Robert Samuelson on Paul Volcker and the Great Inflation

Paul Volcker faced an inflation crisis, and he emerged victorious

Earlier this year, Washington Post columnist and bestselling author, Robert Samuelson, joined David to discuss his most recent book: The Great Inflation and Its Aftermath. Given that much of David's interview with Robert focuses on the late Paul Volcker's efforts in the late 1970s and early 1980s to tame inflation, we thought listeners of Macro Musings would enjoy another opportunity to hear this fascinating discussion.  

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Note: While transcripts are lightly edited, they are not rigorously proofed for accuracy. If you notice an error, please reach out to [email protected].

David Beckworth: Our guest today is Robert Samuelson. Robert is an economics columnist for The Washington Post, and spent several decades also working at Newsweek writing on economics. Robert is the author of several books, including *The Good Life and Its Discontent: The American Dream in the Age of Entitlement 1945 to 1995. More recently, he had another book called *The Great Inflation and Its Aftermath.* Robert joins us today to discuss this book and its implications for today. Robert, welcome to the show. 

Robert Samuelson: Nice to be with you. 

Beckworth: Robert, you're not formally trained as an economist, but you've been writing about economics for almost 50 years. Tell us about your journey into this career field, and how did you get here? 

Samuelson: Well, let me also add there I'm no relationship to Paul Samuelson, although he once wrote me a nice letter when I was awarded, or got the column in Newsweek that he once wrote. His letter said, "Someone named Samuelson can't be all bad." I've always wondered whether he changed his mind. Anyway ... 

Samuelson: You must remember that I am not an economist, that I was hired by the Washington Post in late 1968 as a metro reporter, a reporter covering the city and the suburbs. Only when I came down did Ben Bradlee, who was the editor at the time, ask me whether I would take a slot in the business section, which has just come open. I thought it was not a great idea to contradict my new boss, so I took it. One thing led to another, and that's what happened. 

Beckworth: Yeah. So, you have seen a lot in your career covering economics and finance. As I said, you worked at Newsweek. You were a very famous columnist there for many years. Now, you're at Washington Post. I'm curious, during this time, what have you seen as the biggest economic events? 

Samuelson: Well, I started in the late 60s, and in the late 60s, we were basically at the peak of influence in authority for Keynesian economics. Although I didn't really understand that at the time because I hadn't taken enough economics in college to acquaint me with it. What happened in the 1970s was a collapse of the Keynesian consensus, and that was certainly very interesting to watch. It was somewhat disturbing because it turned out that the government, at least in the 1970s, could not get control of inflation. It kept going up. [The] Fed would put on the breaks, so to speak, and it would come down a little bit. Then, unemployment would go up, and to cure unemployment, they'd loosen policy. 

Samuelson: So, you had a series of stop-go policies. You had a series of wage and price controls, some of which were nominally voluntary, others of which, under Nixon particularly, were compulsory. They didn't work either. You had a breakdown of the political consensus for these policies, but no obvious replacement for it. So, that was one major change. Another major change was the explosion of oil prices in the early 1970s, something that most Americans hadn't considered possible, that we would be ... At the time, we felt we would be permanently dependent on Mideastern oil. That was another big change. 

Samuelson: Obviously, changes occurred after that. Most recently, the financial crisis of 2008, 2009, the Great Recession that followed that, which was the worst business cycle or worst recession since World War II. So, there was a lot to see, and, I have to say, I used to say about the Great Recession, the financial crisis, that its only benefit was to lengthen my career. 

Beckworth: Nice. We're going to talk about the Great Inflation, which was a big part of your career. I'm going to get to that, but there's these other events you've touched on. You mentioned oil shocks. You mentioned the Great Recession. I imagine you covered the Japanese trade wars stories back in the 80s. 

Samuelson: I did. 

Beckworth: Yeah, yeah. So, there's a lot of things going on. During this time, I imagine there's a lot of debates among economists going on. My experience has been really shaped by the Great Recession, and one thing that I've observed and I've been a part of, are all the macroeconomic debates on what's the best policy response, what's the right thing to do. There's a lot of disagreement in macroeconomics, and I'm wondering if you saw that same disagreement going back 40, 50 years? 

Samuelson: Well, I think in the late 60s and particularly the 70s, you did see this sort of collision of Keynesianism, or at least Keynesianism as it was practiced then and Monetarism led by Milton Friedman, which was proffered correctly, as it turned out, as a solution to the inflation problem. I think that that is really the biggest intellectual focus that we've had since World War II in terms of economic theory that has practical relevance. Presumably, there are other economic theories that are less important practically but perhaps more important intellectually. 

Samuelson: I would say that those were the major events, and for much of the 70s, there was an attempt to maintain the Keynesian model and modify it with wage-price controls or guidelines, incomes policies, various names for the same thing. The idea was that somehow you could order inflation to stay where it was or to go down, as opposed to letting markets solve the problems. Those policies generally did not work, although they were tried repeatedly from Lyndon Johnson through Nixon through Carter. It was only when you got to Reagan and Paul Volcker, at the head of the Federal Reserve, that they tried something totally different. 

