American Politics Today - Essentials (3rd Ed)

ECONOMIC POLICY| 435

ceries goes up by 3 percent, and you get a 4 percent raise, you will probably manage
to be at least as well off as you were in the previous year (see Figure 14.2).
However, high inf lation can have serious effects on the economy. First, some
pe ople se e a n erosion of t hei r pu rch a si n g power. S o i f you r rent go e s up by 10 per -
cent and groceries are up by 15 percent, but your pay goes up by only 4 percent,
you will be substantially worse off. Second, high inf lation penalizes savers and
rewards debtors as savings interest rates may be outstripped by inf lation (so
savings are worth less over time), but people who go into debt can repay those
debts with cheaper dollars in the future. Finally, long-term economic planning
by businesses becomes more difficult when inf lation is high, because investors
demand high interest rates to compensate for the added risk of future inf lation.
Typically, unemployment and infl ation are not high at the same time, so there
can be a trade-off in focusing on one or the other in economic policy. There tend
to be basic partisan diff erences on the goals of full employment and stable prices,
with Democrats being more concerned about employment and Republicans more
concerned about infl ation. This is no surprise, given the Democratic Party’s base
of support within labor unions and blue-collar workers and the Republican Party’s
stronger support on Wall Street and with investors whose income is likely to be
eroded by high infl ation.

5

10

15

20%

1960 1963 1966 1969 1972 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 20082010

2012 (Sept

.)

−5

0

Misery Index Annual unemployment rate Annual change in the consumer price index

Source: Data from the U.S. Department of Labor, Bureau of Labor Statistics. Infl ation data from “Consumer Price Index,” http://www.bls.gov/CPI, and unemployment
data from “Labor Force Statistics from the Current Population Survey,” http://www.bls.gov/cps (accessed 9/24/12).

INFLATION AND UNEMPLOYMENT, 1960–2012

The Misery Index is the sum of the unemployment rate and the infl ation rate. Which periods have had the highest misery
rate since 1960? Were there any external explanations for the high misery rate? How did the government respond to the
high levels of unemployment and infl ation?

FIGURE » 14.2