The Great Inflation And Its Aftermath: The Past And Future Of American Affluence Robert J. 11

"Here, we encounter a powerful parallel with double-digit inflation. It took hold because the policies that produced it were initially so appealing--the first effect was a boom--and the policies to reverse it were unappealing. What was remarkable about the Volcker-Reagan policies is that they defied the standard political logic. All the adverse consequences -- high unemployment, lost profits -- were up front. All the benefits were indeterminate and lay in the hazy future. Their actions constituted the single most beneficial act of economic policy in the past half century. But at the time, what they were doing was highly unpopular, even if most Americans deplored inflation and wanted government to get rid of it." (Will Obama and Bernanke or his successor be able to perform as well?)

The Great Inflation and Its Aftermath: The Past and Future of American Affluence Robert J. 11

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We have arrived at the end of a roughly half-century economic cycle dominated by inflation, for good and ill. Its rise and fall constitute one of the great upheavals of our time, though one largely forgotten and misunderstood. From 1960 to 1979, annual U.S. inflation increased from a negligible 1.4 percent to 13.3 percent. By 2001 it had receded to 1.6 percent, almost exactly what it had been in 1960. For this entire period, inflation's climb and collapse exerted a dominant influence over the economy's successes and failures. It also shaped, either directly or indirectly, how Americans felt about themselves and their society; how they voted and the nature of their politics; how businesses operated and treated their workers; and how the American economy was connected with the rest of the world. Although no one would claim that inflation's side effects were the only forces that influenced the nation during these decades, they counted for more than most historians, economists, and journalists think. It's impossible to decipher our era, or to think sensibly about the future, without understanding the Great Inflation and its aftermath.

Stable prices provide a sense of security. They help define a reliable social and political order. Like safe streets, clean drinking water, and dependable electricity, their importance is noticed only when they go missing. When they did just that in the 1970s, Americans were horrified. From week to week, people couldn't know the cost of their groceries, utility bills, appliances, dry cleaning, toothpaste, and pizza. People couldn't predict whether their wages would keep pace with prices. People couldn't plan; their savings were at risk. And no one seemed capable of controlling inflation. The inflationary episode was a deeply disturbing and disillusioning experience that eroded Americans' confidence in their future and their leaders.