Book says inflation rates of 1970s could return

— -- As Americans confront the most threatening economic conditions in nearly a century, gloomy comparisons to the 1930s Great Depression are rife. But a more recent episode of economic dysfunction also may offer lessons as the country tries to regain prosperity.

In The Great Inflation and Its Aftermath, author Robert Samuelson turns to what he calls an underappreciated watershed in U.S. economic history: the spiraling prices of the 1970s and the painful national belt-tightening that eventually quelled them.

Samuelson, a longtime columnist for Newsweek and The Washington Post, rightly describes the era as worthy of renewed attention. After the sunny growth of the 1960s, inflation suddenly spiked to double digits and stayed there for three consecutive years: 1979, 1980 and 1981. It reached an annual high of 13.5% in 1980.

The standard explanation for rising prices identifies as the culprit Lyndon Johnson's bid to have both the guns of Vietnam and the butter of the war on poverty without raising taxes. Samuelson instead blames a generation of depression-scarred economists who shared an "obsession" with obtaining full employment and the hubris to think such a utopian state was attainable.

Samuelson doesn't say so explicitly, but there is an obvious parallel between the unintended inflationary consequences of the full employment campaign and the foreign policy mistakes that led to Vietnam. In both instances, an establishment consensus to avoid repeating searing historical experiences led to disaster.

In foreign affairs, "the best and the brightest," with memories of the appeasement of Hitler still fresh, were determined to confront in Southeast Asia what they saw as another expansionist ideology. Likewise, the postwar economic elite had learned too well the lessons of the Great Depression and in trying to eradicate joblessness stumbled into uncontrolled price increases, Samuelson says.

The message for today: Beware overly confident government officials in possession of powerful policy remedies that "everyone" supports. Samuelson's warning is worth remembering as a new U.S. administration readies a sweeping and expensive economic recovery plan.

In the late '70s, rising prices defied all remedies. Democratic and Republican presidents alike jawboned industry leaders and eventually imposed government controls on what companies could charge for their products. Nothing worked.

Nothing, that is, until Federal Reserve Chairman Paul Volcker turned off the monetary taps and kept them off. Before inflation was vanquished, unemployment neared 11%, a painful tale told in greater detail in William Greider's 1989 history of the Federal Reserve, Secrets of the Temple.

Samuelson credits the anti-inflation campaign with incubating "a prolonged period of national prosperity" marked by fewer and shallower recessions. Lower inflation led to lower interest rates and higher values for stocks and real estate. Corporate profits soared and unemployment eased.

Samuelson largely accepts as the price of such progress the growing gap between rich and poor that accompanied the march to prosperity since the early 1980s. He is an unabashed enthusiast for free markets, who worries that unbridled spending on Social Security and Medicare and efforts to combat global warming could cripple future growth.

Writing before the extent of today's crisis was clear, he acknowledged that if the recent economic moderation ever gave way, "The new order might find itself under furious assault." Still, his overriding faith in market mechanisms seems a bit jarring amid the global financial meltdown.

That said, Samuelson's clear-eyed focus on the rise and fall of inflation remains relevant today, even as the more immediate worry is a prolonged episode of falling prices that would swell debt and paralyze the economy. At some point, after the current crisis has eased, all of the new money that the Fed has pumped into the economy will make itself felt. And when it does, "great inflation" could reappear.