Beckworth: Yeah, I want to come back to those a little bit later in the show. I think they're very important for some of the discussions today. A lot of interest today in a school of thought called MMT or Modern Monetary Theory, and they advocate a more aggressive use of fiscal policy, a throwback to some earlier Keynesian thought. One of the things they want to do is to use price-wage controls, credit controls, if inflation were to get out of hand. 

Beckworth: So, I want to come back and revisit that in a bit, but let's get into your book. Your book's title is *The Great Inflation and Its Aftermath.* The timing of it was very interesting. That's a story in itself. Can you tell us when it was released, and what happened? 

Samuelson: Well, it was released in the fall of 2008, a few weeks after the collapse of Lehman Brothers and in the midst of the financial crisis at 2008 and '09. Except for me, nobody was interested in inflation. It seemed like a problem that was the furthest from relevance at the time. After having spent a lot of time and psychological energy on the book, it appeared, as I say, at the exact worst time it might have, but that's the fate of a lot of authors. 

Beckworth: Yeah, I found it interesting that timing too, disinflation, mild deflation, the very time you're talking about high inflation in the 70s. But that's why we're here today because I think this is an important topic. I think we may be coming full circle where we've gotten to the point where we're taking for granted low inflation, thinking we can push policy to the limits. So, I think it's important to revisit this book on this topic. I want to begin by just asking the question, what period defines the Great Inflation? How would you put markers on the two places that begin and end that time? 

Samuelson: That's not an easy question. To get quickly to the answer, I would place, I would say, 1965 to 1982 or '83. In '65, it was just becoming apparent that inflation was unexpectedly getting out of control, but you could say '64 or '66, and we're dancing on pins here, so to speak. I choose 1982 or 1983 because that was the aftermath of the Volcker-Reagan recession, which raised unemployment rates to 10.8 percent, basically put the economy in a tremendous crunch that destroyed an awful lot of inflationary expectations. So that before the recession, inflation was about 13 percent on an annual basis and sometimes 14 or more percent on a monthly basis. By 1982, it was down to four percent. 

Samuelson: You had basically broken the back of this double-digit inflation. Under Greenspan, who followed Volcker, inflation went down even further to around two percent, but Volcker's determined credit crunch, or crunch on the money supply, really did most of the decisive work in getting rid of the inflationary psychology. 

Beckworth: Yeah, and we want to get into a discussion in a little bit about how awful this experience was and how people dealt with it. But, just to repeat what you said, in your book, you note, "Inflation went from about one percent in 1960." I looked up the highest I could find, which was the early 80s, which you mentioned 14.5 percent inflation year on year change. That's amazing. 14.5, almost 15 percent inflation, something that we just can't imagine today in the United States where we have 1.5 percent, two percent inflation. 

Samuelson: Well, my memory is that most people in the 1950s and early 1960s couldn't imagine it's going to double-digit inflations or even seven or 8% inflation. This was the kind of behavior you expected maybe from European countries or developing countries, but it wasn't the kind of behavior you expected from the richest country in the world and most sophisticated country in many ways. We had a long history of price stability, interrupted, to be sure, on occasions, but we always seemed to return to equilibrium level. 

Samuelson: The idea that inflation would get out of hand was simply not in the common memory. It was not among the assumptions that people took for granted, and that was one of the reasons that it was so devastating because people were just saying, "Well, we're only going to go up a little bit more." Going from one percent to three percent. "Well, that's ... It's not good, but it's not bad." Going from three to five percent. "Well, it's only two percentage points more than the three percent. We've got it under control now." This sort of self-justification was widespread. 

Samuelson: By the time it became obvious that inflation was really a difficult problem to solve ... Because the only way people knew how to do it based on history was to create a crushing credit crunch, which basically would create oversupply in goods and labor markets and drive wages down, or at least drive the increases of wages down. Likewise, goods and services would be affected the same way because labor's their largest cost. This came as a great surprise to people, and as you say, today, nobody would expect it. 

Samuelson: Maybe expectations are so strong that we have a right to believe we won't accept it, but I have a memory, and I do worry that we will ignore it until it now becomes so powerful that we can't ignore it anymore. Whether that's five percent inflation rate or 15 percent inflation rate, I really can't say, but it is a bit of a surprise to me ... Well, let me put it this way. When I wrote this book, I wrote it in part because I just thought the story needed to be told, and it wasn't being told. But, a secondary reason for writing the book was to remind people that this can happen. 

Samuelson: I thought, at the time, that of course, as we get further and further away from the event, people will forget about inflation, but I thought that the memory would operate really over two generations, the people who had been in it, who remembered it firsthand, and their offspring basically. Because enough would have been said about it, particularly among economists, to remind people that this is a possibility. I have to say, and unexpected by me, the memory has faded even faster. I do think that there is this residual danger that we will dismiss inflation as a serious problem. 

Beckworth: That's very interesting because, on the show, we have talked about a generational swing in inflation fears, inflation being embraced, and, I want to be the first to admit, I've been someone who's been critical of the Fed of erring maybe too low inflation. Why haven't they hit their two percent target? Maybe they've been a little too timid. With that said, what we've talked about before on this show, and I'd like to get your take on this, is if you go from the Great Depression, there's a whole generation very risk-averse, very careful, low inflation. 

