That Sinking Feeling

Reviewed by David Smick
Sunday, January 4, 2009


The Past and Future of American Affluence

By Robert J. Samuelson | Random House. 309 pp. $26


By Paul Krugman | Norton. 191 pp. $24.95

In 1975, when I first arrived in Washington to work as a Senate staffer, I was taken aback by a comment from the economist Arthur Okun at a congressional hearing. Inflation was then gaining momentum. Okun, one of the most distinguished U.S. economic thinkers, bluntly admitted that we don't understand inflation -- and never have.

Rarely before or since has Washington witnessed such humility about economic policy. Overall, the past five decades have been an age of economic hubris. In the 1960s, we sought to end poverty through federal spending. By the late '70s, we thought that controlling the money supply could solve everything. In the '80s, tax incentives were seen as capable of dramatically increasing the rate at which people saved. By the '90s, it seemed to many that Alan Greenspan could fine-tune the business cycle out of existence by tinkering with the Federal Reserve's interest rates. Now comes Treasury Secretary Henry Paulson, offering a new taxpayer-funded bailout scheme nearly as often as he changes his shirt. Almost overnight, it seems, we have become convinced that massive infrastructure spending can save us.

The dangers of this constant search for an economic panacea are clear from two important new books: Robert J. Samuelson's The Great Inflation and Its Aftermath and Paul Krugman's The Return of Depression Economics and the Crisis of 2008.

Samuelson, a long-time economic columnist for The Washington Post and its sister publication Newsweek, has become the Cal Ripken of economic journalism. His meaty body of work serves as a kind of national economic encyclopedia. At first glance, Samuelson's book, which describes the implications of the great inflation of the 1970s, may seem irrelevant or out of touch, given today's growing fears of deflation. Nothing could be further from the truth.

What screams out from this book is the need for policymakers to admit, as Samuelson puts it, "how little -- not how much -- we know." He describes the great economic overreach of the 1960s, when Federal Reserve policymakers aimed to produce full employment, thinking they could trade a slight increase in inflation for a significant increase in jobs. As a result, Samuelson says, "too much money chased too few goods," the classic recipe for inflation. In 1962, a Hershey bar cost a few pennies and a full-sized Chevrolet $2,529. By 1994, the candy bar had jumped to 75 cents and the Chevy to $19,495. Samuelson calls this rapid rise in prices "a self-inflicted wound that resulted from collective hopefulness and intellectual overconfidence."

"With hindsight, we know that the idea that the economy's adequate, if imperfect, performance could be substantially improved was a pipe dream," he writes. "The resulting policies not only didn't do what they promised, they actually did the opposite -- led to more, not fewer, recessions; to higher, not lower, unemployment; to slower, not faster, economic growth. . . . What is relevant for our era is that these policies were not undertaken on ignorant whim. Rather, they embodied the thinking of most of the nation's top economists."

Samuelson's book also describes the painful cure administered by Paul A. Volcker, chairman of the Federal Reserve from 1979 to 1987 and now Barack Obama's pick to head the White House Economic Recovery Advisory Board. In an unspoken alliance with Ronald Reagan, Volcker "bludgeoned the economy" with interest-rate hikes, deliberately producing the recession of 1981-82. As the economy stumbled, cars went unsold, office space lay vacant, and unemployment topped 10 percent. This "glut" of labor and goods finally broke the back of inflation; though Volcker's policies were "punishing," the nation went on to experience two decades of vigorous, non-inflationary growth.

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