One of the great achievements of our time has been the conquest of inflation. In the 1970s, it ravaged our savings, raised our taxes and kept the economy on a roller coaster. So it is a measure of our current economic crisis that the return of inflation might be the best thing that could happen.
Over and over during the postwar era, the Federal Reserve has decided that overcoming inflation was worth suffering a recession. This time, it ought to recognize overcoming a deep recession is worth enduring some inflation.
The existing downturn already looks certain to be the most severe since 1981-82, when unemployment soared to nearly 11 percent. There is even a real risk of a painful deflation. The World Bank fears we are entering the worst period since the Great Depression.
Faced with that looming catastrophe, the federal government has been considering or doing things that were once unthinkable -- partly nationalizing banks, buying up debt, bailing out the Big Three automakers, spending hundreds of billions of dollars on infrastructure and doubling or tripling the budget deficit.
It's possible these measures can restore the economy to health. But only possible. What is certain is that they will produce a government that is bigger, more expensive, more overextended and more involved in the operations of private businesses. That result, rest assured, will live on after the crisis is over.
So some economists have concluded that expanding the money supply is the worst option except for the others. Kenneth Rogoff of Harvard writes that "a sudden burst of moderate inflation would be extremely helpful." Casey Mulligan of the University of Chicago says, "Inflation will alleviate some economic problems; prolonged deflation will aggravate them."
Gregory Mankiw, who was chairman of the Council of Economic Advisers under President Bush, urges the Federal Reserve to abandon price stability and commit itself to modest inflation. David Henderson of the Hoover Institution says that if the choice is more federal spending or rising prices, he prefers the latter.
It's not hard to see why. Most of our problems stem from the bursting of the housing bubble. That sent home prices plunging, which reduced the value of mortgages and mortgage-backed securities, which caused losses at banks, which forced a cutback in lending, which squelched consumer spending, which brought the economy to a halt. Which started the whole miserable cycle over again.
But if the crisis stems from declining real estate values, why not stop them from declining? A spell of inflation would arrest the slide by pushing up the price of everything. As home prices stabilize, mortgage-backed securities would regain value, banks would get financially stronger, and loan officers would stop hiding in the vault.
Consumer spending would also revive. In the first place, those who want to buy new cars or remodel their kitchens would be able to borrow money to do so. In the second, people whose money is eroding in value would be motivated to spend today rather than tomorrow -- the opposite of the incentive when prices are falling, as they are today.
Unlike measures to bail out homeowners, inflation wouldn't spawn a new bubble by stimulating overinvestment in real estate. Home prices might rise, but other prices would rise still more, pulling investment away from the housing sector until the current glut subsides.
The best part of inflation is that it avoids the need for the government to embrace vast spending initiatives and micromanage capitalist enterprises it is not equipped to run. And unlike government programs, inflation doesn't last forever.
One of the historic evils of inflation is that by reducing the value of debt, it rewards borrowers while punishing lenders. But this time, both sides may gain from a rising consumer price index -- borrowers because their properties will be worth more than they owe, and lenders because their customers will find it easier to meet their obligations.
Once inflation has performed its useful role, it will have to be tamed. But the Fed has a lot of experience doing that. What it doesn't have is experience bringing the economy out of a deep recession or a depression.
Inflation is not a good thing, any more than powerful, toxic, nausea-inducing chemotherapy drugs are a good thing. But when you have cancer, the one thing scarier than the cure is the disease.