Inflation in the ’80s and the crisis today
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TEXT OF INTERVIEW
One of the few bright spots of a slowing economy is that Ben Bernanke can stop worrying so much about inflation. For years, Fed chairmen have lost sleep to the prospect of rising prices. Even though over most of the past two decades or so inflation’s been fairly tame — 2 or 3 percent a year.
But if you go back farther than that, say, the early ’80s the numbers get a lot bigger.
When Ronald Reagan took office, the consumer price index was running at more that 14.5 percent a year. Unemployment was up alongside prices. It was an ugly time in our financial history. And it’s one that resonates today. Newsweek and Washington Post columnist Robert Samuelson writes about it in his new book “The Great Inflation and Its Aftermath.”
Robert Samuelson: The great inflation was the most important economic event of the last 50 years and by that I mean it had huge effects going up. People just hated it. They could not see the future. They could not know what their savings would be worth. They could not know whether their incomes would keep up with inflation. But it also had huge effects coming down. And those are generally not appreciated.
Ryssdal: Well, make the connection for me then between what happens on the way down from the great inflation and where we are today.
Samuelson: What happened as inflation came down is interest rates came down, stock prices therefore went up because people shifted out of money market funds and out of bonds into stocks. And people felt and were much wealthier. They tended to borrow more against their newfound wealth. And so, we had a consumption boom really for the last 25 years, which powered the economy. And so you had a period of great prosperity, and what this did, in my view, is that it created excessive optimism. And as a result of that carelessness and complacency, the first episode of that was the tech boom in the late 1990s and the second phase of this was the housing boom.
Ryssdal: That sort of suggests that the way to manage an economy is just try something and see what happens.
Samuelson: I wouldn’t go that far. I don’t think anything is better than nothing. I do think, though, that there are dilemmas here that we have not been very candid in acknowledging. You can’t find an economist who will stand up in public very often and say, “sometimes we need recessions.” Periodic small setbacks may be better than trying to prolong a business cycle for a large number of years, because we may discover that in a year or two, we suffer a much harsher and more dangerous recession.
Ryssdal: So, this recession that we are, arguably, in already is a necessary evil?
Samuelson: Well, I think about this business cycle turn that we’re having in two parts. One is a kind of ordinary recession. And if that’s all it is, it probably will be a necessary evil. But the other part of it is this financial crisis, which is unfamiliar to almost everybody and therefore is extremely dangerous.
Ryssdal: Let me go down to the subtitle of your book, “The Past and Future of American Affluence.” What do you think is the future of American affluence given where we are now?
Samuelson: Well, if we get through this with only a routine recession, even if it’s a relatively harsh recession, we do face future problems. And the future problems we face are: we have an aging society, which is going to slow down the growth of the labor force; and we have skyrocketing health costs; we have very high promised benefits to retirees — people like me; and, finally, there is the challenge of global warming. And all of these are going to erode people’s real incomes, either through higher taxes or depressed take-home pay. And so, I think we face the prospect of what I have called affluent deprivation. And that is we will remain a wealthy society but people may feel poorer because they don’t feel they’re moving ahead.
Ryssdal: Robert Samuelson is a columnist at Newsweek and the Washington Post. He also the author of most recently of “The Great Inflation and its Aftermath.” Mr. Samuelson, thanks a lot for your time.
Samuelson: Thank you.
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