Paul Volcker was a great economist but his greatest lesson wasn’t on economics, it was on being a public servant
Regardless of what those answers turn out to be, the life of Paul Volcker offers guidance about the values they might want to embrace in seeking them.
It is easy to forget just how miserable the situation was for the US economy when Paul Volcker took charge as its chief central banker in August 1979.
Inflation was nearly 12 percent a year and rising. People were lining up for gasoline. Unemployment was 6 percent, having spiked over the previous four months. President Jimmy Carter had delivered an Oval Office address a month earlier complaining of “a crisis that strikes at the very heart and soul and spirit of our national will” — his famous “malaise” speech.
In that world of hurt, Volcker, who died Sunday at 92, came to an unpopular view: Things had to get worse before they could get better.
His view was that Americans’ expectations of ever-rising prices were creating a vicious cycle and that only aggressive actions by the Fed to constrict the money supply would stop this — even at the cost of what would become the worst recession in the seven decades between the Great Depression and the global financial crisis.
The standard story that is told about the legacy of Paul Volcker is that history proved him correct. The recessions his actions triggered were painful but brief, and by the end of 1982 the US was beginning what would be called the Great Moderation, a quarter century of steady growth, low inflation, booming financial markets and recessions that were rare and mild.
Four decades later, there are reasons for some historical revisionism, particularly given what has happened to inflation and living standards since.
For one thing, inflation has fallen since the 1980s across the advanced world, not just in countries where a Volcker-esque central banker engineered a severe recession to break inflation expectations.
And there is reason to think the doctrine that Volcker and his successors embraced — of raising interest rates to slow the economy whenever a risk of inflation appeared on the horizon — has contributed to stagnant wages for many workers.
If a central bank views higher pay for workers as a potential cause for alarm, but is more sanguine when corporate profits rise, it is reasonable to expect that the share of national income going to capital, versus labour, will rise over time. And that is exactly what has happened in the United States since the Volcker era.
These kinds of reassessments are important for taking the right lessons from Volcker’s era. After all, he left the Fed chairmanship 32 years ago. What made Volcker a great economic statesman was not so much the details of his analysis of inflation dynamics and the money supply in 1979. It was a culture and mindset he brought to that job and all of those he held over a career in public service that stretched from the Eisenhower administration to the Obama administration.
Volcker was a civil servant’s civil servant. At the Treasury Department in the Kennedy, Johnson and Nixon years, he toiled at rethinking an international monetary system that was breaking down.
Despite jobs at the epicentre of world financial power — early in his career he worked at Chase Manhattan, and he would lead the Federal Reserve Bank of New York before Carter picked him as Fed chair — he seemed uninterested in the trappings of wealth and power.
Always rumpled, always mumbling, his 6-foot-7-inch frame often slumping, he was not trying to be a globe-trotting master of industry or political mover and shaker. He was often dismissive of the views of powerful bankers and politicians. And he lived modestly, wearing ill-fitting suits and smoking cheap cigars and living in a small, not-at-all-posh apartment in Washington with his family back in New York.
He did not focus much on his own status, which made him especially suited to resist the inevitable political pressure that arose when his course of action caused mass unemployment in the early 1980s.
The tidy story of Volcker’s early years at the Fed — that a central banker needs to be willing to tank the economy to prevent inflation — is not necessarily the most important lesson. What made Volcker such a consequential figure is that he did not merely take the conventional wisdom of public policy as he inherited it. He was willing to rethink the Fed’s policy based on what was happening on the ground, not on the theories of politicians and tradition-bound economists.
Right now, Fed leaders are grappling with an opposite set of problems from those that Volcker inherited. Inflation is too low, not too high. Workers’ wages are rising too slowly, not too fast. With interest rates persistently low, it’s not clear how central banks will fight the next recession.
Essentially, the post-Volcker conventional wisdom of how central banks ought to act is in doubt — no surprise given that he left more than three decades ago. His successors have to figure out what elements of his approach have staying power and which should be discarded in creating a 21st-century monetary policy.
Regardless of what those answers turn out to be, Volcker’s life offers guidance about the values they might want to embrace in seeking them.
His life is a testament to what dedicated public servants can do when they put their heads down, and are guided not by how things worked in the past, or how they might wish them to be, but by the world as it is. And the right answer is not always the most popular.
Neil Irwin c.2019 The New York Times Company
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