We need Paul Volcker

Of all the men who have had a positive impact on the U.S. economy in the last 40 years, Paul Volcker is probably the one who has done the most. This will be a fairly short diary, but if at the end of it you know why Paul Volcker saved the economy and how that applies to us today, then I've done something positive.

If my analysis is off, I would appreciate any criticism.

You might have read that Paul Volcker endorsed Barack Obama a few weeks back. There were a few diaries talking about how big of a deal this was because of how respected Mr. Volcker is in the economic community.

But if the endorsement of Obama by Volcker means in any way that Volcker's ideas about the economy are shared by Obama, then the meaning of that endorsement means that the United States economy might be saved.

Volcker is single-handedly responsible for the recession of 1981-82. This is why everyone in the economic community loves him. See, the 70's sucked. We had aggregate supply shocks coming out the wazzoo. Oil spiked twice, and there was a great deal of stagflation - inflation without corresponding economic growth.

See that complete dropoff of inflation after the early 80's? That's Volcker's doing. He did what no other Fed chief before him had been willing to do: he wiped out inflation at the expense of the economy. GDP decreased by 3% after Volcker made his rate hikes.

This paved the way for almost 20 years of virtually uninterrupted economic growth. And all because Volcker got rid of inflation for a relatively short period of time.

Today, commodity prices are skyrocketing. Oil and gold are high, and oil especially is rising. Surely, the Fed will follow the example of the early 80's, bite the bullet, take the recession, and spur the economy on its merry way to growth down the road.

Nope. Instead, the Fed seems to be playing into the sinister hands of inflation, lowering rates at a rapid-fire pace. Bernanke seems to be bending to the will of Jim Cramer and his credit firm buddies.

Now, I'm definitely not advocating a rate hike. That would make things crazy right now, with the mortgage market and all. But Bernanke is lowering rates too fast.

So if Volcker can persuaded Obama to appoint a Fed chief who will enforce a contractionary monetary policy, then this endorsement has a very big meaning indeed.

•  Yeah right

  Tell that to the millions of manufacturing workers who lost their jobs because of his interest rate policies.

  by Paleo on Fri Mar 28, 2008 at 05:42:34 AM PDT

  •  Working people have never recovered from

    Volker's policies of deliberate high unemployment. The financial sector has made out like bandits. Yeah, bring the asshole back and finish off shophands for good.

    by daliscar on Fri Mar 28, 2008 at 05:46:56 AM PDT

    •  Clearly

      you don't know anything about the recession of the early 80's. In fact, financial market was the first to suffer, and they suffered the hardest. How many S&L's do you see today? They were all wiped out by the recession.

      by motbob on Fri Mar 28, 2008 at 05:49:09 AM PDT

      •  S&L's were wiped out by corruption

        ...of which John McCain was a part of.  

        Why don't people remember the Charles Keating and the "Keating Five," of which John McCain was a card carrying member?

        by dannobee on Fri Mar 28, 2008 at 06:11:45 AM PDT

    •  Thank you! Thank you!

        It is time people like you are heard...who are concerned more about blue collar guys in pick-ups and less about the white collar guys in BMWs.  

      by Steve Love on Fri Mar 28, 2008 at 06:13:50 AM PDT

  •  He was a pretty unpopular guy

    A lot of people wanted him out of office. But the results that he achieved are undeniable. The incentive to invest was greatly increased after Volcker wiped out inflation, and that investment led to a lot of new jobs down the road.

    The manufacturing workers got their jobs back; unemployment didn't stay at ten percent forever.

    by motbob on Fri Mar 28, 2008 at 05:47:22 AM PDT

    •  Not true

      Many didn't.  And the decline of union membership began in 1979.

      I guess you subscribe to this philosophy:

      "you can't make an omelet without breaking eggs."

      Josef Stalin.

      by Paleo on Fri Mar 28, 2008 at 05:51:42 AM PDT

      •  Compare me to Stalin

        That always wins an argument!

        But seriously, if you look at the numbers for unemployment, pre- and post- Volcker, employment after his policies is higher.

        by motbob on Fri Mar 28, 2008 at 05:58:42 AM PDT

      •  Causation?

        You are trying to imply that correlation = causation, which it doesn't here.  The decline in unions/manufacturing can be tied to three real big factors that had nothing to do with Volcker:

        1. Increase in global (including other states) competition.

        2. Increases in technology

        3. Strong Dollar Policy (this did have a little to do with Volcker).

        What Volcker did was kill off the inflation/unemployment problem that had plagued the country for the entire decade of the 70s.  Those manufacturing jobs wouldn't have had any chance of being here had he not taken out inflation.

        by SilverOz on Fri Mar 28, 2008 at 05:59:44 AM PDT

        •  asdf

          The entire decade of the 80s had a higher unemployment record than the entire decade of the 70s.

          His high interest rate policy had a lot to do with the high dollar.

