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

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There is no economist - that I am aware of - writing for a weekly magazine (Newsweek) and daily newspaper (Washington Post) that is more objective and nonpartisan than Robert Samuelson. Not only does he avoid promoting either Republican or Democratic economic policies, he is very critical of both.

In this book, he talks about the great inflation, which many of us remember; and the lessons learned, which many of us have either forgotten or never learned in the first place. The great inflation of the 60s and 70s was, according to Samuelson, the result of misguided attempts by the government to keep artificially high levels of employment, and to keep the economy from falling into recession. Lyndon Johnson's Great Society programs were instrumental in creating a wage-price spiral that didn't end until 1980 when Ronald Reagan was elected. Even Richard Nixon could not stop the spiral with the imposition of a wage-price freeze. Nixon too was guilty of tampering with the system by urging the Fed chairman to keep the economy out of recession. During Jimmy Carter's presidency inflation was running at 14 percent and there was indeed an economic malaise. These inflationary times should be duly noted by the incoming Obama administration as many of the advisors are speaking urgently about applying big Keynesian stimulus packages.

When Ronald Reagan came into office he did a very brave and politically unpopular thing: he urged Paul Volcker, the Fed chairman, to raise interest rates and tighten credit in order to kill the inflation beast. (One of the few compliments I have for Ronald Reagan.) This precipitated the most severe recession since the Great Depression, but it did succeed in halting inflation. The recession lasted almost two years, but it paved the way for the almost uniterrupted economic growth that we've enjoyed for the last 25 years.

The aftermath could also be called the great deflation since inflation was kept under control by a fairly strict monetary policy. What escaped the monetarists' control, however, was the amount of debt that followed from their policies. (On this topic, read also George Soros' The New Paradigm for Financial Markets: The Credit Crisis of 2008 and What It Means.) The amount of public and private debt soared to unimaginable heights during this period, especially the last 8 years. During this period everyone - government, corporations, and consumers - lived beyond their means, running up debts that are now drowning the economy in a sea of red ink.

It is predicted, by Samuelson as well as many other economic journalists, that we are now entering an age of less affluence or even scarcity. As we reorganize ourselves more toward production and saving rather than borrowing and spending, we will feel much less affluent than during the years of living large. This restructuring process will be drawn-out since our priorities have been distorted for such a long period of time.

Samuelson warns against new bailouts and stimulus packages in view of the damage they caused in the 60s and 70s. This is in sharp contrast to what Paul Krugman advocated in a recent New York Times article entitled "Depression Economics Returns". Krugman argued that we need much larger bailouts; better to err on the side of doing too much than too little. As evidence he reminds us that the public works project known as World War II was the biggest and most successful bailout in our history. He argues that now, as then, we are so far gone that the caution Samuelson advocates is no longer appropriate, it would indeed make matters worse. The incoming Obama administration will have some tough choices to make, and the wrong ones will be catastrophic.

Robert Samuelson is a journalist, not an economist. But his writing on economic issues makes him sound, to my ear, like an economist. Samuelson's columns in the Washington Post often catch my eye, and I have read many of them. Until I read this book and saw Samuelson's brief biography, I thought he was an economist.

But Samuelson has a way with words that marks him as a journalist. When I saw a Newsweek article by Samuelson based on this book, I thought the book worth a read. It is indeed. Samuelson looks to economic history, in particular the "great inflation" of the 1970s, for lessons that it teaches us about today's world.

In fact, Samuelson believes that the roots of the current credit crisis are firmly planted in the great inflation. That is, that the "disinflation" we grew to enjoy as the great inflation was brought under control led us into bad habits that have finally come to roost.

I won't summarize the book here. If you want a good summary, the Newsweek excerpt that Samuelson himself wrote does a better job than I can. The core of the book is there. To get much more, you have to read the book.

And I encourage you to read the book. Samuelson sometimes has the air of a didactic "know it all." Maybe that comes with the territory when you are a columnist (not a self-doubting profession) for both the Washington Post and Newsweek. That air can annoy -- it did annoy me a bit in this book. But it has not kept me from benefiting from Samuelson's work.

