Secrets of the Temple. - book reviews

Washington Monthly, Jan, 1988 by Alan S. Murray

Greider is right to complain that the distribution of wealth and of income has become more unequal during the 1980s. Commerce Department figures show that the percentage of income going to the top 20 percent of families rose to 43.7 percent in 1986 from 41.6 percent in 1980--a big move in such a short period. At the same time, the income going to the bottom fifth dropped to 4.6 percent from 5.1 percent.

But it's wrong to finger Volcker's anti-inflation policy as the principal culprit in this change. What Greider fails to note is that the trend toward regressivity actually began in the late 1960s and took firm hold during the inflationary 1970s. The trend probably has far more to do with tax and budget changes than with monetary policy. If Greider wants to improve income distribution, he should look to tax policy and budget policy. Using monetary policy in an effort to redistribute wealth and income would be a wrongheaded and dangerous mistake.

The point here is that stable money is more than just an obsession of the "creditor class"-- as Greider suggests. And it is more than an anal obsession, or an oedipal rebellion--suggestions Greider also makes. Reasonably stable money is good economic policy. And while the American people may not have much say in the Fed's activities, the majority of them would agree that inflation is harmful to their way of life.

Greider chronicles the tremendous pain caused by Volcker's efforts to rein in inflation. The farm crisis, the Third World debt problems, and the plight of U.S. manufacturers were all largely results of Volcker's decision to boost interest rates to fight inflation. The human suffering that resulted from that decision was enormous.

But ultimately, that suffering isn't the cost of maintaining a stable money policy. Rather, it is the enormous cost of wringing inflation out of the economy once it has taken hold. The lesson of the last two decades is not that inflation is preferable to disinflation, as Greider suggests. Rather, it is that stable prices are preferable to either inflation or disinflation.