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Two days ago on the main site, I reviewed Robert Samuelson's new book "The Great Inflation," in which he concludes that the US of 2008 faces the same threat of inflation that it did in the period he chronicles in the 60s and 70s. More recently, many prominent economists have prognosticated that in fact deflation is the looming threat. In my article, I assess those claims and argue in favor of Samuelson's position. To sum up quickly: the government is writing all kinds of checks it can't cash -- the financial industry bailout in the short term, and unfunded entitlement debt in the long (but not so long) term. Although Nouriel Roubini, among others, is right to think that aggregate supply far outstrips aggregate demand right now, as reflected in commodity prices and the TIPS spread, he is ignoring the role government intervention has played in almost every instance in modern economic history. Samuelson shows that Reagan administration is the exception that proves the rule.

I was surprised, then, to see Samuelson turn around and argue that deflation is now the pressing issue, and even endorse Obama's fiscal stimulus. He doesn't go into depth, but merely notes that indeed commodity prices are falling rapidly and financial institutions aren't lending to one another. Deflation is such a down-side risk that action must be taken to prevent it.

I will defend his book even if he won't. First of all, one concern policymakers have is that in the event of deflation we might fall into a liquidity trap, in which the central bank cannot effectively lower interest rates any further to stimulate lending and increase consumption. This is true only of responsible policymakers, which we no longer have.

James Hamilton points out (h/t Bryan Caplan) that there is one readily available tool in the situation of a liquidity trap: massive inflation, through a variety of channels. A responsible Fed would never use this, because the "Great Inflation" attests to the malaise inflation expectations bring about. But, as I argue in my review, the Fed is hardly independent right now, and political expedience calls for a quick and easy solution. Only a politician of Reagan's character can resist the temptation; I don't think either the outgoing or incoming administrations measure up.

Samuelson ends his article with:

"A "stimulus package" of more spending increases and tax cuts would provide extra insurance against an economic free-fall. The trick for Obama and other leaders is to ensure that new commitments are temporary -- and don't worsen grim long-term budget outlooks."

"The trick" isn't realistic. No reasonable observer of government activity would believe that it would engage in temporary interventionism. We saw this play out with the bailout: they asked for the power to do implement one very specificly defined measure, and ended up doing whatever they wanted. Why trust those same characters with any more policy tools, and why think they wouldn't let the inflation genie out of the bottle?