December 22, 2008
George Santayana said, "Those who cannot remember the past are condemned to repeat it." Those words of warning may apply to many Americans who were too young in the 1970s to remember the ravages of inflation, but to other policy wonks as well. For example, Steve Chapman (at Real Clear Politics) argues that what our depressed economy needs to get fired up again is a mild dose of inflationary stimulus. He seems to think that inflation can be controlled like a thermostat, apparently ignoring the lessons of the 1970s in Western Europe and the U.S.A., when Keynesian economic stabilization programs failed. (Latin America learned the same lesson in the 1980s.) Chapman cites former Bush economic adviser Gregory Mankiw, who earned a bad reputation a couple years ago for justifying the practice of outsourcing. (Hat tip to Shaun Kenney, who seems to be neutral on the issue.)
I would not dismiss Chapman's fears of a "looming catastrophe," but there are better ways to fix the economy than indiscriminate deficit spending. Inflation is a very tempting short-term solution to political leaders who don't know what else to do, and don't really care about the future. (The perfect contemporary example, of course, is Zimbabwe, where President Mugabe has unleashed a surge of inflation that has climbed to well over a million percent annually.) [The problem is that inflation] has a momentum that is far stronger than most people imagine, like the gradual but overwhelming pull of the tides. Once businesses and consumers get used to the idea that prices are going up, they will factor that into all their decisions, and trying to reverse inflationary psychology is extremely painful. President Reagan and Prime Minister Thatcher faced bitter opposition to their anti-inflationary policies in the early 1980s, and without their strong and determined leadership, the war against inflation would never have been won.
Barack Obama already has enough excuses to ditch fiscal prudence to carry out his ambitious agenda of "change," so why give him even more leeway? I know that in deep recessions you can't expect to balance the budget, or even come close, but with the exploding federal deficit that President Bush has bequeathed to his successor, this country is already in a perilous position vis-à-vis foreign creditors -- such as the People's Republic of China! Unfortunately, national security is not very high on Obama's list of priorities, and it's not likely that his cabinet will take due account of the strategic implications of embarking on a "pump-priming" spending spree financed from abroad.
For the record, I would not object at all if Obama goes ahead with large-scale public works programs similar to what FDR did in the early 1930s -- as long as they are of finite duration and for compelling public purposes, such as repairing streets and cleaning up neighborhoods. Clearly, there is an urgent human need for relief, and our stores need customers. To avoid going deeper into the red, any such new spending should be offset by cuts in spending on general government operations, such as mandating that all government employees cut back on time and salary by ten percent for six months or so. Impossible? Well, Obama has the clout to do it, and he could overcome public employee union opposition in a way that no Republican could ever do.