Not enough history books that cover the period from the late-1960s to the early-1980s devote enough ink and thought to the recurring high price inflation of the period. Usually inflation/stagflation are given a quick blurb amounting to "the oil shortage made prices go up," a simplistic description that any halfway decent economist would find only partially adequate, at best. Robert Samuelson deserves credit for writing a book in which the inflation of this era is placed front-and-center.



The book is well-written and much more readable than most economic history books. Further, Samuelson does a particularly good job in linking ideas with their consequences -- in this case, the ideas are the neo-Keynesian "New Economics" that arose and became dominant in political and academic circles in the 1960s, and which dominated until experience showed its massive flaws by the late-70s. The consequences were high inflation and stagflation.



These neo-Keynesian economists believed in the so-called "Phillips curve," an economic model that posited a consistent, inverse relationship between inflation and unemployment. In other words, by deliberately increasing inflation through fiscal and monetary policy, a government could lower unemployment. Or, should the government decide to fight inflation, the Phillips curve indicated that this would be at the cost of higher unemployment. Thus politicians could choose from a "menu" of options, aiming for the optimum blend. Not surprisingly, politicians gave low unemployment a much higher priority than low inflation -- that is, until the inflation got so bad that it couldn't be ignored, and the stagflation of the 70s showed the failure of the model itself.



The main hero of the narrative is Paul Volcker, who came in as Federal Reserve Chairman in the late-1970s and continued in that position until the mid-80s. Volcker decided to kill inflation at all costs by raising interest rates and restricting the money supply, regardless of the negative consequences, which amounted to severe -- though temporary -- recession and unemployment. Samuelson casts Ronald Reagan in a supporting role as virtually the only prominent politician in the early-80s who kept supporting Volcker through the tough times, until price inflation was eventually stopped. Once that was accomplished, the economy rebounded quickly.



Samuelson then argues that the end of high price inflation (which he calls "disinflation") led to the booms of the Eighties and Nineties, but counterintuitively, the mostly good economic times of those decades set us up for our current problems by making Americans optimistic to the point of recklessness.



My main criticisms of the book are in terms of historical and economic analysis. As someone who primarily believes in the so-called 'Austrian school' of economics, I bought some, but not all, of Samuelson's analysis, which seems to be more monetarist. For example, I agree with him that the neo-Keynesian economists and their ideas were ultimately the root of the problem. However, I think Samuelson doesn't quite give enough importance to the money supply itself and its growth. He makes the typical error of equating "inflation" with "price inflation." They are strongly related but are not the same. The former refers to an increase in the money supply, while the latter refers to one of the effects of the former -- a general rise in prices. Failure to make this distrinction muddies up the analysis somewhat. For example, Samuelson gives some blame to the Fed for creating the inflation, but in my view not enough -- since the Fed is by definition the only institution currently capable of legally creating money and credit out of thin air, it deserves the lion's share of the culpability. Though the neo-Keynesians may have advocated harmful ideas, without the vehicle of the Federal Reserve they would have been unable to implement them.



Also, though I'm not generally a big fan of social history, I think this is a case where more social history might have been beneficial in Samuelson's narrative. For example, more information on how price inflation manifested in consumer prices and effected consumer behavior would have given readers who, like myself, were either not born or were very young during this period, a better feel for inflation's effects. Samuelson gives some of this, but I would have liked more.



Though I don't agree with all of Samuelson's analysis, I think this is a good, enjoyable read and is very much worth checking out for anybody interested in the recent economic history of the US.