Economic History: A Benchmark Revision

Ryan Avent joins the conversation on the Great Inflation of the 1970s I’m a bit taken with the idea of high inflation as the fruit of a young, optimistic economy—and of low inflation or deflation as the choice of economies in the twilight of life, excessively cautious, with an eye on the past rather than the possibilities of the future. Alternatively, inflation is a salve that helps mitigate the pain of mistakes (by making it easier to reduce the real value of debts or wages, for instance). Mistakes are the domain of the young; regrets of the old. But mistakes are a critical part of an economy’s dynamism. And imposing the sobriety or asceticism of old age on younger generations has significant costs. One starts to wonder whether a society, or a monetary regime, that always advantages the economic interests of the young isn’t preferable to one that simply caters to the modal generation across its life-cycle. The bolded portion in particular is very close to my takeaway from delving into the period and it was startling. It starts to make sense once you realize that the society which defeats its inflation is the cautious one and its also the one that writes the history of the period. The inflationary episode is always cast as irresponsible and reckless when viewed in the rearview mirror. Moreover, the height of the inflation and the onset of disinflation are likely to occur just as the society is transforming from young and dynamic to old and cautious. So, the history is thick with malaise. The time lag between loose monetary policy and painfully high inflation only adds to this feeling. The costs are being experienced now, while the benefits have faded.

via Forbes Real Time


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