Robert J. Samuelson: The Absence of Inflation Explains the Prosperity of both the Reagan and Clinton Eras

Robert J. Samuelson, in the Wash Post (12-2-04)

The Age of Inflation is finished. Over the past four decades, the rise and fall of double-digit inflation has been the most significant force affecting the U.S. economy. Inflation rose from a little less than 2 percent in 1960 to 13 percent in 1979 and then gradually descended to a little less than 2 percent in 2003. Going up, inflation generally harmed the economy -- causing harsh recessions, a stagnant stock market and lackluster gains in living standards. Coming down, inflation generally helped the economy -- leading to longer expansions, a stock market boom and stronger gains in living standards.

That's the Age of Inflation in a nutshell, but it's barely understood.

One reason is simply the passage of time. Americans who were 20 in 1980, when double-digit inflation was at its most destructive, were barely old enough to appreciate what was happening. Yet, those people (now 44) are older than two-thirds of the population. They have no memory of rising inflation. As for declining inflation, its benefits have occurred in a gradual and almost invisible manner. We haven't paid much attention. Our economic debates blame or credit high-profile presidential policies (Reagan's tax cuts, Clinton's budget surpluses or Bush's deficits) or focus on more dramatic upheavals: the Internet or globalization.

Inflation mattered more than any of these.

Consider recessions. From 1969 to 1982, when inflation was highest, there were four recessions, including the two worst (1973-75 and 1981-82) since World War II. In 1982 unemployment peaked at 10.8 percent. Since 1982 the economy has suffered only two mild recessions (1990-91 and 2001). Put differently, the economy has expanded in all but 16 months of the past 22 years. Economists debate the causes of this smoothing of the business cycle, which they call "the great moderation." But the central cause seems obvious: lower inflation. Prices moved less abruptly. Government policies to suppress inflation (mainly tighter money, from the Federal Reserve) were deployed less often....

The gains from purging double-digit inflation are a great untold story. The Federal Reserve's staunch anti-inflationary policies, and stiff competitive pressures (from imports to the rise of Wal-Mart), demolished the deadly wage-price spiral. We've been reaping the benefits ever since. These gains -- not Reagan's tax cuts or Clinton's budget policies -- mostly explain the economy's fabulous performance in the 1990s.