William Greider, in his new book on the Federal Reserve, "Secrets of the Temple," mistakenly suggests that creeping inflation is good for the country -- that is, for farmers, members of unions and homeowners who don't have wealth in one form or another.
His populist view on inflation, which he sees as good for the poor but bad for the rich, is a serious flaw in an otherwise impressive and detailed history of the Federal Reserve System. He finds much to criticize in all the recent chairmen of the Fed, notably Paul A. Volcker and the late Arthur F. Burns.
"Creeping inflation" is my phrase, not his. But that's what he means. On the Diane Rehm Show on WAMU-FM, the public radio station, Greider readily conceded that there is a critical level of inflation beyond which "it is destabilizing."
So what Greider is talking about is a benign sort of inflation that creeps up -- for working people and homeowners -- beyond the level of their own costs. That's an inflation that doesn't get out of hand. But politicians and seers have been searching forever for that kind of alchemy. The trouble is that inflation has a nasty habit of accelerating instead of creeping.
Robert Kuttner said in a flattering Washington Post book review that Greider "stops just short of advocating inflation as deliberate policy." But that is precisely what Greider does advocate. Greider is very direct -- he doesn't kid around.
When you get some increase in the consumer price index if farm prices are pushedup, "my view is that that is not all bad," Greider told Rehm. Higher prices have "a redistributive effect from those who have accumulated financial wealth to those who are borrowers."
But as prices go up, workers have the right to demand higher wages. And it's only if wages can stay ahead of inflation that the workers are better off. Eventually, the balloon bursts -- just check it out with the Brazilians and the Israelis. The end result is a wicked kind of disinflation that sandbags not only the rich but the poor.
Beyond that, what Greider totally ignores is that this is now a global economy: when auto and steel workers forced wages higher to compensate for higher prices, they eventually priced not only their products but themselves out of the market.
If one looks for a reason to explain the phenomenal success of the Japanese (who, incidentally, maintain a low inflation rate) one doesn't have to go much beyond the callous attitude of American labor and management in the 1960s and early 1970s. They thought each could grab a bigger part of the pie -- and pass the costs on to the consumer with inflated prices. We saw the results in the massive trade deficit that the United States began to build up.
Greider makes a convincing case that, from 1979 through 1984, Volcker and the Fed put the nation through a high-interest-rate economic wringer that caused excessive pain. It is a thoroughly rational argument, and Volcker is still around and able to defend himself against such charges if he wants to. Volcker's friends have already begun to take their shots at Greider.
But Burns died last year and is unable to make a response to the Greider charge that Burns deliberately manipulated monetary policy in 1972 to help Richard Nixon get reelected. Greider himself concedes: "No one, of course, could definitively settle the question of motivation, but politicians could interpret the evidence themselves."
I actively covered Burns and the Fed in that era and, when this accusation was first raised by Sanford Rose in a Fortune magazine article, sought confirming evidence. I searched hard at the time and never uncovered evidence that Burns pushed the Fed into an accommodating policy to help Nixon.
If Burns was manipulating the board on behalf of Nixon in 1972, some of his fellow governors -- who were not particularly enamored of Burns -- weren't aware of it. If Greider thinks that Burns sold out and became a political hack in 1972, he is also in effect saying that the six other governors also went into the tank.
What Greider refers to as "evidence" is a record that shows the Fed followed too easy a money policy in 1972. But bad policy is one thing, and a politically manipulated policy is another. Greider's long attack on Burns comes down to innuendo, such as an anonymous quote from "a high official at the Treasury, where Paul Volcker was in charge of monetary policy": "The word went out that 1972, by God, was going to be a very good year." To me, that's not all convincing.
Ironically, Greider told Diane Rehm that the new Fed chairman, Alan Greenspan, may act in a similar way this year to pump up the economy. Greenspan, he said, may "do whatever it takes to keep the Republicans in the White House. I'm not particularly partisan to these folks in the White House, but I think if Alan Greenspan does that this year, it will be exactly what's right for the country."