Beckworth: You get to this period. We'll talk about the chapter in your book, where you talk about what led to the Great Inflation. People began to experiment with full employment. They began to take for granted too the low inflation they had coming out of that period, took a generation or two to get the desire to tinker. Here we are, again, we've had the Great Recession. It's just happened really much sooner. The young, my generation and younger, we're willing to experiment. Do you see a pattern here repeating itself? 

Samuelson: Well, I don't think there's anything wrong with experimenting, and I think, in fact, it's desirable. I think so far the evidence does not point to a real inflation threat, and we should follow the evidence as Janet Yellen and Ben Bernanke used to say. What worries me is that when inflation begins to get up a bit, not spectacularly bad, but just up a bit, that people will rationalize it, and they let it become embedded in their expectations and behavior. Then it will be slightly more difficult to get inflation back to the two percent range. 

Samuelson: Let me just add, parenthetically, I don't think the Fed can hit a target as precisely as two percent. It's just not that much of a science. I, myself, if I were on the Fed, and I'm certainly not qualified to be on the Fed and have no desire to be on the Fed, but I would have cited a range between zero and two as what the Fed wants to hold it. I understand the arguments for trying to get a little more inflation in the system, so you have more ammunition if there's a downturn. I regard this something as a rationalization. I'm not so bothered by the possibility it might go into a little bit of deflation. 

Samuelson: I think if you show you're determined to avoid a deflation getting worse and worse, it seems to me you can have a little deflation as an antidote to more inflation than you wanted, but you need to act quickly. I think that with people's expectation, you have to ask yourself, "If deflation goes down one percent, are most people going to recognize that?" No. It's just the same as when inflation goes up one percent. Do most people recognize that? No. It's just too damn small. 

Samuelson: If you let the negative one percent go to five percent, people will surely notice it, and if you let the one percent go up to five percent as inflation, people will surely notice that. So, your target ought to be bunched around zero. Maybe, minus one to plus two with a bias to be more energetic, keeping it above zero than below, but I wouldn't have gone for a specific target. 

Beckworth: Do I take that to mean you're not a big fan of price-level targeting? 

Samuelson: I am not. I don't understand it that well, but the notion that somehow you set a target of two percent and then the economy goes into a recession and inflation averages one percent. The idea, as I understand it, is as the economy comes out of the recession, you can justify three percent to get you back to where your original, nominal level GDP was. Well, okay. That makes sense on paper, but will it make sense in reality? When people start seeing inflation go to three percent, will they say, "Holy moly. What's going on here?" 

Samuelson: You begin to lose confidence of the institution because what you're doing is quite uncertain. It's new, and it's disruptive in ways that people don't want to be disruptive. It's too damn complicated. So, I'm not a fan of this. By the time it becomes a relevant issue for journalism and economists, I will have retired. 

Beckworth: Okay, and I'll let our listeners know that we gave Robert a nominal GDP targeting mug before the show, and he let me know ahead of time he's not a fan. But- 

Samuelson: I'm not giving it back either. 

Beckworth: Yeah, right. But, I also told Robert we've got plenty of literature for him to read to ... Someday he'll be convinced of level-targeting, whether it's price-level or nominal GDP level targeting. But, that's not the point of this show. 

Samuelson: Well, don't be so sure of yourself because my daughter summarizes my philosophy of life, "All change is bad." Anyway ... 

Beckworth: Well, I believe even old dogs can learn new tricks. I believe that it's possible. I'm holding out hope that we can have another conversation later about nominal GDP level targeting, and you'll have a different take on it. But, we're here to talk about your book, not about nominal GDP level targeting. 

Beckworth: I'm glad to talk about it. You've got a great book, and I really do want to push your book because, as you said, there is this lack of understanding today, I think, lack of appreciation what went on in the 1970s. Even myself, I was just a kid, a little kid. I really have no awareness other than what I've read, and really, I haven't read a lot about that period. 

Beckworth: Your book ... I think Paul Volcker's new autobiography speaks to it, but your book really does speak to some of these challenges. What I want to do is go through the chapters in the book, and I want to ask a question, which is answered in your first chapter. Your first chapter's called Lost History, and you've already touched on this, but let me ask it anyways. Why write the book? 

Samuelson: Why write the book? 

Beckworth: Yeah. Well, and you've already answered it, but for the sake of our listeners. 

Samuelson: I write the book because this was a story that I was convinced was critical to American history in the post-war period. I don't think Ronald Reagan would have been president without the discontent fostered by high inflation. I don't think the so-called conservative movement would have had the same impact that it had without the impact of inflation. What you have to remember ... or maybe you don't need to remember, you need to understand it ... that the inflation that we experienced in the late 1970s and the early 1980s was not primarily an economic crisis. It was a social and political crisis. 

Samuelson: People detested inflation. They found living with it extremely difficult. They found it as a kind of symbol of how the American government had lost its way and how people who ran our society were no longer competent. Feeling the projections of how Americans would feel about the future were increasingly negative, authority figures were ridiculed. The prime evidence here ... 

