Monday, April 21, 2008

Volcker and Reagan -- another comment turned blog post

Probably too full of myself, but I'm too pleased with a couple of links to leave them buried in comments, where I'll have trouble finding them in the future.

In a must-read post Oyster quotes the WSJ:
Nationally, median household pre-tax income in 2006, though slightly higher than in 2004, fell to $48,223 from an inflation-adjusted $49,477 in 2000, according to the Census Bureau. Weekly wage figures from 2007 suggest the decline persists.

He also quotes a Historical Revisionism Today* article:
Part of Reagan’s legacy is the latitude he gave Paul Volcker, as risky and painful as that was, to deal with those problems. Unless one believes the next president will want to take the hit for Bush’s decisions, or that someone with Reagan’s mandate and courage is about to appear, whoever is in the White House a decade from now will probably confront the economic fallout from current policies. But by that time will anyone remember how it all started? How many cursed LBJ or Nixon in 1979? The White House not only knows the answer, it’s counting on the nation’s forgetfulness.

Oyster rightly pointed out that Volcker was a Carter-appointee, but the first sentence didn't jibe with my recollection of the early Eighties. So I did a little a googling and left a lengthy comment:
According to data from, if all the changes since 1983 were undone, newspapers would be sporting banner headlines about 12% inflation, instead of one-column, below-the-fold items reporting 4% annual CPI growth.

To be fair, Clinton also benefited from Pollyanna Creep, but it's called creep for a reason. At any rate, if median income, in inflation adjusted dollars, didn't quite hold even using the official rate of inflation, the decline in median incomes when adjusted with an honest rate of inflation should be much greater (edited version).

The 1979 quote is spot on; people always dismiss it as partisanship when I point out that the economic problems of the 70's were too much for three presidents. I was too young for Nixon's attempt at wage/price controls to register, but, as an eighth or ninth grader couple of years later, I was old enough to laugh at Ford's WIN buttons. That's also, BTW, why I've never had much interest in historical speculation based on the Nixon pardon or Iran, I think the economy would have made it extremely difficult for either Ford or Carter to be re-elected.

Finally, in the case of Volcker, Greenspan and inflation, you have to wonder why it took that success so long to even get a second father. For years, conservatives pretended that Carter-appointee Volcker never existed; now "The American Conservative" is crediting Reagan for giving him latitude -- that's really rich. Time Magazine 1984:

Last week they were started anew by White House Press Spokesman Larry Speakes. Immediately after the banks raised the prime rate, he told reporters, "We have been asking the Federal Reserve Board to allow sufficient monetary expansion to assure noninflationary growth. Although the economy has been growing at a healthy pace and inflation remains at a low level, it appears that the money supply is not accommodating real economic growth."

The following day the attack was picked up by Treasury Secretary Regan. In a speech to Massachusetts businessmen and community leaders, he warned that the Federal Reserve's stringent credit policies could begin to hurt. Said he: "If the Fed continues on its tight path now, it will have an effect on November and December. Does that have us worried? You bet your life it has us worried."

Real Clear Markets, 2008:

Given Volcker’s historical ties to Reagan, some Republicans logically took offense to his seeming apostasy. Their dismay is misplaced. Volcker was never on board with the Reagan economic plan in the way that modern history suggests, and rather than an essential driver of the ‘80s economic renaissance, a more realistic account of Volcker’s early years at the Fed shows that far from a facilitator of pro-growth policies, Volcker’s actions nearly derailed Reagan’s economic plan and presidency altogether.

I've said for years that Volcker did the heavy lifting and Greenspan got the credit. I don't claim it was an original thought, but you only heard from the fringes; few mainstream commentators would say it until very recently. I can only speculate as to why. I'd guess that conservatives didn't want to share the credit while Greenspan was treated like God, mainstream liberals were afraid were afraid of being accused of petty partisanship, and academic and types didn't think it worth the "liberal bias" charge.

Credit for the old Time Magazine quote goes to Xpatriated Texan, but I give myself some credit for remembering my college and spotting a lie -- more credit for remembering my college years than for spotting an obvious lie. Judging by the magazine that Oyster quotes, some conservatives will believe anything -- the Federal Reserve is independent, and the president can't just remove its chairman.

*Not the actual name of the magazine.

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Thanks for the response. I appreciate it.

I certainly grant your main point, and will say that I almost chopped off the Cunning Realist's rosy interpretation of Reagan and Volcker. I didn't like how it was phrased and think it should've been qualified much more. The "1979 quote" was the main point I wanted to stress.

That article from the May 1984 issue of Time is a gem. I too seemed to remember some complaints during that time. I think it would be fair to say, though, that Reagan was surprisingly tolerant of Volcker's radical medicine. In the same situation, most other Presidents of either party would've stopped him long before he was done tightening.

Also, it surprises me (I was only 12 at the time) to learn that interest rates were still that high in 1984. I'd assumed most of Volcker's "heavy-lifting" occurred in the previous three years --which it had-- but in retrospect it's amazing to see how gun-shy the banks were after 15 years of high and higher inflation. They wanted ample proof of containment before lowering rates to levels that would be obscenely high by today's standards. Kind of makes you shudder about what's to come.

