Last week, I wrote a column taking issue with Paul Krugman’s contention that President Ronald Reagan had little to do with the decisive crushing of double-digit inflation of the early 1980s. In Krugman’s telling, all the credit belongs to Paul Volcker, then chairman of the Federal Reserve Board. In my telling, both Volcker and Reagan counted. Volcker imposed tight money; Reagan’s support enabled him to maintain the painful and unpopular policy (the monthly unemployment rate peaked at 10.8 percent) long enough to purge inflationary psychology.
The column predictably provoked a backlash; economist and New York Times columnist Krugman responded on his blog. So I return to the subject. My aim here, as with the original column, is to ground history in facts. In that spirit, let me address some common criticisms of the column.
● President Jimmy Carter deserves some credit for reducing inflation, because he appointed Volcker in 1979.
This misses the context. Volcker was not Carter’s first choice. To improve his approval ratings before the 1980 election, Carter had dismissed five Cabinet members, including Treasury Secretary W. Michael Blumenthal. Carter couldn’t find a leading business figure to replace Blumenthal and so turned to G. William Miller, an ex-CEO who was chairman of the Fed. When Miller accepted, Carter needed to find another Fed chairman. Private-sector figures again turned him down. Carter didn’t have the luxury of waiting, because financial markets were in a tizzy. Volcker, head of the New York Federal Reserve bank, was an obvious default choice, though some Carter officials disliked his tough views on inflation.
● Volcker’s deep recession cost Carter his reelection.
Not so. True, there was a short, sharp recession in 1980. But this was mostly the unintended consequence of Carter’s own anti-inflation program. It unexpectedly reduced consumer spending and increased joblessness. The unemployment rate went from 6.3 percent in March to 7.8 percent in July. In a post-election interview with journalist Theodore White, Carter said uncontrolled inflation was the biggest reason for his defeat. As for Volcker’s tight money, its largest effects occurred after the election.
● The Reagan administration was not united in its support of Volcker; some officials criticized the Volcker Fed.
True — but largely irrelevant. The criticisms came mostly from unelected mid-level officials and concerned the money supply and other technical issues. The stories were often deep inside newspapers. They didn’t affect public opinion or the political climate, which is what counted. Widespread congressional opposition to Volcker came from both Republicans and Democrats. Reagan was the nation’s chief political officer. Five words from him withdrawing support from Volcker would have been worth more than 50,000 from administration technocrats complaining about the money supply.
● The 1980s were a triumph of Keynesian economics, because “events played out exactly the way Keynesian-leaning textbooks said they would.”
The claim and the quote are Krugman’s. They distort history. As preached and practiced since the 1960s, Keynesian economics promised to stabilize the economy at levels of low inflation and high employment. By the early 1980s, this vision was in tatters, and many economists were fatalistic about controlling high inflation. Maybe it could be contained. It couldn’t be eliminated, because the social costs (high unemployment, lost output) would be too great. Inflation persists, wrote Yale economist James Tobin, because “major economic groups [claim] pieces of the pie that together exceed the whole pie.”
This was a clever rationale for tolerating high inflation, and the Volcker-Reagan monetary onslaught demolished it. High inflation was not an intrinsic condition of wealthy democracies. It was the product of bad economic policies. This was the 1980s’ true lesson, not the contrived triumph of Keynesianism.
As my original column said, I don’t dispute Krugman on the importance of the 1980s’ disinflation. Indeed, the premise of my book (“The Great Inflation and Its Aftermath”) is that inflation’s rise and fall are underrated events in post-World War II history. But it matters how high inflation was overcome. Krugman seems so determined to discredit Reagan that he makes a mockery of the history.
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