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.