          I didn't say he was solely responsible for loss of union/manufacturing jobs.  But he played a large role in getting the process going.

          by Paleo on Fri Mar 28, 2008 at 06:10:14 AM PDT

          •  Nah

            "The entire decade of the 80s had a higher unemployment record than the entire decade of the 70s."

            What a bogus statistic. I wish you would look at the relevant timeframe: from the beginning of the first oil crisis onward.

            Compare 1973-1981 to the time period after the recession and you will see the difference clear as day.

            by motbob on Fri Mar 28, 2008 at 06:24:48 AM PDT

            •  Cherry pick

              You can cherry pick and make the stats do whatever you want.  Unemployment was high from '73 to '75.  The rate dropped from '75 to '79 before rising from '79 till it reached 10.8 at the end of '82.  It was 5.4 by the time Reagan left office.  Which is comparable to the early Carter years.

              by Paleo on Fri Mar 28, 2008 at 06:37:39 AM PDT

              •  What Volcker did was kill inflation

                the rate from 73 (when the inflation problem began, its not cherry picking), through 81 (when Volcker hiked dramatically) the inflation rate averaged 9.04% a year.  From 82-88 (roughly the rest of the Reagan years, but you can extend it out as much as you like) the inflation rate averaged 3.84%.  So yes, Volcker did a fantastic job in killing inflation and setting up a long period of low unemployment and inflation.

                by SilverOz on Fri Mar 28, 2008 at 06:57:28 AM PDT

                •  Unemployment

                  Unemployment did not become "low," below 5%, until the late 90s long after Volcker had departed the scene.

                  by Paleo on Fri Mar 28, 2008 at 08:51:35 AM PDT

•  Tips for Volcker

  by motbob on Fri Mar 28, 2008 at 05:44:18 AM PDT

•  I was just thinking the same

  thing the other day.  We need Paul Volker.

  by Mz Kleen on Fri Mar 28, 2008 at 05:46:28 AM PDT

•  Huge difference in the times

  Volcker addressed double digit overall inflation levels, which were propagated by wage inflation that lead was leading to an inflationary death spiral.  Even after he "killed" inflation, the rate actually remained at levels that are comparable to today.  A high interest rate policy now would fail drastically, as it would not only kill the economy (think of housing with 15% mortgage rates), but would likely have little impact on inflation since it is being driven by external demand and speculation that the fed may be unable to control. Finally, remember that Bernanke's term doesn't end until 2010.

  by SilverOz on Fri Mar 28, 2008 at 05:48:03 AM PDT

  •  Maybe I should have made it more clear...

    I'm not really advocating a rate hike, as inflation isn't really a problem yet. But lowering interest rates now, as it looms on the horizon, just seems foolish to me. I'll edit the diary to make my position more clear.

    by motbob on Fri Mar 28, 2008 at 05:51:12 AM PDT

    •  I would respectfully disagree: I think inflation

      is a big problem, it's just the people who control our political economy changed the way inflation is computed to the detriment of those whose pension cost-of-living adjustments depend on it. It also undercuts organized workers from demanding higher pay based on the cost of living.
      It used to be: Increase productivity, increase your wages. Now there's a disconnent. Productivity has doubled in the past 20 years and wages have remained the same.

      by daliscar on Fri Mar 28, 2008 at 06:05:17 AM PDT

      •  Are you talking about the CPI adjustment? n/t

        by motbob on Fri Mar 28, 2008 at 06:09:36 AM PDT

        •  Hi. Yes, it's my understanding that the 1998

          formula for refiguring the official cost of living had the result of lowering the CPI and hence lowering the annual adjustments to keep up.
          If I am wrong, I'd like to know so I can stop repeating a mistake.

          by daliscar on Fri Mar 28, 2008 at 06:55:47 AM PDT

          •  Nah, you're not wrong

            But all indications that I've seen are that the adjustment didn't go far enough in lowering CPI.

            Of course, the CPI is a really complex subject that no one fully understands, not even the gov't commission to study it. But after years of discussion and debate and study, it is generally accepted that CPI is a solid, accurate measure of inflation.

            The other popular measure of inflation, the GDP deflator, is even lower than CPI, and the gov't doesn't use that.

            by motbob on Fri Mar 28, 2008 at 08:34:53 AM PDT

•  Just looking at your graph,

  I don't see anything happening today that is comparable to the 1970's regarding inflation rates.  Your graph doesn't support your thesis.  We still have low inflation right now.  As Bernanke has stated, this means there is a lot of "ammunition" with which to fight a recession.  What's worse, losing your job or seeing inflation rise by a point or two?  I think most people would go with a little more inflation.

  by eastsidedemocrat on Fri Mar 28, 2008 at 05:55:37 AM PDT

  •  You got that right.

    As Bernanke has stated, this means there is a lot of "ammunition" with which to fight a recession.

