interesting. Aftermath, not so much.
Don't ignore the title here - these really are two different works sharing a single binding. The thesis of the "Great Inflation" portion of this book - namely, the potentially ruinous effects that even the best of intentions can have - is a compelling, educational read. The miscalculations by the nation's best and brightest throughout the 60's and 70's is ably chronicled. Mr. Samuelson has performed a real service in reminding us of a period in our relatively recent history that we have inexplicably forgotten. The insights into the nature of a democratic, capitalist society - indeed, the insights into human nature itself - are fascinating.
In reading the early chapters of this beek there are obvious parallels to our current crisis to be drawn, but there are no easy answers. Is our government's plan to print massive amounts of money the right response to the current economic crisis? Have we learned the right lessons from the Great Depression? Or are we laying the groundwork for a new great inflation? Though these questions aren't explicitly raised in the book - it went to print before the full dimensions of our economic calamity were evident - these thoughts are provoked nonetheless. That's the brilliance of the first part of the book.
After describing the origins and the effects (economic, political, spiritual, psychological) of the Great Inflation the author goes on to explain how (to use the common, somewhat paraplegic phrase) its "back was broken". He credits Fed Chairman Paul Volcker with uncommonly good sense and perseverence, and Ronald Reagan with exceptional political courage. I'm not necessarily a fan of Ronald Reagan's, but the author makes a good case. As he says, it is unlikely that any other president in recent memory would have made the unpopular choices - namely, initiating a very sharp recession - needed to tame inflation. This is well-written and convincingly argued.
Mr. Samuelson goes on to argue that the economic growth we experienced from the 80's onward would have been compromised by persistent inflation, and he is undoubtedly right. Had he left it at that, I would have nothing but praise for this book. However, he then spends a great deal of time extolling the virtues of the harsher brand of capitalism that emerged during the Reagan years and defending the excesses of the "new order". It is here, in my opinion, that he loses the scholarly objectivity that characterizes the early portion of his book. He seems to abandon his disciplined, coherent thesis in order to indulge in wide-ranging musings on the state of the world today. His disparaging appraisal of the "welfare state", his disdain for Hispanic immigrants, and his nihilism with respect to global warming all left me cold. These things don't strike me as particularly relevant to the subject matter, and the arguments the author made were neither interesting nor convincing. At one point Mr. Samuelson even rants against government restrictions regarding oil extraction and their effects on global commodity prices. He makes no effort to explain how the U.S. can, with so little of the world's oil reserves under its soil, affect global oil prices on the supply side. You can almost hear him chanting "drill, baby, drill" at a Sarah Palin rally.
I hadn't read any of Mr. Samuelson's work before, and I really don't know what his political leanings are. I'm really just commenting on a single work here. I really enjoyed the scholarly, objective initial part of this book. I only wish it had ended there.
Inflation is ultimately a political problem. 
Samuelson has written a very straightforward historical account of how destructive inflation is to an economy, the tremendous boost an economy gets from low inflation, how America got itself into a nasty inflation mess in the 60's and 70's and how we ultimately got out of it.
This book is very timely because currently the government is sowing the seeds of rampant inflation through massive amounts of fiscal and monetary stimulus. The amount of money that is being flooded into the system is unprecedented in our history.
There is immense political pressure on the President of the United States to prevent recessions, and keep unemployment low. As Clinton advisor James Carville said in 1992: "It's the economy stupid." Once the United States went off the gold standard, it became very easy to cheat by artificially keeping unemployment low by lowering interest rates and increasing the money supply. The result was lower unemployment with the side effect of persistent, high inflation.
The only way to combat inflation is to take harsh steps, causing deep economic pain to the country. Not until Ronald Reagan came along with Paul Volcker as Fed Chairman was anyone able to confront the inflation problem directly. The short term result was 12% unemployment and interest rates as high as 18%.
It took an incredible amount of political courage to take the drastic steps they took. The result over the next 25 years was an unprecedented economic boom primarily caused by stable prices.
The question I have for President Obama is whether he will have the guts to put the country through the same short term pain to rein in the inevitable inflation that will result from the current policy of massive money injections into the economy? It is one thing to propose a one trillion dollar stimulus using borrowed money, but quite another to propose throwing people out of work in order to recover from the effects of that stimulus.
Here are few quotes from the book that illustrate these points:
- Nixon said early in his presidency: "We can't allow a recession. We'll never get in office again." Presidents knew their political fortunes rested on the economy and were willing to run inflationary risks to preserve low unemployment. Low employment was the be-all and the end-all of economic policy; inflation was an inconvenient nuisance.
- In 1968, economist Milton Friedman explained that, if government tried to hold unemployment below some "natural rate", the result would simply be accelerating inflation. Americans came to believe that inflation, as much as they hated it, was a semi permanent way of life. Government wouldn't suppress it, because doing so would involve large, politically unacceptable social costs - higher unemployment, lower incomes and profits.
- Volcker took a sledgehammer to inflationary expectations. Volcker raised interest rates, tightened credit and triggered the most punishing economic slump since the 1930s. Volcker's approach was not subtle. The Federal Reserve bludgeoned the economy until inflation subsided. It is doubtful that aside from Reagan, any other potential president would have let the Fed proceed unchallenged. Reagan's indestructible optimism, especially for the country's future, was liberating. He believed that correct decisions would turn out well. He was also convinced that reducing inflation required some high unemployment.
- The Volcker-Reagan campaign discredited many of the ideas that had misgoverned national economic policy for nearly two decades. The notion that the Federal Reserve couldn't control inflation was discredited.
- The achievement of Reagan and Volcker was profound - and it was as much about politics as economics. One of the dilemmas of a democratic society is how to take actions that though immediately painful and unpopular, seem essential to the society's long-term well-being. Coping with double-digit inflation posed precisely this problem. Any realistic program was bound to hurt millions of Americans, almost all innocent victims.
- "Central Bankers over the past several decades have absorbed an important principle," wrote Alan Greenspan. "Price stability is the path to maximum sustainable economic growth."
This book is a fascinating look into a part of US history that does not get much attention. It is highly recommended.
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