Robert Samuelson, columnist for the Washington Post (and no relation to Nobel Prize winning economist Paul Samuelson) takes issue with Paul Krugman in an Op-Ed yesterday in which he argues that Ronald Reagan should be given credit for the decline of inflation in the 1980s because he supported the Fed Chairman, Paul Volker, in the effort.
I'll grant that Reagan could have had some influence, though as Krugman says in his response:
But that’s not the key point. The key point is that the great disinflation of the 1980s was essentially a monetary affair, and fully consistent with Keynesian economics. And as far as I can tell, Samuelson doesn’t disagree with that assessment.
My problem is that Krugman has let far more significant historical distortions in Samuelson's piece slide, apart from this minor quibble over how much he may have influenced the independent Chairman of the Federal Reserve. I'll examine those, and why they are important, below.
Samuelson begins by offering some "background" on the problem of inflation. "It went from 1.4 percent in 1960 to 5.9 percent in 1969 to 13.3 percent in 1979", he says. So far so good. Then he says this:
The Federal Reserve — custodian of credit policies — veered between easy money and tight money, striving both to subdue inflation and to maintain “full employment” (taken as a 4 percent to 5 percent unemployment rate). It achieved neither. From the late 1960s to the early 1980s, there were four recessions.
Well yes, you can follow
the link he provides, and see that the last sentence is true. However, he neglects to note that
two of those recessions he is counting are those that were actually
caused by Volker's determination to "crush inflation". As a matter of fact, Volker was appointed in August 1979. He had the economy in recession by January 1980, and after that downturn ended in July 1980, the economy was back into recession a year later in July 1981.
So how could this instability possibly be the fault of Fed policy prior to Volker, and not rather, a fault of the very policy Samuelson is commending Reagan for supporting here? Prior to Volker taking office in August 1979, there had been exactly two recession in the previous 18 years. 18 years!
Moreover, the implication that the Fed had not achieved an unemployment rate lower than 5% in this time is also inaccurate. For the entire decade of the 1960s, after all, the civilian unemployment rate had averaged 4.7%. For 1969, it had average 3.5%. And, when Volker was appointed in 1979, it was at 6%, and it had been below 5% as recently as 1973. So more accurately, maintaining employment had only been a very recent problem, as the economy had not yet recovered fully from the recent recession which had ended in March 1975.
Later on he asserts:
What Volcker and Reagan accomplished was an economic and political triumph. Economically, ending double-digit inflation set the stage for a quarter-century of near-automatic expansion
Let's examine that as well. We'll agree that tight monetary policy succeeded in bringing down inflation. That, after all, was Krugman's point. And of course what textbook economics would have predicted.
But was anything else accomplished other than low inflation? Was growth especially strong during this expansion, for instance? No.
Average Annual Increase in Real GDP 1947-2014
If we measure from when Volker became Fed chairman in 1979, total growth in Real GDP over the next 20 years was 187%, compared to 221% for the previous 20 years. Even if we ignore all of the suffering caused by those two recessions, and measure from the low point in 1982, it's hard to make a case that growth was anything special. For the 10 years starting in 1982, the total Real GDP increase was 142%. For the 10 years ending in 1979 (including the 1970 recession), the total Real GDP increase was 137%. And any longer than 10 years, and the comparison gets less favorable, as that starts to bring in the still unmatched growth of the 1960s.
And did they find it any easier then to meet that unemployment target, of below 5 percent? Again, no.
Civilian Unemployment Rate 1958-2014
Unemployment spiked in the wake of Volker's tightening, to double digits, and it was a full 15 years before it again fell below that 5% level which Samuelson considers "full employment". So how exactly was this an improvement, much less an economic triumph? 15 years of depressed employment is a triumph?
We are left with two things, one that inflation was lower, and the other, Samuel's bizarre magical notion that expansion after that point was somehow "automatic". He describes this as though this one moment had some unexplained lasting historical impact, such that Fed policy, fiscal policy, trade policy, etc., in the succeeding decades were of little consequence. And yet lowering inflation, the one thing that was accomplished, that was completely done by 1983 (and had only been a problem since about 1973).
This kind of empty rhetoric, with little economic evidence, and lots of misleading innuendo, has been typical of the Reagan myth writers for thirty years now. I'll comment on one more thing:
The Gallup Poll routinely asks respondents to select “the most important problem facing the country.” From 1973 to 1981, the “high cost of living” ranked No. 1. People lost faith in the future, as they have now.
As they have now. And yet, inflation was conquered in 1982. If this was such a resounding success, then why are people still having trouble with the "high cost of living"? Maybe it has to do with more than inflation. Just maybe causing high unemployment, in order to suppress wage increases, has had other effects aside from keeping prices under control?