INFLATION, as Americans have learned to their sorrow, is habit-forming. Curtailing the habit is not painless. The consumer price index is rising more slowly than at any time since 1976, in the aftermath of the last severe recession. Withdrawal symptoms are now beginning to appear, as financial risks and burdens shift from savers to borrowers.
It's hard to think of a subject on which the public rhetoric has been less illuminating than this one. Perhaps we in the news business, in our modest way, have contributed to the fog. Political discourse conventionally speaks of inflation in terms of pain and suffering. It also speaks of the erosion of savings. There has been plenty of financial pain, to be sure, but it has been limited to those people drawing low interest rates on their savings and investments. Those savings haven't been eroded. They have been quietly transferred to other people--those who kept borrowing at interest lower than the inflation rate. Those who profit most handsomely from a period of rising inflation, like the late 1970s, are those who most flagrantly violate the Puritan ethic.
Political rhetoric suggests that inflation is a sort of natural disaster, like a drought or an epidemic of chicken pox; nobody is to blame, and everybody wants to end it as soon as possible. The reality isn't quite so innocent. While several nasty surprises like oil crises and poor harvests contributed to the last decade's inflation, that was only the beginning of the process. American society couldn't decide how to allocate the higher costs of fuel and food. Instead, it kept trying to protect everybody from them. Inflation was a way of postponing payment--at least temporarily--and diffusing the trouble. In retrospect, it's remarkable that lenders reacted so slowly to their losses. But they are reacting now.
The people currently most at risk are those who borrowed heavily and counted on future inflation to help them pay off those debts. A lot of businesses got accustomed to floating along on a cushion of inexpensive credit. There are going to be strains on some of the companies that are committed to pay wage increases, and suddenly find that they can no longer expect to pass those increases on to their customers.
Bankruptcies were more common this winter than at any time since the 1930s. The current unemployment rate, and the plant closings, are not merely the effects of another recession like all the others. They are some of the costs of ending a long cycle of inflation. How high will those costs run? That depends heavily on public policy. The administration seems to regard the present decline as just another recession that will automatically reverse itself in a few months and then rapidly lead toward a strong recovery. If policy persists in this error, the costs could ultimately run very high.