Samuelson: Of course, there were all sorts of things that people experienced day-to-day. They didn't know how much their savings would be worth. They didn't know whether or not their salaries would keep up with prices and so on. They didn't know whether or not these high levels and rising levels of inflation would cause more recessions. There were many, many ways in which inflation offended people and threatened them, and they felt it. Their optimism about the future declined, as I said. 

Samuelson: Getting inflation down was not primarily an economic problem. Milton Friedman once said, I think maybe, probably said it many times, "That if everything was indexed to prices, economically there wouldn't be such a big problem," because people knew their wages would keep up and whatever. That may be true, and he was against inflation, but he minimized ... He said, "The effects could be minimal." 

Samuelson: There are two problems with that, and I think he probably recognized both of them. One is, you don't know whether or not you're going to institute indexing to begin with and you don't know how much the indexing is going to work. Secondly, people didn't think that inflation would stabilize at some higher level, undesirable, but it would stabilize. It would be eight percent or whatever, 10 percent. People felt intuitively, and I think they were right, that once you got on a wage-price spiral, it will just continue until you stopped it. 

Samuelson: You couldn't say, "We're going to stop it. We're going to have six percent inflation forever," because the six percent would become eight or nine percent. Then when you got there, you had to get it down to some level that was obviously manageable and containable. That's what Paul Volcker, and to a lesser extent Alan Greenspan, did. 

Beckworth: Yeah, it's worth mentioning, not only did it get high, but the rate was volatile. It had swings. 

Samuelson: Absolutely. 

Beckworth: It'd be one thing if it were high and predictable, but far from it. It was high. It was a growing rate of inflation, and you had these big swings. The point of your chapter one in the book is that too many people have forgotten it, and that includes historians. I want to read a quote that starts off chapter one. I think it's very powerful the point you're making here. You say, "History is what we say it is. If you ask a group of scholars to name the most important landmarks in the American story of the past half-century, it would list some, or all of the following: the war in Vietnam, the civil rights movement, the assassination of JFK, Robert Kennedy, Martin Luther, Watergate, President Nixon's resignation, the sexual revolution." You mention the computer chip, Ronald Reagan's election, the end of the Cold War. 

Beckworth: You go on and on and on. What you say, at the end of this discussion, "But missing from any list would be the rise and fall of double-digit inflation. This would be a huge oversight." You stress this multiple times in your book that many people have forgotten this episode and how consequential it was. It's almost like there's a memory gap in our collective consciousness. Why have we forgotten it? 

Samuelson: Well, that's it. That's an insightful comment, I think. I truly don't really know why we have forgotten it as quickly as we have. I think one reason is both parties were implicated in this. The Democrats started it in the 1960s, but Nixon continued inflationary policies or was unwilling to contain it. Ford was a little less responsible for it, but there was a bipartisan consensus not for inflation, but a bipartisan consensus against the things that might cure inflation because they were initially painful. 

Samuelson: You have the predicament of democratic governments, which is the problems that need solving involve either large pain or no gain in the short-run, even if they promise benefits in the long-run. A democratic system is hard-pressed, basically, to make sacrifices initially for some future, unquantified gain. It's very difficult to do that. The second reason, I think, is it's complicated, and people really didn't understand why this was happening. There were all sorts of theories from economists and others as to why it was happening. 

Samuelson: One theory, for example, was, well, Americans want more than we're able to produce. What we do is we basically ration by inflation. We produce what we can, but we raise the prices of some so that some people can't get them. The problem is a psychological problem that comes from wanting more than what we create. Well, that sounds very sophisticated, and a lot of people bought into it. Just totally wrong. Once we decided to end inflation, we could end inflation. That was simply by squeezing the money supply and squeezing credit sources. It wasn't pleasant, but it showed that that explanation was wrong. 

Samuelson: There were other explanations that somehow you could reconcile high inflation, or stable inflation, with wage and price controls, which I've mentioned several times. Without getting into the details, that didn't work either because you had to get the support of most Americans to make it work. Because if I live across the street from you and your salary is allowed to go up under wage-price controls and mine is not because of differences in the way our occupations work, the differences won't matter to me. All I will know is you're getting more, and it's unfair. 

Samuelson: Well, the permutations and regulations just exploded, companies that used imports as inputs, companies whose businesses were seasonal, and so on, hospitals that needed extra money because costs were rising. There was just a proliferation of these exceptions, which undermined public acceptance of the wage-price controls, and it's inevitable outside of wartime in a democratic society. So, you had all sorts of problems like this, and people just wanted to forget about it. 

Samuelson: It is interesting, and I guess I haven't thought about this until right now. I grew up in the 1950s. My parents almost never talked about the Great Depression. I don't think our family was devastated in the Great Depression, but the Great Depression was something that affected everybody in one way or another. Yet Americans are forward-looking people. People didn't want ... I have a quote in the book from Studs Terkel about one of his interviews. The guy's being interviewed. He said, "What's the point of talking about the past? The past is past. We're just going to look at the future." To some extent, Americans' optimism and looking to the future has caused us to forget a valuable lesson that I hope we won't have to replay. 

