National Press Club

Samuelson Links Today's Economy to Inflation's Ups and Downs

April 22, 2009 | By Lorna Aldrich

Robert J. Samuelson, columnist for Newsweek and The Washington Post, tied the rise of inflation and its demise from 1960 to the 2000s to the present economic crisis in a speech at the Club April 21.

He referred to his 2008 book, “The Great Inflation and Its Aftermath,” citing its thesis that the rise and fall of inflation was the major economic event of the last half century. He called that rise and fall “more important than globalization and the Internet.” He noted that inflation rose from 1 percent per year in 1960 to 13 percent in the 1980s and then declined in the 1980s and has remained relatively stable since. The decline was engineered by the Federal Reserve, led by former Board of Governors Chairman Paul Volker.

The critical consequence of the decline in inflation, and concomitant decline in interest rates, he said, was a run-up in asset prices, both stocks and housing, because asset prices move inversely to interest rates. Consumers reacted to their perceived increase in wealth, he added, by spending more and reducing the U.S. saving rate from 10 percent of disposable income in the 1980s to zero in 2006. At the same time, the economy appeared more stable, generating only two recessions.

“All these good things went to excess,” he said. The perception that risk had declined led to risky decisions, subprime mortgages being a prime example, he said.

Samuelson offered reasons for both optimism and pessimism with respect to ending the current crisis.

On the optimistic side, he said, “Business cycles do end.” He cited some classical business cycle developments: cars wear out creating pent-up demand and inventories decline inducing production. In addition he expressed confidence that central banks would not repeat the mistakes of the 1930s that exacerbated the Great Depression. Also, leaders are more willing to “try to spend their way out of recession” now.

Reasons for pessimism are more “literary,” he said, meaning more institutional and possibly more psychological. Like Britain after WWI, the United States cannot play the dominant role in the world economy that it has played in the past, he noted. Also, as in the 1930s, exchange rates are “misaligned.” The dollar is overvalued because it does still serve as a basic reserve and trade currency, a situation that raises demand for it and hence its value, he explained. He believes the Chinese currency is undervalued as a conscious policy.

Samuelson said he has come to believe that “expectations are fundamental to what happens in the economy.” On economists, whom he claimed to admire and even befriend, he said, “Even when they’re wrong, they sound right.”