Inflation Reasserts Itself in Economic Plans
MICHELE NORRIS, host.
All three major stock indexes were down today. The Dow Industrial dropped more than 200 points. The financial markets are adjusting to the idea the Federal Reserve may soon increase interest rates, this after a long series of cuts. The Senate is worried that a weak dollar and high oil prices will inevitably push up prices for other goods.
As NPR's Adam Davidson reports, it's been a long time since the U.S. has had a serious inflation problem.
ADAM DAVIDSON: The last time America had really bad inflation, Alfred E. Kahn was President Carter's inflation czar, the first and last guy to have that title.
Mr. ALFRED E. KAHN (Inflation Czar): I hated the job.
DAVIDSON: Why'd you hate the job?
Mr. KHAN: It was just a lousy job.
DAVIDSON: This was only 30 years ago, but man, the U.S. had a different economy. Back then the way Kahn tried to fight inflation was by meeting with guys like Frank Fitzsimmons, the president of the Teamsters Union. Kahn says those were not pleasant meetings.
Mr. KAHN: Well, he was tough. I mean I only knew that he probably despised me. He knew who had the trump cards.
DAVIDSON: Unions were powerful enough to demand and get large wage increases every year. Wages went up, which made prices go up, which made wages go up, which kept inflation growing and growing. Kahn was supposed to convince the unions to demand smaller wage increases. That didn't work so well. He was then supposed to convince Chrysler not to give in to the United Auto Workers' demands; that didn't work either. Khan is the first to admit he did not solve the inflation problem; someone else did - Paul Volcker.
Mr. MARTIN MYER (Economic Historian): Volcker's not only a great man, he's the last honest man in American politics. He's really, really an amazing figure.
DAVIDSON: That's Martin Myer, economic historian and author of "The Fed." Volcker became chairman of the Federal Reserve when inflation was in double digits. He promptly raised interest rates, a lot. It was painful. He brought on a recession. He probably ensured Jimmy Carter would not win reelection. That took real guts, but it didn't take genius.
Now most people agree that what Volcker did was the right thing to do. Myer argues it should have happened much earlier under Nixon or Ford, but presidents and Fed chairman kept avoiding the obvious because it would cost them in the short term. Put simply, they were political cowards, Myer says.
Mr. MYER: Most of the things you have to do associated with preventing or particularly curing inflation are rather painful; you'd much rather invent things which would sort of show you are full of goodwill but are not directly painful.
DAVIDSON: Today, Myer says, there is no simple, brave choice that Fed Chairman Ben Bernanke or the president can make to keep inflation in check. The U.S. economy is open to the world now. Policy makers can't just raise interest rates and then convince three burly men in the transportation sector to keep wages down. No. Oil and food prices are hurtling upwards and the U.S. can't do much about that.
China and India and Brazil and Russia and Saudi Arabia, they have real economic might now. Put simply, it is a global economy. The U.S. still has a big role, but it's diminished. Things are so different that there is no clear consensus on what should be done, how to avoid inflation, or how to fix it if it comes. The biggest lesson of history, Khan and Myer agree, is that history has little to teach us about today's scariest economic challenges.
Adam Davidson, NPR News, New York.