Beckworth: You mentioned it's complex. One explanation I thought of in reading your book is because it's complex, sometimes we attribute to different things what happened. I was speaking with a family member recently, and they attributed the erasure of inflation to President Ronald Reagan. Now, in your book, you do bring out that he had Paul Volcker's back, but there's this lack of recognition the role the Federal Reserve played. Like you said, the Federal Reserve tightened monetary policy significantly, painfully, and that was pivotal. 

Beckworth: But many people would say, "Oh, it's just Ronald Reagan. Look what Ronald Reagan did." That, to me, is an example of some of this confusion of what really happened. 

Samuelson: Well, in my telling of the story ... I actually just received an email this afternoon from an old friend of mine who's an economist who says, "Everything I believe is wrong about Reagan," But my telling of the story is Reagan was a critical character in the story. If Reagan had not been president, what happened would not have happened. Something else would have happened. My guess is if inflation would have gotten higher, at some point we would have stopped it, but it would have been even harder. 

Samuelson: Volcker knew what to do technically, and he knew from his experience what would happen if he did the things that he was going to do, which was basically, as I said, squeeze the money supply, squeeze credit, raise interest rates, basically bring the economy to a halt so people will stop raising prices and wages. But he knew that also that there would be a tremendous backlash against this, and Reagan protected him from the backlash. There was all sorts of proposals made on Capitol Hill to either expand the Federal Reserve board or impose requirements on them. I think firing Volcker was included in one of these things. I'd have to check that. 

Samuelson: Reagan never got on board with these things. Numerous times he basically said, "We're just going to have to ride this out." Because the other way of just letting ... and, I'm using his exact words ... letting the money supply zoom is just a formula for more inflation. I was told by somebody who had covered Reagan in the 1970s that even then he recognized that there was going to be this short period, or maybe not so short period, of austerity because, as he quoted Reagan as saying, "There's going to be some bellyache because it's the only way you can do it." I quoted that in the book. 

Samuelson: I call the chapter about Volcker and Reagan, “A Compact of Conviction.” Both of these men, for different reasons, but both of them felt very strongly that the United States as a society could not prosper, it could not do well, with high inflation. Volcker basically took that conviction and took it to the marketplace, and Reagan basically took Volcker's action and said, "You've got my support for this." So, it was a political act, and, as I say in the book, "If there were two other men who had been assigned this task, or had been president and chairman of the Fed, it's not clear at all whether or not what happened would have happened." 

Samuelson: I go even further and say, "If one of those men was missing, it's not clear what would have happened." If Volcker did not have Reagan's backing, it's not clear that he wouldn't have been stopped at some point by a coalition in the Congress or other politicians. If Volcker had been absent, it's not clear whether Reagan would have forced his successor to be as tough on inflation as Volcker was. It was a happy coincidence, but it's not clear that what actually happened can be repeated. 

Beckworth: The stars were just aligned for those two men to come on the scene when they did. 

Samuelson: There are times in history when who was acting and who was in charge makes a difference. This was one of those times. 

Beckworth: I want to read an excerpt from your book where you touch on this. This is about the bills and Congress going after Paul Volcker. You write, "There were an outpouring of bills and resolutions to impeach Volcker, rollback interest rates, or require the appointment of new Fed governors sympathetic to farmers, workers, consumers, and small businesses. Representative Jack Camp, a prominent Republican supply-sider, wanted Volcker to resign." Even the supply-siders, the conservative Republicans- 

Samuelson: Supply-siders were berserk over this. 

Beckworth: That was probably the most surprising part of this because you associate them with gold standard and hard money, but they wanted his neck too. In August 1982, Senator Robert Byrd of West Virginia, the Democratic Floor Leader, introduced the Balanced Monetary Policy Act of 1982, which would have forced the Fed to reduce interest rates. So, you have these attempts by Congress to micromanage what the Fed was doing, and fortunately for Volcker, Reagan had his back. 

Samuelson: Exactly. People do not want to admit that Ronald Reagan played a vital role here. There's a bias, at least in Washington, against Reagan that lasted to this day. My wife, who's a wonderful woman, thinks Reagan was basically already under siege by Alzheimer's disease, and she doesn't give him any credit for anything. I think Reagan was probably the best president we've had since Dwight Eisenhower. 

Beckworth: Okay, great assessment. Just going back to my point, you needed the political support, you needed the technical support. These two men filled those roles, but do you get a sense ... Maybe here in DC people know Volcker played a large role, but the public at large ... Going back to this question, why have we forgotten? The public at large maybe, I'm wondering if they recognize the role that it took to get rid of inflation. It took Volcker having a spine, sticking with his plans, having political support. Do you get a sense for that? 

Samuelson: I think there's less understanding of that than you would hope for. 

Beckworth: Okay. 

Samuelson: This raises a problem of journalism. I'm 73 years old. I think of the 1990s as recent. My kids think of the 1990s ... They don't think of the 1990s at all. The problem is in writing you have to make assumptions about what people know. When you get as old as I am, the assumptions you make may not be realistic anymore because what is new and fresh to me 20 or 30 years ago was a whole lifetime to people who are younger. 