Be warned, though. Samuelson says he wrote this book for the general reader. Readers without an interest and some background in economics may find the book tough going. It's not a collection of columns. It's an in-depth economic history and analysis. At times it can be difficult. Even dry. I must confess that I skipped over parts that seemed not worth the trouble.

Yet I do recommend the book. There's little question that we face some troubled economic times. As Samuelson points out, much of it is perception rather than reality. Samuelson's book helps put the problem into an historical perspective. That helps. The main thing to fear may well be fear.

Fear can be deadly. Yet a book about cancer can sometimes help someone just learning that they have cancer deal with the fear. Learning facts and thinking logically can combat emotion. Reading about what we are facing as Americans, and learning more about the great inflation era, may help us shrug off the despair and get to work on the nation's financial problems.

Samuelson's book helped me do that. I hope the book will help other readers do that as well.

Robert J. Samuelson asserts in this book that the last half-century has been one long economic cycle dominated by the rise and fall of inflation.

Inflation surged in the 1970s, after many years of economic policies designed to smooth out business cycles and to keep unemployment as low as possible, even at the risk of higher inflation. Fighting inflation was not a top priority in the presidencies of Nixon and Carter. Samuelson believes that Ronald Reagan would not have been elected president had there not been double-digit inflation during the Carter years, and also believes that Reagan was the only president who would have allowed Fed chairman Paul Volcker to raise interest rates to the extent necessary to minimize inflation.

The author demonstrates that the taming of inflation led, in the following years, to milder and briefer recessions, globalization, and the boom in stock prices and home prices. However, while economic growth was robust in the 1980s and 1990s, jobs were not as secure as they were in the 1950s and 1960s.

Samuelson believes that the half-century economic cycle defined by inflation is ending, and speculates about what might come next. He compares the present moment to the late Fifties, just prior to the rise of inflation in the Sixties, and discovers many similarities. He offers his opinions on what should be done for the economy (starting with, of course, controlling inflation) in the coming years.

Hopefully, the incoming administration will favor a strong currency and resist the temptation to implement more and bigger social programs, which would stifle economic growth. It is heartening to see that Paul Volcker is one of Barack Obama's economic advisors.

This timely book is a groundbreaking study of how inflation affected not just the economy at large, but the lives (and psychology) of ordinary Americans over the last fifty years. There are also a couple of really cool appendices containing statistics about GDP, inflation, unemployment, and business cycles since 1950.

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.

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.

If, as Robert J. Samuelson asserts, the "Great Inflation" has largely been forgotten, then this book renders an important service. It is hard for someone who lived through the years and events recounted here to believe that they have been forgotten, but perhaps it's so. Samuelson's book is generally excellent, but there are some problems: 1. The basic historical narrative is not as coherent as it might be. A more precise chronology of the development of inflation is needed. Too often the reader is taken through a decade or two of developments in one area too quickly to really understand them, and then transported back again 20 years to follow another train of events. In part this is because of the topical arrangement of the first three chapters, which might better have been combined into a single, slower chronological narrative. 2. The book does not explain in sufficient detail why inflation is so pernicious and wreaks such havoc. No-one who lived through the period doubts the evil of inflation, but a quote from Keynes and some anecdotes are not enough to demonstrate the point. 3. While endorsing the basic insight of Milton Friedman and other "monetarists" that inflation is a monetary phenomenon, the book also concludes that it was the fiscal policy of Kennedy's Keynesian economic advisors that first caused it. Both can't be entirely true, and the tension is left unresolved. Does monetary policy cause inflation or merely accomodate it? If inflation is purely monetary, why does it take a severe recession in the "real" economy to extinguish it? In short, the book does not enable the reader to understand the relationship between fiscal and monetary policy, between the real economy and the money supply, between inflation and production. This may be asking too much of it, as it is not clear that the science of economics can do this: it arguably has yet to produce such a "unified field theory". That it hasn't, and that economists themselves may not fully understand the causes of economic events, is a scary aspect of the current (Dec. 2008) scary situation. As Samuleson notes, economists' professional hubris was (or should have been) punctured by the Great Inflation; we don't need a second Great Depression to reinforce the point. The shortcomings noted herein give rise to more than just quibbles, but they should not deter you from reading this fine book, which is a first-rate piece of economic history.

