The most important thing to remember about how to survive jumping off a cliff is not to jump. You’re not likely to find any good options once the free fall has begun.
The same is true of runaway inflation. Like a dragon from House Targaryen, it’s a beast that’s hard to control once allowed to escape the lair.
Rather remarkably, that reality was understood by politicians and policymakers from both major political parties for nearly 40 years. That’s probably because pain is a hard but unforgettable teacher.
In 1980, Americans endured an inflation rate of more than 14%. And that was after Democrats and Republicans in the White House and Congress had spent years trying to squelch the fire.
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Along came Federal Reserve Chair Paul Volcker with a plan: Aggressively raise interest rates to corral the inflation dragon.
In 1982, the average home mortgage rate stood at 16%. High interest rates burned like whiskey in a wound, but they worked. By 1985, annual inflation was down to 3.6%.
Inflation was banished for 40 years
And the dragon, banished deep inside its cave, stayed hidden for decades. In fact, some of us came to believe we’d never see those bad old days again.
But then came the pandemic, President Joe Biden, Russian dictator Vladimir Putin’s war, a Democratic-controlled Congress, supply chain disruptions, a labor shortage, a swarm of locusts and a plague of gnats.
Now inflation is running at more than 8%, home mortgage rates are above 7% and the Federal Reserve just hit us with another hefty rate hike. Today’s forecast: 100% chance of more pain ahead.
What do we do now? The only realistic option is to let the Fed do its work of taming inflation by raising rates, curtailing the money supply and in turn slowing the economy.
I hate to say that because I know millions of Americans are truly hurting from both high inflation and rising interest rates. And they’re likely to suffer more as the economy slows and employers stop hiring (or worse, start letting workers go).
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I wish there were a way to trap the dragon without tasting the fire, but the other methods – price controls, shaming for-profit companies for making money, Whip Inflation Now buttons – have been tried before. Spoiler alert: They don’t work.
Larry Summers sounded the alarm
I have no desire to say “told you so” about the dangers of inflation. Too many Americans are truly hurting. But I will say that the president and Congress should have listened to Larry.
Summers, that is, who served as President Bill Clinton’s Treasury secretary and President Barack Obama’s director of the National Economic Council. He wrote in The Washington Post in February of last year that Biden’s economic stimulus legislation would “set off inflationary pressures of a kind we have not seen in a generation.”
Summers was right, of course, but the White House dismissed his warning at the time. Inflation, we were told, wasn’t a major concern. Later, we were told it was merely temporary.
Now, Americans are living with the harsh consequences of that hubris.
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Summers is now sharing another hard truth with Americans: Inflation won’t be tamed any time soon so the Fed needs to stay on track with raising rates.
“I look at economic history and I see that there are many times when the Fed didn’t do enough and so inflation re-accelerated, but I can’t find any times in the last 60 years when the Fed did too much,” Summers told CNN on Tuesday. “Even if there is a downturn or recession, I don’t think there’s any reason to think that the Fed has any real prospect of pushing inflation durably below (their stated inflation goal of) 2% without a lot more action,”
Not what we want to hear. But what we need to hear.
The dragons are still on the loose.
Tim Swarens is deputy opinion editor for USA TODAY.
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Republicans must move past Trump for sake of the party’s future – and the nation’s.
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