Beckworth: Yep. I don't want to belabor this, but because we are trying to make the point that the 70s inflation was consequential, I want to read one more excerpt from your book about what it was like during this period. This deals with an under-appreciated psychic cost, the mental costs, that almost a sense of defeatism the American public had. You write, "What made Americans detest rising inflation so much was its assault on the national belief in progress. It challenged Americans' hopeful view of themselves and consigned their destiny to outside forces. We seem to have lost control both as individuals and as a society over our fate. That was inflation's most damaging effect." You go on to cite a pollster who says that, "Americans were more concerned about this than Vietnam or Watergate." 

Samuelson: The Gallup poll asks every year, "What do you think is ... " I'm paraphrasing. What do you think is the major problem facing the country? I think the years were '73 to '82, roughly in that period. Cost of Living was always number one. This is completely forgotten, even at the time. I think if you asked 100 people on the streets, which was more wrenching to society, the war in Vietnam or inflation. I don't think you'd get one. You might get one or two or even five or 10, who would say inflation, but most people would say Vietnam, and maybe they're right. Vietnam was awfully wrenching. If you said Watergate, I would say that was less wrenching. The effect of inflation on people's confidence in their outlook and their trust of government was much, much more important. 

Beckworth: So, the cost of living inflation was the foremost concern for many years? 

Samuelson: For almost a decade. 

Beckworth: For almost a decade. That's remarkable when you think of the other things that were happening during that time. Again, if you read those- 

Samuelson: I think that's on page 22 by the way, in case you want to check it later. 

Beckworth: Okay. If you look at a typical high school history textbook or most historians' accounts, like you point out in the book, they don't focus on this inflationary period. They focus on Watergate, on Vietnam. 

Samuelson: They focus on political events, and it is amazing to me that this is the case, that historians are so blinded. I have a sentence in there somewhere that says, "Economists don't do history and historians don't do economics." I think that that is true. By and large, historians do not include sophisticated discussions of economic events and pressures on the people they are writing about. 

Samuelson: The opposite is true too. Economists don't merge their economic stories into the broader narrative, what's happening to the country. They're just trying to find out what happened to the last recession or whatever. Historians really don't integrate economics into their narratives. So you have these vast, empty planes of intellectual life. They're simply sitting there. Nobody pays attention to them. 

Beckworth: Why don't you tell us about what got this ball rolling? What caused inflation expectations to become unmoored in the 60s and ultimately inflation itself? 

Samuelson: Well, what happened in the 1960s is that the economists, most of them were Keynesians, believed that they had formulated a way of manipulating the economy by speeding it up when it was slowing down through lower interest rates and tax cuts and budget deficits, and doing the opposite when the economy was going too fast and inflation was threatening. They would slow the economy down through higher taxes, budget surpluses, higher interest rates. It all seemed very simple, and there was one target. The target was full employment. 

Samuelson: The argument was when you reach full employment, the pressure of scarce labor would push up wages. That would feed into prices, and you go off into a wage-price spiral. To avoid that, you would use your Keynesian tools to stop the expansion of the economy when it got to full employment. Full employment, in 1962, was considered about a four percent unemployment rate. 

Samuelson: Well, this hit two objections. One is, you didn't know whether or not full employment was four percent. This is something you could only estimate after the fact. After the fact, the damage has already been done. Even if you could estimate it, in real time, the political system was not ready to do things that were unpopular, raise taxes, cut spending, raise interest rates, until it was absolutely unavoidable. So, you had a political asymmetry. 

Samuelson: You had politicians who were basically wedded to the good half of the Keynesian model, which is we'll raise deficits, cut taxes, increase spending, lower interest rates when the economy is not doing as well as we would like, and we will aim it at full employment. Maybe we overestimated full employment, so full employment's actually a little bit less than we thought. Full employment became this sort of universal target. Inflation was an afterthought. 

Samuelson: Really from the mid-60s, I would say, to the early 80s, until Volcker and Reagan came around, full employment was the primary target of economic policy. It became a political symbol as to whether or not ... The lower the unemployment rate, the more people would feel better, and the less fearful they would be of losing their job. So, that was the target. As they say, inflation was something they hoped to take care of in their side pocket either through wage-price controls or some sort of just hoping that a little bit of restraint would get them a benefit on inflation that would allow them to pursue full employment. 

Beckworth: Okay, so the pursuit of full employment with imperfect tools led them to this great unmooring of inflation expectations and inflation taking off. You mentioned, one way they tried to fix that is through wage and price controls. I want to spend a few minutes on that because today there are calls for wage and price controls by advocates of MMT. They argue if we go all fiscal policy again, we can use credit controls, price controls, wage controls. 

Beckworth: You have some stories in your book. You tell one story, for example, where the government was using price controls on gasoline, and there's these long lines. You want to talk about road rage today, there was gas station rage. When I was reading your book, one gas station owner got shot, others got ran over because of the shortage created by these price controls. 

Samuelson: Absolutely. There are people now who also blame higher oil prices and gasoline prices as the major reason that inflation went up. This is a complete cop-out. It's true that higher gasoline prices and fuel prices contributed to the rising inflation, but the government also publishes figures without the effect of fuel. Those figures show that there would have been inflation if oil hadn't been in the index at all. At best, price controls got you a kind of pause in inflation. 

