We hawks are almost all of a certain vintage: born in the 1950s or early 1960s and matured in the 1970s. Our formative experience of economics was bleak. Economic news was not the booyah billionaire carnival we know. The stock market was, despite the swings, flat as a pancake and about as sexy as nail fungus: the Dow Jones industrial average was 839 at the end of 1970 and at the end of 1979 it was of… 839.
During this time, people got raises but never advanced. Mum’s frequent trips to the supermarket to feed her large, starving family were marked by growing desperation as prices rose like sparks from a fire. We stopped filling the family car’s gas tank; the price was prohibitive. Instead, we snuck up to the next paycheck on drips and fumes, adding a gallon here, two gallons there—just enough to get to the next destinations.
Mind you, we were a solid middle-class family, living in a four-bedroom, 2½-bathroom house with a couple hundred dollar mortgage payment. But that’s what persistently high inflation mixed with a sluggish economy does. It makes people poorer. Don’t listen to economists who focus on higher wages to paint high inflation as benign. Prices are rising faster and faster.
I take no joy in finally being right: inflation is here. This is news for anyone who pays for groceries or pumps gas. Yet the fact is of urgent importance. In recent months, inflation has topped 8% year-on-year, the highest level since the bad old days. Twenty years of stimulus federal spending has finally caught up with the US economy. And while the resulting stock market crash scratches the fortunes of wealthy Americans, as always with inflation, the real pain is felt at the lower end of the prosperity spectrum.
According to credit monitor Equifax, delinquent loans in March among subprime borrowers – workers trying to advance – had risen for eight consecutive months. It’s more and more people who can’t balance their car or their credit card payments. With prices soaring on everything from gasoline to new homes, this debt trap is sure to get worse before it gets better.
In this context, a very impolitic remark by Treasury Secretary Janet L. Yellen might have been heroic. Addressing the Group of Seven finance ministers of major Western economies at their meeting in Germany on May 18, Yellen brandished the dreaded watchword of 1970s misery: stagflation. The last remaining bulls on Wall Street have curled up in a fetal position, their animal spirits shattered by the mere sound of the word.
Normally, a Treasury Secretary isn’t supposed to crash the markets by saying the quiet part out loud. But in this case, Yellen’s candor could speed up the healing. The sooner we all realize the dangers of our severely disrupted economy, the better. There is a proven medicine for the disease of high inflation; delaying its intake only makes matters worse.
Prices rise when demand exceeds supply. Unfortunately, the fact of rising prices is accelerating the problem, as people and businesses are starting to think: I better buy now because everything will cost more next week. This pushes demand up, accelerating the ugly cycle.
From Weimar Germany to modern Venezuela, governments have tried to solve the price boom by giving people more money. But that only increases demand, driving up prices even further, until people haul cash in wheelbarrows to buy a loaf of bread. Some governments attempt to cap price increases, as President Richard M. Nixon did in the early 1970s, with poor results. Some try to talk cheerfully, the opposite of Yellen’s approach. President Gerald Ford bombed the mid-1970s with his “Whip Inflation Now” campaign. WIN was a loser.
What works is a nasty regime of steeply higher interest rates, as Paul A. Volcker, then head of the Federal Reserve, finally proved in the 1980s. consumption to savings, which restores price equilibrium. Current Fed Chairman Jerome H. Powell has boldly signaled his intention to follow in Volcker’s footsteps. The wise will thank him one day. And if Yellen’s outspokenness gives Powell the necessary support, we’ll thank her, too.