Tom's Life Bits

By Robert J. Samuelson

309 pages. Random House. $26.

Robert J. Samuelson, an economics columnist for Newsweek and The Washington Post, says historians have not understood the significance of the “Great Inflation” that raged through the economy in the late 1970s and early ’80s. It was, he argues in “The Great Inflation and Its Aftermath,” one of those watershed moments in American history, not at the level of the Civil War or the Great Depression, to be sure, but perhaps the major turning point of the postwar era.

In 1976 the Consumer Price Index rose by 4.9 percent; over the next few years it climbed steadily until it reached double digits, 13.3 percent in 1979 and 12.5 percent in 1980. And with these rising prices, productivity declined, standards of living fell, investors fled the stock market, debt crises followed one upon another. Almost everyone was affected, and not just in their wallets and bank accounts.

As he writes, “ ‘The economy’ is also a social, political and psychological process,” and the Great Inflation, he explains, did real damage to the American psyche, engendering a feeling of hopelessness, causing citizens to lose confidence in their political and economic institutions. An inflationary psychology took hold, creating a self-fulfilling prophecy as wages chased prices in an ever more destructive cycle. “In all of American history,” Mr. Samuelson writes, “this inflation had no comparable precedent.”

And who was to blame for this unparalleled disruption, this system-threatening state of affairs? According to Mr. Samuelson, we all were. Pogo Possum said, “We have met the enemy and he is us.” Mr. Samuelson says so too.

His tale of culpability begins at the end of World War II. With the Depression a recent memory, Americans entered peacetime worried above all about the return of widespread joblessness. In 1947 Harry S. Truman declared, “The job today is to see to it that America is not ravaged by recurring depressions and long periods of unemployment.” Dwight D. Eisenhower agreed. But it was under John F. Kennedy that the nation ambitiously shifted from fighting unemployment to promoting “full employment.”

Armed with the tools of Keynesianism, Kennedy’s team of economic advisers believed they could fine-tune the economy, controlling business cycles and eliminating the possibility of recession. Lyndon B. Johnson, Richard M. Nixon and Jimmy Carter all went along with the new thinking, as did the economists at the Federal Reserve, whose easy-money policies abetted the politicians’ full-employment aspirations. A bipartisan consensus had been achieved. But, Mr. Samuelson says, the consensus was wrong. “Wishful thinking” had triumphed over reality.

Reality came in the form of inflationary pressures. Beginning in the mid-1960s policies intended to promote full employment — tax cuts, budget deficits, low interest rates, easy credit — were pushing prices up. Presidents, both Democratic and Republican, chose to ignore the warning signs, or to administer weak palliatives until it was too late. Once the inflationary mentality set in, only the harshest medicine would work. Inflation had to be wrung out of the economy. The costs would be high.

At this point Mr. Samuelson’s story enters its heroic phase: Ronald Reagan and Paul Volcker stepped onto the stage and seized control of history. As chairman of the Federal Reserve, Mr. Volcker proceeded to fight inflation with stern determination, tightening money and credit and dragging the economy into what Mr. Samuelson calls “the most punishing slump since the 1930s.” Unemployment climbed to 10.8 percent (still a postwar high), and everyone screamed. Senator Howard Baker, the Republican majority leader, called for the Fed to “get its boot off the neck of the economy”; others demanded Mr. Volcker’s head, or at least his resignation. But his medicine broke the inflationary fever by the mid-1980s, and prices stabilized. Reagan’s role in all this was to provide Mr. Volcker with crucial political cover. Unlike the presidents before him, Reagan insisted that inflation be brought under control, even if the cost was high unemployment. Unsurprisingly, his own popularity plummeted. In early 1982 Newsweek ran a cover story headlined “Reagan’s America: And the Poor Get Poorer.” But in an act of genuine political courage Reagan persevered, and Mr. Samuelson concludes, “Of all Reagan’s economic achievements,” his successful battle against inflation “was the most definitive. The rest of his economic record was mixed.”

After this stirring description of the high drama of the early ’80s, the remainder of “The Great Inflation and Its Aftermath” is an anticlimax. In fact the narrative dissolves. In bringing his story down to the present, Mr. Samuelson identifies current economic problems and proposes solutions. Some of his arguments are irrefutable, if familiar: the country is going to have to find a way of reforming Social Security and Medicare.

But for the most part he gets lost, and loses his readers, in a morass of on the one hand, on the other. We should trim back the welfare state — but we should also worry about fairness. We should deal with the problems of globalization — but consensus will be difficult to achieve. The final third of Mr. Samuelson’s book has none of the sweep and clarity of the earlier sections.

Worse, perhaps because Mr. Samuelson finished his book before the current financial crisis fully hit, he spends too much time fighting the last war (or even the one before that). His first policy recommendation, his “unambiguous message,” is that we must maintain control over inflation. But at a time when unemployment is predicted to reach 8 percent or higher, and when the economy is feeling deflationary, not inflationary, pressures, a sermon about the evil of rising prices is not the one President-elect Barack Obama most needs to hear.

What’s more, Mr. Samuelson says the larger lesson of his history of the Great Inflation is to demonstrate the dangers of good intentions. “Skepticism,” he writes, “ought to qualify and restrain our reformist impulses.” And as a warning against economic activism he adds, “Just because something isn’t perfect doesn’t mean it can be improved.”

Fair enough. We should always question our intentions, heed the naysayers. And since politicians and policymakers almost inevitably overstep, the skeptic is usually proved correct — eventually. But skepticism can only raise questions; it can’t provide answers or solve problems.

It’s fine to maintain a healthy distance from our politicians and their hired guns, the economists, as Mr. Samuelson urges. Yet in this moment of crisis we would undoubtedly be wiser to be skeptical about Mr. Samuelson’s skepticism.