Samuelson: Nixon imposed price controls in August of 1971, and everyone believed, or almost everyone believed, that this was an attempt to squash inflation just before his reelection in 1972 so he could speed up the economy, get unemployment down, and have inflation restrained artificially by wage and price controls. That is, in fact, what happened, but as soon as the election occurred, the wage and price controls started to come off. They were breaking down anyway. There were opposed by some of Nixon's economists as undesirable. Of course, Nixon wasn't looking whether it was desirable for the country. He was looking for whether it was desirable for him. 

Samuelson: Yeah, and so it was not a happy episode, but, as you have said a number of times and I'm afraid correctly, it's been more or less regarded by everybody. So, if we try this again, it will be a perfect example of not learning from history's lessons. 

Beckworth: Yeah, I think of other examples like in China where they've attempted to impose capital controls. It's almost impossible to make them work because you have a big, big economy. People are going to find ways around them. They aren't applied efficiently. In the US, it's a large, large economy. You mentioned in your book studies by the economist Hugh Rockoff. He looked at price controls during World War I, World War II, and he said they worked relatively well then. But the reason they worked well then is people had a motivating force, patriotism. You don't have that during peacetime. 

Samuelson: Absolutely. I talk about that in the book, that wage and price controls are hard anytime, but if you are in a major war, people are understanding that you need to make sacrifices. People are understanding that everything won't be fair. There's a kind of a latitude that people accept as being realistic, and it is realistic. Once the war was over, the clamor to remove these controls was enormous. There was no affection for wage and price controls. The political support they had was mainly the result of, as you said- 

Beckworth: Of the war. 

Samuelson: ... patriotism of the war. 

Beckworth: Even in World War II, which some would point to as an example of successful price controls, there's many examples during that period where they went awry. One that I'm familiar with was the government set a price for how much a loaf of bread would cost. What people did is they started changing the ingredients that went into a loaf of bread, so the quality of the bread went down. You can ration by price. You can ration by quantity or quality. 

Beckworth: The government's saying a loaf of bread only can cost so much. Well, the people who make it are going to find ways to cut the cost of making it. What happened then is the government started regulating what type of ingredients could go into that loaf of bread, and then people found ways around those regulations. Before the war was over, there was a thick book on how to officially make a loaf of bread because of this price control. Those are the kind of distortions that can arise when you start imposing these things. I guess they're very unpopular even in times of war. It strains credulity to think they would work in peacetime, and they didn't during this period. 

Samuelson: They don't work in peacetime not only because of all the practical problems, but again, because of people's relative status and income. People see that those are being changed and often changed arbitrarily, and so they are naturally unhappy about it, and not just unhappy but actually infuriated. 

Beckworth: Now, I want to touch on some of the other explanations given for this. I want you to respond to them. Some people say, "Well, in the 1970s, inflation was caused by big supply shocks, oil." What's the response to that? 

Samuelson: Well, the response to that, as I've said earlier, is that the government ... It did hurt. Rising oil prices did make a contribution to inflation, but the government does its statistics without oil, and the curves are exactly the same. They're a little bit lower, but the shape of the curve is exactly the same. What my recollection is when I looked at it, and I can't remember what year this is, that the overall inflation rate of the consumer price index was 11 percent, and without oil, and I think food was excluded as well, it was nine percent. 

Samuelson: Qualitatively, it was identical. Quantitatively, it was slightly different, but people jump on this to excuse knowing much about the real effect of wage-price controls and knowing much real effect about what actually happened during the 60s and 70s. If we go down this road again, these arguments are just going to come out of the woodwork, and since everybody hates big oil ... and now we have another reason, climate change, to hate big oil ... it will seem practical. 

Beckworth: Yeah, for me, what I see is the confusion between relative price changes and the general price level change. When people start talking about supply shocks, they can temporarily cause inflation to move, but to change trend inflation, the average growth rate over a long period, that has to be something that quantity of money, monetary policy, macroeconomic policy is doing, the amount of government liabilities being created. I think there is this confusion between relative price change and the price level changing. I think we see some of that coming back even now. 

Beckworth: Let me also mention, Ben Bernanke had a famous paper where he looked back at the 70s and looked at these inflation periods, and he makes the argument that the reason that those oil shocks did matter as much as they did, is because it's how the Fed responded to them. It wasn't the oil shocks themselves that mattered so much, but the fact that the Fed itself hit the brakes, panicked, made things worse. Any thoughts on that? 

Samuelson: Well, I must have forgotten this paper. I don't remember this particular paper, but once you have a price increase like this, you have a dilemma, a dilemma you can't do anything about. You've got to choose one side or the other. You can accommodate the price increase and basically shield the economy from slow down or recession, or you can basically knock down the price increase but at the risk of the economy going into a recession or slowing down. 

Samuelson: The behavior of the Fed in the 70s was usually to take the easiest way out, and you can't blame them. This is what basically the political system wanted. But just because the political system wanted it doesn't mean it's necessarily any good. 

