In New York they're rioting over $7 movie tickets. At the carryout next to my office, a large coffee just went from 55 cents to 60 cents. In case you hadn't noticed, inflation is back. The comfortable assumption that the price you pay tomorrow will be the price you paid yesterday -- a comfort we thought we'd lost forever, then started taking for granted again -- is fading once more.
At about 4 1/2 percent, inflation is already higher than the rate that panicked President Nixon into slapping on wage and price controls in 1971. The outlook for this year is cloudy; another oil price collapse may save us. But one way or another, 1988 is the year the bill comes in for the Reagan free lunch. And one thing we're going to have to decide is how badly we want to avoid another serious bout of currency erosion.
The debate over interest rates, exchange rates, money supply, deficits and so on usually is framed in terms of how best to thread a path between recession and inflation. But this technical argument hides a sterner moral dilemma. The nostrums for recession are generally pleasant (loose money, bigger deficits) while the nostrums for inflation are painful (tight money, smaller deficits). The hidden question usually is how much nasty medicine we have to take, and someone always has a fancy explanation why we don't need to take any at all.
Throughout the early 1980s, the main advocates of holistic economics have been self-styled "conservative populists" with convoluted theories generally involving the price of gold. Now they are being joined by self-styled populists of the left with a more straightforward argument: inflation is good. That is the message of William Greider's big new book on the Federal Reserve, "Secrets of the Temple."
It goes like this. Wealth is highly concentrated. Creditors are rich; borrowers are poor. Inflation, by eroding the value of debt, therefore takes from the few and gives to the many, like Robin Hood. The inflation of the 1970s was actually good for most Americans, especially those who owned houses with mortgages. Greider writes, "A social philosopher, searching for a progressive theory of justice, might contemplate the underlying consequences of inflation and conclude that this system was a promising model of social equity."
Right-wing pseudo-populists have no explanation why anyone would wish to inflict fiscal or monetary discipline on society. They make it seem like pure sadism. Their left-wing allies at least have a coherent theory: class warfare. The Fed protects the interests of the rich. But inflation is hardly a progressive panacea, for four reasons.
First, it's far from clear who wins and who loses. Much if not most financial wealth in this country is held by institutions on behalf of ordinary people: their savings, life insurance and pensions. Life insurance and pension rights are generally not indexed, and evaporate with inflation. If unionized workers and others with market power keep up, poorer workers and those on welfare don't. Homeowners beat inflation, but, precisely because of this, homes are getting out of reach for the lower middle class.
Second, a dose of inflation may stave off recession in the short run, but it's disastrous for economic growth in the long run. It encourages consumption, borrowing and short-term profit-taking; discourages saving and long-term investment. Just coping with a sinking currency is a vast and costly distraction for the economy.
Third, inflation carries high political and spiritual costs. Remember the late 1970s? That sour mood, that feeling of vertigo, the sense that everything was falling apart, the bitter politics of group against group were caused in large part by the collapse of the currency and the desperate search for protection.
Many of our current troubles, in fact, are a hangover from the inflation era. Fear of its return has kept long-term real interest rates at record highs. And yet our savings rate remains abysmal, because Americans never recovered the habit of thrift. The thing-obsessed yuppies who matured in the late 1970s never learned it. In fact, the "me first" attitude of the 1980s that progressives rightly deplore, because it stands in the way of social consensus and compassion, has its roots in the culture of inflation.
In any event (reason number four) the trick of redistributing wealth through inflation won't work the next time around. Debt only erodes if inflation exceeds the interest rate. Otherwise, the debt compounds faster than it loses value. In the 1970s, 10 percent inflation merrily melted away 5 percent mortgages. In the 1980s it would take 20 percent inflation to melt away 10 percent mortgages.
And precisely because of past inflation, interest rates are now on a much shorter fuse. Adjustable mortgages and floating-rate money-market funds make inflation leap-frog a futile game. "What the economy most needs," writes Greider in The Post, "is rising prices and lower interest rates." But we can't have rising prices and lower interest rates anymore. The suckers have caught on.
The victory over inflation was the greatest public policy achievement of the past decade, and possibly the most costly. Squandering it would be criminal.