The Cunning Realist is an exceptionally honest conservative, in my view, and while I'm sure he and I would have very different interpretations of the Reagan "legacy", I do believe he operates in good faith. I'm sure he isn't carrying water for the American Conservative magazine, and, correspondingly, he shouldn't be saddled with any baggage that the magazine he got published in possesses.
It might have been a bit of an overtstatement to say that cunning realist was lying since he at least gave Volcker credit and implicitly admitted that Carter wasn't responsible for the stagflation that elected Reagan. However, cnservatives have been lying about or trying to disappear Volcker for over decades, and C.R. neglected to mention that Carter appointed him.

The judgment that he made would be largely subjective and, to some degree, based on memory. FWIW, I'm probably 2-5 years older than C.R. (he describes himself as early forties, I'm in my forties -- a couple of months younger than Obama); that 2-5 ywould be significant when it comes to memories of the early eighties. At any rate, a very conservative friend who's my age and I were once discussing the same thing. He and I both remembered two presidents getting exapserated with Volcker.

At any rate, I don't understand what either of you mean by Reagan's extraordinary toleration -- the Fed's independent. I suppose Reagan could have brought more public pressue, but why should he have. When it came to the economy, his position was analagous to a new coach who just needed to show improvement after three coaches with pathetic records. Unemployment went up slightly in his first term, but improved from 1983 to 1984 so there was some ease in pressure there. More importantly, inflation dropped almost ten points in his first term. He could brag about the reduction in inflation and complain about the fed slowing the job recovery; anyway, 1984 (the election year) saw a real improvement in unemployment figures.

In discussing that inflationary period, I think that any objective person would agree that the eighties were bound to show improvement -- unless somebody f***ed it up with something like easy money policies. Time, to recover from the Johnson/Nixon deficits and the early seventies supply shocks, was the main thing needed to get inflation under control. Volcker's monetary policies would come in second, IMO.
Should have read, I'm in my mid-forties.
Reagan did re-appoint Volcker in 1983 when the unemployment rate was nearly double digit and farmers were protesting high interest rates. But, I'm pretty sure that Wall Street and the nation's bankers wanted him re-appointed. And, like I said, unemployment up a couple of points, inflation down 10 points from 1980 to 1983 -- he wasn't going to mess with that. He was going to let advisors express displeasure, but he certainly wasn't going to mess with investor confidence.
"At any rate, I don't understand what either of you mean by Reagan's extraordinary toleration -- the Fed's independent. I suppose Reagan could have brought more public pressure, but why should he have? When it came to the economy, his position was analagous to a new coach who just needed to show improvement after three coaches with pathetic records."

In late 82 the country had been in the worst recession since WWII. The unemployment rate was nearly 11%, and Reagan's approval rating plummeted down into the mid 30's in mid 1983. So, it wasn't at all clear at that time that Reagan's 1st term would be an improvement. The common view was that the Fed had engineered the recession to kill inflation. But my impression is that Reagan laid off making the Fed the big scapegoat. In fact, he started talking about how dangerous inflation can be ("cruelest tax"... etc.).

The Fed is supposedly independent, but let's not pretend that Presidents and Fed Chairman don't have their "lively" talks once in a while (usually a year or so before election day). I just think a lot of administrations would've panicked in, say, early 1983 and brought the public pressure down on the Chairman.
Thanks for the link.

It's a shame your commenters didn't follow the links and read Volker's statement of his relationship with Volker: "I saw him from time to time, but I was not a close intimate of President Reagan’s." I've never found anything from either Reagan or Volker that indicated they spoke more than required to by their job - especially once Reagan found out that Volker would do his job no matter what Reagan wanted.

In fact, Volker has said (sorry, can't find a link at the moment) that he retired early because he was tired of Reagan's boys running him down and trying to butt in where they weren't welcome and weren't competent.

It's simply revisionist to say that Reagan "started talking about inflation" in '83-4. Take a look at his 1980 acceptance speech: Many others on fixed incomes, especially the elderly, have watched helplessly as the cruel tax of inflation wasted away their purchasing power."

Reagan didn't attack Volker or the Fed directly, because that wasn't his style. He was the smiling grandfatherly guy who never had a bad word to say. The people that worked for him carried big hatchets and used them indiscriminately.

Without casting stones at anyone in particular, this made me laugh: "The Cunning Realist is an exceptionally honest conservative..." That is a VERY low bar to set for someone.
Thurman Hart
I don't think anybody said that Reagan started talking about inflation in 83/84. I said that unemployment improved during that time -- it actually peaked late 82/early 83. Throughout 1984, the election year, unemployment rates were about what they were when Reagan took office. Yeah, he would have liked them to be better, but a nearly ten point improvement in the rate of inflation was all he needed to get re-elected. Especially since he could claim the unemployment numbers were improving and he had the Grenada thing to make him look tough.

So, yeah, it's totally incorrect to say that Reagan showed remarkable forebearance where Volcker was concerned. He was primarily elected to get inflation under control, and he still let his surrogates attack Volcker. I suspect that Reagan would have joined in if the jobless numbers hadn't started to improve in the Summer of 1983, but that's speculation.

I will say in Oyster's behalf that he does have the rare, but admirable, tendency to assume integrity on the part of people that he disagrees with (except in the case of intraparty conflicts -- just kidding). I'm not familiar enough with Cunning Realist to judge that particular assessment.
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