The Future Of Affluence

It may seem that the Great Inflation holds no relevance for us today. It came and went and, whatever its deeper effects, they are now either woven into the fabric of society or have completely dissipated. One way or another, the Great Inflation's significance is mainly historical. Not so. The Great Inflation instructs us in ways that speak powerfully to present problems and circumstances. For lack of a better phrase, the connection between then and now might be called "the curse of good intentions." A central lesson was that ambitious efforts to remedy obvious economic shortcomings can actually make matters worse—that happened then, and it could hap pen now. The law of unintended consequences went into overdrive and might again.

Separated by roughly half a century, our era bears an eerie resemblance to the years preceeding the Great Inflation. By the late 1950s, the U.S. economy had performed well for nearly two decades. In World War II, it had served as the world s "arsenal of democracy," as Roosevelt put it. After the war, a dreaded resumption of the Depression had been avoided. Despite three recessions (1948-49,1953-54 and 1957-58), unemployment in the 1950s averaged only 4.5 percent. People were palpably better off. As America suburbanized, families bought bigger homes, flashier cars, televisions and new time-saving appliances (washers, dryers, dishwashers). And yet, the economy inspired widespread criticisms. Growth wasn't fast enough. Recessions were too frequent. The Soviets might overtake us. We could, it was said, do better—and many economists, emboldened by their enthusiasm for Keynes, agreed.

This was the intellectual and political crucible in which the Great Inflation was forged. With hindsight, we know that the idea that the economy's adequate, if imperfect, performance could be substantially improved was a pipe dream. The resulting policies not only didn't do what they promised, they actually did the opposite—led to more, not fewer, recessions; to higher, not lower, unemployment; to slower, not faster, economic growth; to more, not less, economic anxiety. What is relevant for our era is that these policies were not undertaken on ignorant whim. Rather, they embodied the thinking of most of the nation s top economists, reflecting a broad consensus among their peers. It was the scholarly respectability of these ideas— and the apparent disinterestedness of their sponsors—that recom mended them to political leaders and made them easier to sell to the public.

Switch now to the present. Parallels abound. On the whole, the U.S. economy has done well in recent decades. From 1982 to 2006, it created 46 million jobs. Living standards have improved. In 2006, median income of a four-person household ($69,605) was 27 percent higher than in 1980. Homes are bigger; cars are safer and better equipped. Stock-market wealth has soared. Still, complaints about the economy are common. There's too much insecurity and inequality. Manufacturing jobs have moved abroad. Living standards are growing too slowly. Our high use of oil and coal makes us dependent on foreign oil producers and worsens global warming. These complaints are not fantasies, just as the complaints decades ago were not. Now, as then, many are richly described and corroborated by studies from observers—economists, social scientists, journalists—in academia, various think tanks and the press.

Compounding the disappointment is a backlash against modern capitalism, which often seems rigged to benefit the privileged few. Capitalism's most subversive figures are often the captains of industry and finance themselves, who manage to enrich themselves regardless of how well they perform. By and large, Americans do not oppose accumulations of great fortunes when the wealth seems honesdy earned and, in some way, contributes to the common good. The builders of huge enterprises and pioneers of new technologies—the Henry Fords, Sam Waltons and Bill Gateses—are not pariahs. What is resented are large payouts to executives that seem to occur, willy-nilly, whether they have improved their companies' performance or not. In some cases, their failures have weakened the overall economy. All too often, their lavish rewards do not seem economically or morally justified.*

Like the early 1960s, then, the spirit of reform is in the air. Great projects of economic uplift seem to beckon. Protect the middle class. Provide universal health care. Exorcise corporate greed. Control globalization. And more recently: Curb global warming. But the question now, as it should have been then, is this: How much can we remedy the problems we've identified? Just because something isn't perfect doesn't mean it can be improved. Americans' reformist enthusiasms face practical obstacles. When thinking about the economy's future, we ought to acknowledge how little—not how much—we know. Despite elaborate computer models, economists have a poor record in predicting recessions, interest rates, inflation and productivity trends. If economists can't forecast them, it's doubtful they can accurately foretell the full effects of many proposed changes in government policies. Economic models that purport to predict the future often offer no more than the pretense of knowledge.

There are many ways in which our current economic system falls short. No doubt there are policies that could strengthen job security, reduce glaring income inequalities, broaden health-care coverage and limit fossil fuel use. But with what unanticipated consequences?

* So it was with the recent "subprime" mortgage crisis. It occurred in part because the Wall Street firms that sold the mortgage-backed securities failed to evaluate the worth of the underlying loans. The subsequent losses cost CEOs at some firms (Citigroup, Merrill Lynch, Bear Stearns) their jobs, but all left with multimillion-dollar pay packages.

If economic growth is something we need—and I believe that it is—we ought to recognize that the natural impulse to improve the economic system in many small ways might, if overindulged, weaken it. A plethora of new taxes, spending programs and regulations, each of which may seem justifiable or involve a small cost, could coalesce into a much larger burden. The economy's growth could suffer death by a thousand cuts when no individual cut might matter much.

As we weigh our economic prospects, we need to recall the lessons of the Great Inflation. Its continuing significance is that it was a self-inflicted wound: something we did to ourselves with the best of intentions and on the most impeccable of advice. Its intellectual godfathers were without exception men of impressive intelligence. They were credentialed by some of the nation's oustanding universities: Yale, MIT, Harvard, Princeton. But their high intellectual standing did not make their ideas any less impractical or destructive. Scholars can have tunnel vision, constricted by their own political or personal agendas. Like politicians, they can also yearn for the power and celebrity of the public arena. Even if their intentions are pure, their ideas may be mistaken. Academic pedigree alone is no guarantor of useful knowledge and wisdom. Skepticism ought to qualify and restrain our reformist impulses.

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