Oops

Book publishing schedules are cruel. Robert J. Samuelson, a Newsweek columnist and self-confessed “slow writer,” most likely started on this book in 2005 or so when the economy was booming. He would have turned in the final manuscript about a year and a half ago as the yawning cracks in Wall Street’s underpinnings were first becoming clearly visible.

Samuelson’s primary topic is what he calls the “Lost History” of the great inflation of 1968-82, and its subjugation by the combined efforts of former Federal Reserve Chairman Paul A. Volcker and President Ronald Reagan. He overstates the extent to which the episode has been forgotten—the Wall Street Journal has used it as a bogeyman against all forms of government intervention ever since. But The Great Inflation may be the first popular book devoted entirely to the subject, and Samuelson is surely right that it is a critical period in recent economic history.

The history of the buildup of the inflationary infection and its eventual conquest is accurate and complete, although oddly organized. Through the first half of the book, Samuelson treats inflation as if it were solely a matter of government fiscal and monetary policy, as many conservative economists do. It is only after he has finished that story that he flashes back, a bit awkwardly and too briefly, to more fundamental causes relating to the privileged position of American business in the first three-quarters of the twentieth century.

America’s leading companies rapidly outstripped their European competitors starting in the late nineteenth century, achieving near-global dominance by about 1913. But from that point they quickly settled into a comfortable world of managed competition and “administered,” or cartelized, pricing. Except for the entry of companies in entirely new industries like television and airlines, the roster of the top hundred companies barely changed until the 1980s.

But that sustained success didn’t stem from U.S. competitiveness. It was mostly because their global peers regularly blew each other up. American companies emerged from the two world wars not only unscathed but as virtually the sole suppliers to former combatants. By the 1950s, big U.S. companies and their unions were lolling in a lazy world of “planned obsolescence,” locked-in wage/price increases, and falling productivity. It was only after the furious competitive assault from the Japanese and Germans in the 1960s that the U.S. government became so deeply involved in the protectionism and subsidies that generated the inflationary momentum of the 1970s.

Organizational quibbles aside, Samuelson’s book suffers from being rooted in the economic mindset that prevailed when he started to write it. He appears to have bought, hook, line, and sinker, the once-ruling mythology that the “Great Moderation”—the steady-growth, low-inflation, libertarian market economy of the early 2000s—was not only well-entrenched but, for all its admitted imperfections, about the best Americans could hope for. It is his misfortune that the book came out just as that supposed economic nirvana was being exposed as an utter fraud.

Despite some last-minute revisions, Samuelson is stuck with anachronisms like his portrayal of Alan Greenspan, Volcker’s successor at the Fed, as an apostle of monetary tightness “determined not to squander Volcker’s legacy.” Of course, it was precisely Greenspan’s easy-money policies through the 2000s, and his hands-off attitude toward Wall Street—also quite different from Volck-er’s—that fueled massive bubbles in housing, takeover loans, office buildings, and other assets. The messy, serial bubble-implosions have plunged nearly the entire world into a serious recession, if not a full-blown depression.

Samuelson also complains about “caricatures” like the ones that portray recent growth

...as controlled by a selfish elite of investment managers and corporate executives, who manipulated the system to increase profits and their own wealth. In this, their natural allies and fellow travelers were the conservative politicians who idolized “the market” and were obsessed with lowering taxes and shrinking government.

The ranks of people who consider that description a caricature, of course, are diminishing by the day.

While Samuelson’s economics have always struck me as fairly centrist, in this book he seems to have fully bought into the libertarian mythology of the great benefits showered on the less-well-off by untrammeled free markets. He extols the “gadgets and conveniences...computers, cell phones, flat-screen TVs, and larger homes as evidence that any stagnation in lower-stratum living standards is ‘preposterous.’”

Note that better health care is not on that list. Samuelson does recognize that the lower-income strata have become much less economically secure in recent years, but suggests that it is the inevitable price of national economic stability. The case for such a tradeoff was briefly plausible in the late 1990s, when rapid economic advances did translate into broadly distributed improvements in living standards, including better health coverage. But the claim certainly rings hollow now.

If there is any lesson from the current economic crisis it is that we should never again be conned into believing that Wall Street’s interests are synonymous with an ideal of free-market efficient outcomes.

The huge jump in personal consumption and in house prices in the 2000s, and the consequent rundown in personal savings, did not represent, in any way, an optimum economic equilibrium. It just happened that houses, big cars, and electronic toys from Asia were things that Wall Street could finance at maximum profitability. As today’s shuttered foreclosures and unsellable cars suggest, a vast amount of recent activity may turn out to be pure social waste.

Now that the politico-economic wheel is revolving toward more government-centric national solutions, The Great Inflation is a useful reminder of the ability of Big Government to get things wrong. But the Great Credit Crunch of the 2000s is the equivalent demonstration of the idiocies of markets. Catastrophe, that is, lies at the extremes. One hopes that policymakers can carve out a sensible course between them.