I've always enjoyed Robert Samuelson's articles, not that I've always agreed with him. He writes with uncommon clarity and simplicity about a subject that is often murky and difficult.

He traces the Great Inflation back to the Kennedy Administration and the bright young economists of that era who thought they had the economic tools and understanding to fine tune the economy to eliminate the business cycle. The tools were primarily Keynesian fiscal policy and the object was to keep the unemployment rate low. Monetary policy in those days was subservient to the needs of fiscal policy.

Keynesianism had an appeal both to economists and politicians. Keynes's ideas were easily adapted to mathematical models and velocity of money curves, so economists could make their ideas look much better and more scientifically convincing than they were in the real world. Politicians loved Keynesianism because it provided an intellectual justification for what they wanted to do anyway: spend other people's money. It also provided politicians with a number that was the key to their political survival, the unemployment number. Kennedy, Johnson, Nixon, and Carter knew high unemployment was the number that could crash their presidency. But, as the inflation numbers climbed throughout the 1970's, the tools of Keynesian fiscal policy stopped working. Then, Paul Volker stepped in with his version of Milton Friedman's monetarist policies and Reagan gave him political cover.

Samuelson's view of the economists and politicians of the era as well meaning bumblers rather than suspects in a "who done it" is refreshing. Many books in this area have a silly, unstated assumption that somehow the engineer wanted to have the train wreck. I am glad that he wrote it.

I am not an expert in economic affairs, so I cannot outright disagree with Samuelson's refutation of the importance of the 1973 and 1979 oil shocks regarding the great inflation.
I just think it's interesting to note that the recession only got underway in grand style following the 1973 Arab oil embargo, and that the recession only receded in grand style following the end of the Iran-Iraq war in the mid-80s (which flooded the market). I think it's alot more than a coincidence that our economic fortunes rise and fall in relation to the market price of petroleum.
Of course, Samuelson is right that it all started back with Kennedy's "best and brightest". But the role of oil in the economy cannot be entirely dismissed as he says.

Robert Samuelson's book "The Great Inflation and Its Aftermath" is largely an economic history of the United States after World War II but it gives particular emphasis to events up to, during and immediately after a period of high inflation that gripped the country in the 1970s and early 1980s. It is a story that has been briefly described in many news articles but Samuelson felt no one had discussed it comprehensively, thus he wrote the book and, in that sense, it is very worthwhile.

The first thing Samuelson does is sweep away the notion the inflationary period was a product of the Vietnam War or the oil shocks of the 1970s. The data he presents suggests both added only marginally to inflation and the run up in prices would have been dramatic even in absence of the two aforementioned events. Rather he lays the blame on prevailing economic theories in the early 1960s and a belief that the government could guarantee "full employment" with fiscal and monetary policy. In particular, the Federal Reserve gets plenty of blame for rapid expansion of the money supply.

It isn't until the severe recession of the early 1980s that the Federal Reserve takes serious action to reduce inflation. Samuelson credits Fed Chairman Paul Volcker and President Ronald Reagan in the fight against inflation. Volker gets credit for prescribing the harsh medicine of higher interest rates and curtailing money supply growth. Samuelson suggests that while the Fed is nominally independent, it is vulnerable to political pressure from the executive and legislative branches of government and thus Reagan deserves credit for giving Volcker political cover.

The remainder of the book is a synthesis of Samuelson's ideas on a broad array of economic topics that he has covered in his columns in Newsweek and the Washington Post. He discusses the long term solvency of programs for the elderly and the desire to combat global warming. He suggests we are entering a period of "affluent deprivation" were the collective well-being of the nation continues to improve but is unable to provide all the benefits the public expects.

The Great Inflation is a defining chapter in the financial history of the US, so this book is an important read. Samuelson provides a very clear perspective of the origins and consequences of monetary policy. My quibble, as with several other histories of finance that I have read, is that it is a bit too long. I think all of the points he made (and there are many) could have been enumerated in fewer words. Having said that, it puts the current potential for inflation in perspective and is a warning that our Federal Reserve must keep in mind so that we do not repeat these mistakes.