Moderation in All Things -- Including Inflation

ROBERT RENO

July 31, 1992|By ROBERT RENO

Wholesale prices -- excluding the volatile energy sector -- actually fell in June, an indication that we may be getting close to that shining nirvana of ongoing zero inflation that Federal Reserve Chairman Alan Greenspan has held up to us as the handsome reward for his cautious monetary policies.

By not lowering interest rates as fast as he has so often been urged to do, by resisting demands for a vigorously stimulative policy when the economy first started to fall out of bed, the chairman has, I guess, covered himself with glory if you accept the premise that a zero inflation rate is worth the cost of achieving it.

There were times, of course, back in the 1970s, when a zero inflation rate would have provoked general rejoicing of a sort that is hardly in evidence now. Richard Nixon was experimenting with emergency wage and price controls, Gerald Ford was promoting victory gardens and Jimmy Carter's presidency was being wiped out by double-digit inflation rates.

Now, Americans have every right to ask what good this conquest of inflation has done them. Because they have been told so often that inflation is detrimental, even naughty, something liberals create, many people don't realize that economists generally have a hard time proving in hard numbers just why a moderate inflation rate is harmful and an even harder time proving that the costs of strangling inflation don't exceed the cost of tolerating it.

''It is one of the dirty little secrets of economic analysis that even though inflation is regarded as a terrible scourge, most efforts to measure its costs come up with embarrassingly small numbers,'' wrote Paul Krugman of Massachusetts Institute of Technology in his book ''The Age of Diminished Expectations.''

Economists Samuel Bowles, David Gordon and Thomas Weisskopf in their book ''After the Waste Land'' argue that the slaying of the inflation dragon was actually more of an indiscriminate massacre.

''Even though right-wing economics simultaneously butchered wages and incomes so much that real living standards fell in spite of the sharp declines in inflation rates, many people appear to have paid relatively more attention to the slain dragon than to their own butchered living standards,'' they wrote in 1990.

Subsequent economic events, including the further butchering of blue-collar living standards by the collapse of economic growth and the rise of unemployment since 1990, have made it DTC plain to the public that there is more than one corpse involved here and that this is why the stench is now so overpowering.

If President Bush wants to, he can flap his arms and run around saying that the decline in prices in June was a wonderful thing demonstrating the brilliance of his policies. But this might incline people to start asking just why prices declined. It was because demand was weak. Too many people were either too poor or too frightened to spend money.

This is the price we are paying for absolutist policies that assume it is good to squeeze every last drop of inflation out of the economy, that zero inflation is, in fact, the only desirable normality. Moderate inflation levels, like moderate budget deficits or a moderate trade balance, together with an immoderate intolerance of economic suffering, are, if history serves us, more likely to produce the happier result.

Robert Reno is an economics columnist for Newsday.

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