JUDGMENT CALLS
Robert J. Samuelson
The Return of Inflation?
An indecisive Fed risks repeating its previous blunder.
Forget the housing collapse, the "credit crunch" and—in isolation—higher oil prices. The real economic menace may be resurgent inflation, which is the broad rise of most prices. To understand why, some history helps. The government's worst domestic blunder since World War II was the unleashing of high inflation: In 1960, annual inflation was 1.4 percent; by 1979, it was 13.3 percent. This terrified Americans, who feared falling living standards. It also destabilized the economy, causing harsher recessions that culminated in 10.8 percent unemployment in 1982.
We don't want to go there again, and Federal Reserve Chairman Ben Bernanke has been insisting that we won't. In a recent speech, he argued that the economy today is much different from what it was in the mid-1970s. He's right. In 1974, inflation (as measured by the consumer price index) was 12 percent. Unemployment in the parallel recession peaked at 9 percent in early 1975. We're not close to that havoc. Unfortunately, Bernanke's comforting analogy is misleading. The question is not whether it's 1975; it's whether it's 1966.
It was then that the inflationary psychology, which later led to so much grief, took hold. Vietnam War spending and the Fed's easy-money policies created an economic hothouse. Government officials and most academic economists underestimated the danger. Inflation crept from negligible levels to 3.5 percent in 1966 and 6.2 percent in 1969. There are eerie parallels now. From 1997 to 2003, inflation averaged slightly more than 2 percent. Now it's 4 percent, and some economists soon expect 5 percent. Hmm.
To be sure, differences abound. Then, we had a classic wage-price spiral. Strong consumer demand allowed businesses to raise prices, which spurred demands for higher wages that companies paid because they needed the workers and could recover the costs through higher prices. In 1959, labor costs rose 4 percent; firms could offset most of that through efficiencies (aka "productivity"). By 1968, labor costs were up a less-forgiving 8 percent.
By contrast, today there's not yet a wage-price spiral. Inflationary pressures seem to originate mostly in rising raw materials prices. In 2002, oil was $25 a barrel; now it's $135. Corn was $2.30 a bushel; now it exceeds $7. Copper was 70 cents a pound; now it's $3.80. Meanwhile, a powerful anti-inflationary force—cheaper manufactured imports—is waning. The weaker dollar and higher transportation costs have raised import prices. In the past year, prices for imported consumer goods (excluding autos) are up 3.6 percent.
We seem to be hostage to global forces. Economists Richard Berner and Joachim Fels of Morgan Stanley call this the "new inflation," because it's not easily squelched by domestic policies. Up to a point, that's true. Although the Fed influences interest rates, it doesn't own oil rigs or cornfields. Long-term price relief for oil involves switching to more-fuel-efficient vehicles and increasing worldwide, including American, oil production. Removing subsidies for corn-based ethanol would reduce food price pressures.
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Member Comments
Posted By: tc125231 @ 06/24/2008 6:17:06 PM
Comment: This is correct. And the biggest contributors to defecit spending are (drum roll):
1. Bush tax cuts
2. Iraq War (supported by Samuelson) financed by IOUs
3. The idiot prescription drug benefit (which outlaws price negotiation with the pharmaceuticals) used successfully to by the 2004 election.
I don't remember any screams of outrage from Samuelson on these. Except for the third, he clearly supported them.
Posted By: clikdawg @ 06/24/2008 5:51:53 PM
Comment: Um ... the whole point of the economic course being followed is, specifically, to break the economic (and thus political) power of the middle class; the outcome to be the long-desired return to the have/have-not system of the feudal era. Big-time benefits accrue to barons under that system (not the least of which is watching you and I knuckle our foreheads whenever they pass), and this time around the merchant class which gummed up the works last time around has been incorporated in the scheme -- their numbers being presently thinned to a manageable level even as we speak.
10%+ unemployment? A veritable Baron's Dream Come True!
Posted By: smokey_joe @ 06/24/2008 5:26:07 PM
Comment: The root of all the economic evils we are now seeing is the higher cost of energy which feeds into the price of every other product in one way or another. All the bad-mouthing comments on ethanol missed the point that ethanol is cheaper by the gallon, so if we consume more gallons of ethanol, its more than offset by the fact that ethanol is so much cheaper than gas and will become much cheaper as time goes by. Another sad note for our country and energy independence: One of the biggest sugar producers in the USA was defeated in court by the environmentalists and sugar cane fields in Florida will soon be returned to the crocs, gators and geckos. Sugar cane is much more cost-effective for producing ethanol, so naturally we have decided to kill it. Our enemies must be rolling on the ground with laughter. Soon oil slicks from the Chinese-Cuban oil wells in the Carribean will be washing into the everglades and giving the gators and crocs a good mouthwash.