As the top financial columnist for Newsweek, Robert Samuelson is on the front lines of the economic wars. His new book, out this month, is a project more than four years in the making. It’s called The Great Inflation and Its Aftermath: The Past and Future of American Affluence, and it couldn’t be more timely. Samuelson, who has lived in Washington since graduating from college, was first hired by Ben Bradlee as a Metro reporter at the Washington Post but was switched to the Business desk as soon as he started—and he’s been covering it ever since.
"The rise and fall of double-digit inflation was the most important economic event of the last 50 years. In some ways this financial crisis vindicates the book’s hypothesis because I think this financial crisis is the last great consequence of the decline of double-digit inflations. As inflation dropped in the early 1980s, interest rates also dropped. Stock prices and later housing prices began to rise rapidly. People spent more and borrowed more against their increasing wealth. What was initially justified by declining interest rates degenerated into speculative frenzies, bubbles, and lax lending practices because people thought prices could only go up. We are now suffering the horrific consequences, which, I admit, are worse than expected.
The defeat of double-digit inflation—basically a good thing—involved a paradox. If you just look at the macro picture, things improved. From 1982 to 2007, we had only two modest recessions. But if you look at how individual workers feel, and how individual companies have behaved, workers have become a lot more fearful for their job security. Companies have become a lot more nervous about their survival. The insecurities and anxieties felt by workers and managers helped contain inflation.
When things are going well, people don’t want to change anything. People don’t want to ask whether this is too good to be true. In the late ’90s there were a lot of people—including me—who said, “This stock market is crazy. It simply is too high and cannot last.” It was very hard for government to step in and say, “This is unreal.”
Alan Greenspan has come under a lot of criticism, some of it legitimate, but remember that in the mid-’90s he did talk about irrational exuberance. That affected the stock market for a couple of days, and then people just went on their merry way. So when things are going well, it’s very difficult for society to regulate and control it. The same was true of the housing bubble.
This process of globalization has run ahead of our understanding of it. We’re discovering that a lot of these interconnections were not even well understood by the technicians, economists, bankers, and regulators. We’re at risk of having a system we can’t control because we don’t understand it.
One of the problems today is that the things we ought to do in the long term are not necessarily related to the things we need to do in the short term. What I think is going to happen, regardless of who is elected president, is that there’s going to be a lot of spending next year and a lot of tax cuts.
In the short run, those things may be justified—but in the long run it’s clear we have to raise taxes. We also should be cutting back spending, and we need to reduce the benefits for retirees. We need to raise eligibility ages; we need to make these programs—Social Security and Medicare—more means-tested. Otherwise we’re going to have to either gut the rest of the government to finance spending for Social Security, Medicare, and Medicaid or we’re going to see taxes go up very sharply or we’re going to see deficits go to unsustainable levels.
What is happening today is so outside the realm of experience of everybody that I think it’s very difficult to find major fault, particularly at the Federal Reserve. They acted very quickly and made dramatic departures from past policies to accommodate this rapidly evolving situation. I’m no smarter than anybody else, but I think the betting will be that we’ll go through a recession—and nothing worse. But who knows?"
This article first appeared in the November 2008 issue of The Washingtonian. For more articles from that issue, click here.
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