Alan Reynolds Embraces Deflation

Conservative economist and Cato Institute senior fellow Alan Reynolds takes to the pages of The New York Post to argue that the economic situation’s not so bad:

A wise adviser to President John Kennedy, Arthur Okun of Yale, devised the “misery index” to gauge the pain of economic crisis — a measure that simply adds together the unemployment rate and the inflation rate. It hit 22 percent in June 1980, during an inflationary recession that preceded the Fed’s disinflationary squeeze of 1981–82. The misery index was nearly as bad in January 1975, at 19.9 percent.

Assuming inflation was close to zero this January, the misery index would have been roughly the same as the unemployment rate, or 7.6 percent. By this standard, we have a very long way to go before the economy feels nearly as miserable as it did in 1975 or 1980.

John Judis observes that this is a strange argument to make against a fiscal stimulus measure whose purpose is to avoid a deflationary spiral.


To go stronger, one question a non-crackpot asks himself before proclaiming the economic situation not so bad is “does my method carry the implication that the Great Depression was only a mild downturn?” And, indeed, Reynolds’ method does have this implication. During the Depression, the unemployment rate was extremely high but the inflation rate was strongly negative leading to “misery index” measures that are a lot lower than the “stagflation” of the late-1970s:

In other words, according to Reynolds not only are today’s problems no Great Depression, but the Depression itself paled in comparison to the horrors of the Ford years. But surely nobody — not even Reynolds — is dumb enough to think that economic conditions were worse in 1975 and 1980 than they were in 1932. Right?