    Or we might stimulate the economy as we did back in the 30s by a tax structure that took the least from those who needed it the most and the most from those who needed it the least and invest that money in creating green jobs to employ American workers not create a larger consumer economy for Chinese imports.  
      We have a financial philosophy like our health care: instead of preventive activities we wait for the patient to get deathly sick and then call in the Feds or take them to the ER.

    What's worse, losing your job or seeing inflation rise by a point or two?  I think most people would go with a little more inflation.

     
      Of course.  But what is inexcusable is the 8% of our federal tax dollars going to borrow money to pay the interest on borrowed money. The inmates have taken over the financial institution.  :-(

    by Steve Love on Fri Mar 28, 2008 at 06:10:14 AM PDT

    •  Good point, but

      the problem is that in the 1930's, the economy never got stimulated by the policies you describe.  Try as they did, the economy never got back on its feet until WWII provided a rationale for borrowing and stimulating the economy through debt and a massive expansion of the state, mostly in the defense sector.

      by eastsidedemocrat on Fri Mar 28, 2008 at 06:22:59 AM PDT

      •  I've heard that story before....

        the problem is that in the 1930's, the economy never got stimulated by the policies you describe.

          The problem is that it just is not true.  The Hoover administration was committed to balanced budgets.  The FDR economic plan was to create markets by using deficit financing to funnel money into the bottom of the economy...into worker's paychecks through a whole range of public works projects and by recognizing workers' rights to collective bargaining...and, indeed, jobs were created, the banking industry was saved from itself and the economy grew.
          Rebuilding the economy did not take overnight but it was a start in the right direction and an essential part of that was the unionization of the major industries, which effectively put a floor under wages.  The formula of the 40-hour week, time and a half for overtime, health care benefits and paid vacations were made the norm for industrial employment in those days.    
          Had, during WWII, unions been delegitimized in an effort to squeeze the most production out of the workforce for the least price, we would have come out of WWII exactly like we went into the 40's and the post-war middle class would have been stillborn.  Instead, the economic policy of the early New Deal was continued right through WWII and for the next 30+ years until the conservatives began their war on unions...and the middle class has been suffering ever since.  As worker wages go, so goes the economy...something we are having to relearn since the great hoodwinking of the American people by Reagan and the conservative revolution.  

        by Steve Love on Fri Mar 28, 2008 at 09:33:22 PM PDT

•  I thought this was snark, and

  then I read it.

  Let's clone Reagan too.  Maybe he can stare down another union, like he did PATCO.  

  by Kab ibn al Ashraf on Fri Mar 28, 2008 at 06:16:03 AM PDT

  •  I don't see the connection

    between Reagan and Volcker. I mean, Volcker was appointed by Carter.

    by motbob on Fri Mar 28, 2008 at 06:27:19 AM PDT

    •  All the Presidents

      are foot soldiers for capitalism.  The neoliberal reforms began under Carter, were sped up by Reagan, and completed with Clinton.

      When did Reagan stare down PATCO?  When did Volcker crush labor?  The two overlap.

      by Kab ibn al Ashraf on Fri Mar 28, 2008 at 06:46:34 AM PDT

      •  This is clearly the way I remember it.

        by daliscar on Fri Mar 28, 2008 at 06:57:13 AM PDT

•  PV is a senior advisor. That's VERY good.

  Speaking as a long time Wall Streeter (We're not all evil Republicans, btw), I am very heartened that Barack Obama has Paul Volcker as a senior advisor.  Will he be Fed Chair again? I think not.  Were all of his policies good for everyone? Again, no, but on balance they managed a number of tough business cycle pretty well.  The goal is to balance long term growth and full employment in a free market economy and it's not a cakewalk.

  I think yesterday's "Six Principles" speech is very important.

  http://www.nytimes.com/...

  Yet again, MSM missed the point. The business media (even more clueless) chose to focus on a side issue, a possible capital gains rate hike to 20-25% (Guess what? There aren't going to be many capital gains for awhile so it is not a huge issue.  We are in a recession and asset valuations - especally financial assets - are falling and will probably continue to slide for a while. The hope is that they don't "crash" much more than they have already.)

  Yesterday's speech was all about the regulatory landscape in financial markets going forward.  The target audience was Wall St and the speech was studied carefully.  I personally think it had Paul Volcker's fingerprints all over it.  He is intimate with the institutions, structures, and players involved and enjoys their respect.  This speech was a rejection of the Greenspan philosophy.  It was sensible, it flowed, and, to those who know the implications, was a sea change but was not an unmanageable one.

  I think we can all agree that when Obama gives a major speech you can look back years later and say he was usually spot on.  I think the speech left McCain no opening to launch substantive criticism against this approach.  You sure don't hear Wall St. squawking about it. All Krugman could say was it was too cautious.  Nonsense.  Not a peep from the reactionary Wall Street Journal editors this morning after this, a major economic address, from the highly likely 44th POTUS. Interesting.  

  by Critical Dune on Fri Mar 28, 2008 at 06:36:15 AM PDT