Beckworth: Okay. One other story I want to share with you and our listeners, when I was visiting the American Economic Association many years ago, I went to a session that revisited this Great Inflation, and there were two sides there. Representing one side was John Taylor and Andrew Levin, and they had a paper where they argued it was monetary policy that caused the problem and what ultimately fixed it, again, with these other conditions in place and the support of the president and the political backing to it. It's a great paper. They show how inflation expectations become unmoored. They show the actual inflation rate. 

Beckworth: So, they get up and present their paper. Then, Alan Blinder, who has a famous paper where he argues it was supply shocks that cause it, he gets up and presents his argument. Someone in the audience might be torn on which one is right. They both make convincing cases. Then what really was, to me, the knockout punch for the monetary policy story is that a third paper from people in Germany got up, and they showed how they didn't have any inflation during this time, or at least far less inflation during this time, and they too were subject to the oil shocks. They too had made the same supply-side problems, and somehow they didn't have the Great Inflation like the US did, which points to a policy choice being a part of the story. 

Samuelson: That's absolutely right. The excuses that people make for the inflation we had disguises the reality. The bedrock reality was this was a man-made, human-made problem, and I do worry that we're going to forget that. 

Beckworth: Many people who would agree with your assessment that the Great Inflation was a policy error and was fixed by policy, better policy, by the Federal Reserve, by Reagan backing the Fed, they would agree with that assessment, but then they would say the correction, what the Fed did, was too extreme. The Fed could have fixed the problem without creating such a deep recession. 

Samuelson: Well, I think we tried that in the 1970s, two or three times. There was a recession at the beginning of the 70s, and that was the argument that was made then. There was a recession in 1973, '75, in part, caused by the oil, higher oil prices. Then there was a recession in 1980. In each case, inflation ultimately came back and came back fairly quickly. By the time it was Volcker's turn to take a swing at the bat, his view was, I think, "We're going to do it this time. We are not going to let up until it's clear that what we set out to accomplish is accomplished." He wasn't talking about a scientific right or wrong. He was going to say, "We're just going to do this." At that time, that was what was needed. 

Beckworth: All right, in closing, in the time we have left, I want to bring up a point you made in your book, and that is as successful as the Fed was, Paul Volcker and Ronald Reagan, in getting rid of inflation, you argue that it ultimately planted a seed for the next great disaster. 

Samuelson: This is the ultimate irony of this, and I don't think almost no one has picked this up. I think they should but they won't. The economic boom created by lower inflation basically created an economy that seemed to be better than in the past, more stable, growing adequately, if not booming, and people lost their fear of economic change. What you had is a situation where inflation went down, interest rates followed. 

Samuelson: As interest rates went down, the stock market went up. As the stock market went up, people felt richer because their paper wealth was higher. Housing prices ultimately followed suit. People felt richer because their housing prices were higher. People started saving less because their wealth on paper substituted for the money they were spending. They felt that their wealth hadn't declined because it was now in the value of their houses or stocks. 

Samuelson: People borrowed against increased amounts of money in housing, and so what you got was you got a virtuous circle in which lower inflation stimulated more spending. People felt richer. As people felt richer, they took more risks. It was one economy in the early part of this century, the high tech economy, a recession, stock market went down, but it was mild by comparison. So, you have all these positive things, basically, that the origins were mostly, if not exclusively, in the defeat of inflation. 

Samuelson: The irony of this is this great triumph of public policy, the defeat of double-digit inflation, was followed by this disastrous catastrophe of public policy, which was the financial crisis and creating the Great Recession. To me, that is the ultimate irony of it, and it really calls for some very rigorous and honest scholarship. In all the stuff I've read, I haven't seen a word about it. 

Beckworth: So the Great Inflation was conquered. That planted a seed for the great moderation, the stability, a greater risk appetite, all the leverage we took on, and then, boom, it all ended. Maybe some volatility's okay. Maybe some- 

Samuelson: There's nothing wrong with some volatility. 

Beckworth: Yep. 

Samuelson: Yeah, and people need to be reminded in the most practical way that there's a value in prudence, that there are risks and it's okay to take the risks if you understand what they are. If you don't understand what they are, maybe you shouldn't take them. The world is uncertain, and it's not just uncertain in press releases and academic studies, it's actually uncertain in the real reality of it. All the people need to be reminded of this, and it's very hard to remind people of this when you're in the midst of a stock market boom, and their net worth is going up every day. So, there you have it. 

Beckworth: Yeah, it's hard not to drink the bubble Kool-Aid when everyone else is drinking it and getting caught up in it. 

Beckworth: Well, our time is up. Our guest today has been Robert Samuelson. Robert, thank you for coming on the show. 

Samuelson: Thank you. 

Beckworth: Macro Musings is produced by the Mercatus Center at George Mason University. If you haven't already, please subscribe via iTunes or your favorite podcast app. While you're there, please consider rating us and leaving a review. This helps other thoughtful people like you find the podcast thanks for listening.

Photo credit: Getty Images.Mark Wilson

About Macro Musings

Hosted by Senior Research Fellow David Beckworth, the Macro Musings podcast pulls back the curtain on the important macroeconomic issues of the past, present, and future.