Harrop: Volcker’s medicine had bitter taste, but it worked

Under Carter and Obama, Paul Volcker had the cures, first for inflation and later for recession.

By Froma Harrop / syndicated columnist

Paul Volcker administered the tough medicine when the American economy badly needed it. It was 1980, and the inflation rate had passed 14 percent. OPEC, a cartel of foreign oil producers, had launched an oil embargo against the United States a few years before, causing prices to soar. Older Americans remember long lines of cars snaking to gas pumps. The country felt in crisis.

President Jimmy Carter appointed Volcker chairman of the Federal Reserve Board to fix inflation. Volcker knew he had to raise interest rates to beat it down. He did and succeeded, but the cost was a sharp economic downturn. Workers lost jobs, and many regarded Volcker as the villain.

Ronald Reagan defeated Carter in 1980. As president, he took credit for a growing economy, thanks in good part to Volcker’s having conquered inflation and falling oil prices. That occurred as consumers responded to the oil shock by reining in their use of — and, therefore, demand for — oil.

Reagan wanted to loosen the rules governing Wall Street. Volcker believed in them, so Reagan replaced Volcker as Fed chairman with Alan Greenspan. The relaxation of regulations led to the savings and loan crisis, which forced a massive government bailout of failing institutions. Reagan’s tax cuts and defense spending gave the economy a temporary boost. But by the time he left office, the national debt had doubled.

Under President Bill Clinton, taxes were raised and budget deficits turned to surpluses. There was even talk of eliminating the national debt altogether.

Then George W. Bush became president. Again, Wall Street was turned loose; taxes were cut; and federal spending took off. The Bush presidency ended with a financial meltdown leading to the worst recession since the Great Depression.

Entering office with an economy in ruins, President Barack Obama named Volcker chairman of his Economic Recovery Advisory Board. There Volcker pushed for the Dodd-Frank regulatory overhaul. That included the Volcker Rule, which curtailed the banks’ ability to take risks with the depositors’ money.

President Trump is following his Republican predecessors’ path of slashing taxes, accelerating spending and pushing for financial deregulation. Despite a strong economy — for the time being, anyway — deficits are skyrocketing.

In an interview a year ago with Barron’s, Volcker explained why the U.S. debt can’t continue its explosive growth. “Someday confidence is lost,” he said. “The longer the imbalance lasts, the more difficult it is to correct.” He said that deficits can be good for business, enabling them to invest abroad and import more freely. “But eventually it breaks down,” hurting small manufacturers.

Volcker said he was OK with tariffs that were carefully applied. But in an interview held in February, he criticized Trump’s approach to China. “We are all threats and demands,” Volcker told hedge-funder Ray Dalio, whereas he believes China seems to want “a harmonious relationship over time.”

Volcker’s biggest concerns of late had centered on Americans’ loss of trust in government. He laments the falloff in respect for public institutions among the rich, the poor and the middle class alike. “You can’t survive if people don’t trust their government to do the right thing most of the time,” he told Barron’s.

In his memoir, “Keeping at It,” released late last year, Volcker wrote, “Too many of the best in the assailed bureaucracy … have left too soon, doubting that their voices could be heard or that their goals could be achieved.”

Volcker helped found The Volcker Alliance, a nonpartisan group dedicated to improving the efficiency and accountability of government at all levels.

Volcker died this week at the age of 92. He was a great man and a great American.

Follow Froma Harrop on Twitter @FromaHarrop. Email her at fharrop@gmail.com.

Talk to us

More in Opinion

Editorial cartoons for Friday, May 29

A sketchy look at the day in the coronavirus pandemic (and politics).… Continue reading

Editorial: State officials’ pay raises poorly timed

Set by a citizen panel a year ago, the raises begin just as the state needs to make deep budget cuts.

Comment: Cooper’s ‘damsel in distress’ act has sorry history

The claim that white women needed protection has been used to justify lynchings and bigoted laws.

Commentary: Twitter struck fair balance between liberty, fact

Twitter did not remove President Trump’s tweet. Its small label informed people how to ‘get the facts.’

State action on dams is good news, but more action needed

In response to the recent editorial (“State gains keener watch of dams… Continue reading

Consultant report arguement against City of Snohomish rezone

The City of Snohomish planning director has released a project update on… Continue reading

Disease screening should be required for imported dogs

More than one million dogs are imported into the U.S. each year… Continue reading

Editorial: If not for yourself, wear face masks for others

Masks aren’t perfect, but studies are showing they can help limit the spread of the coronavirus.

Most Read