Monday, January 12, 2015

Robert Samuelson Credits Reagan for the Volcker Disinflation

Paul Krugman has some fun with the latest from Robert (no relationship to Paul) Samuelson:
My point was that the legend of Reaganomics — that supply-side tax cuts produced a disinflation that confounded Keynesians — is not at all what happened in the 1980s. What happened instead was that harshly restrictive monetary policies created a deep recession, and a period of very high unemployment broke the wage-price spiral.
This narrative went completely unchallenged by Samuelson in his strange attack on Krugman. So what was Samuelson’s beef?
From 1960 to 1980, inflation — the general rise of retail prices — marched relentlessly upward. It went from 1.4 percent in 1960 to 5.9 percent in 1969 to 13.3 percent in 1979.
I guess Samuelson forgot that Nixon listened to Milton Friedman for his first couple of years as well as those Ford WIN buttons. And Volcker’s first monetary restraint occurred during Carter’s years in office. But let’s move on:
What Reagan provided was political protection. The Fed’s previous failures to stifle inflation reflected its unwillingness to maintain tight-money policies long enough to purge inflationary psychology.
Paul questions whether the Reagan Administration was totally behind Volcker’s tight monetary policy:
As it happens, I don’t agree on the political story either; based in part on what I saw during my year in government (1982-3), Reagan’s inner circle didn’t even understand that monetary policy was what was going on.
But we can go back to a 1986 discussion from Tom Redburn:
President Reagan's four appointees as governors of the Federal Reserve Board prodded Fed Chairman Paul A. Volcker toward a less restrictive monetary policy when they outvoted him last month on a cut in a key interest rate charged to financial institutions, sources said Tuesday.
The people that President Reagan was appointing to the Federal Reserve did not agree with the Volcker majority and eventually garnered enough influence to force a less restrictive monetary policy. I offer this not as a criticism of President Reagan as some of us loathed the severity of Volcker’s tight monetary policy. But people like Samuelson heart both Reagan and tight monetary policies. Faced with the inconsistency of these two positions – they decide to rewrite history. Update: Dean Baker has more on this including a nice graph of inflation that undermines this line from Samuelson:
Worse, government seemed powerless to defeat it.
Never mind that Dean’s graph shows inflation fell when the FED did tight money under Nixon and again fell after Gerald Ford started up with those damn WIN buttons.

4 comments: said...

I remember well what was going on at the beginning of the Reagan administration. It was completely split. I knew people in the Treasury Dept, and there were two completely opposed Assistant Secretaries appointed, supply-siding Paul Craig Roberts, recently seen declaring that the attack on Charlie Hebdo is a CIA plot, and Bery Sprinkel, a hardline monetarist. They were totally opposed on what the Fed should do, and I was told that "blood is flowing in the halls of the Treasury."

The conflict ended after Volcker relaxed monetary policy starting in August 1982 when Mexico nearly defaulted and Reagan cancelled the next round of his tax cuts. Roberts left before Sprinkel, and the latter bought into the party line. said...

Just read the RJS column, and it is truly awful. And he goes out of his way to say this is the first column he has written devoted entirely to responding to somebody else. Well, he massively fell on his face. Supporedly it is based on some book he wrote. Glad I not only never read it but never even heard of it before.

So, perhaps his most egregious failure is not even to mention the name of Carter. Not only did Carter appoint Volcker, but Volcker had already started his restrictionary policy, which tiggered a massive downturn for Carter just prior to his reelection effort. Without doubt, the lousy state of the economy was a major reason Reagan beat Carter, but Carter continued to support Volcker in this.

While it is true that Reagan supported Volcker, thanks to pressure from Sprinkel, over objections of Roberts, it is not at all clear that Volcker would have changed course if Reagan had sounded like Roberts in conversations with him. Volcker was and is a massively self-directed and strong-willed individual. But claiming that it is awful that Reagan was given no credit for pulitically supporting him, when it was Carter who both appointed him and took the political heat and lost his presidency largely because he provided political support for Volcker is simply outrageous in the extreme.

Shame on Robert J. Samuuelson. I am one of thoee regularly poking at him, but this is really over the top unacceptable.

ProGrowthLiberal said...

Brad DeLong checked the NY Times archive and his account of what was really happening back then is a must read.

reason said...

"Just read the RJS column, and it is truly awful."
Question - has RJS ever written a non-awful column? It seems Dean Baker would hardly have a blog if it wasn't for RJS.