What Was Going on Between the White House and the Federal Reserve in the Early 1980s?: Daily Focus
I must say, I am surprised to see Robert Samuelson claiming that the Federal Reserve and the Reagan administration were in accord in 1982…
Let’s roll the videotape:
Presidents and the Economy:
“Serious analyses of the Reagan-era business cycle…
…place very little weight on Reagan, and emphasize instead the role of the Federal Reserve…. Paul Volcker, was determined to bring inflation down, even at a heavy price; it tightened policy, sending interest rates sky high, with mortgage rates going above 18 percent. What followed was a severe recession that drove unemployment to double digits but also broke the wage-price spiral. Then the Fed decided that America had suffered enough. It loosened the reins, sending interest rates plummeting and housing starts soaring. And the economy bounced back. Reagan got the political credit for ‘morning in America,’ but Mr. Volcker was actually responsible for both the slump and the boom…
Volcker, Reagan and History:
“It’s important to get history right…
…Paul Krugman has gotten it maddeningly wrong…. Reagan was crucial. In nearly four decades of column-writing, I can’t recall ever devoting an entire column to rebutting someone else’s…. Krugman’s error is so glaring that it justifies an exception…. Reagan provided… political protection….
As the gruesome social costs of Volcker’s policies mounted–the monthly unemployment rate would ultimately rise to a post-World War II high of 10.8 percent–Reagan’s approval ratings plunged…. Still, he supported the Fed. ‘I have met with Chairman Volcker several times during the past year,’ he said in early 1982. ‘I have confidence in the announced policies of the Federal Reserve.’ This patience enabled Volcker to succeed…. It’s doubtful that any other plausible presidential candidate, Republican or Democrat, would have been so forbearing. During Volcker’s monetary onslaught, there were many congressional proposals, backed by members of both parties, to curb the Fed’s power, lower interest rates or fire Volcker. If Reagan had endorsed any of them, the Fed would have had to retreat.
What Volcker and Reagan accomplished was an economic and political triumph…. Politically, Reagan and Volcker showed that leaders can take actions that, though initially painful and unpopular, served the country’s long-term interests.”
Reaganomics Undefended:
“This piece by Robert Samuelson…
…is really strange…. Samuelson declares me ‘totally wrong,’ then seems to agree with me about the economics. 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…. Events played out exactly the way Keynesian-leaning textbooks said they would…. [Samuelson] accept[s] that it was all about tight money, and he just wants to give Reagan credit for staying off Volcker’s back….
[This] does nothing at all to resurrect the case for Reaganomics, for the magic of tax cuts? Maybe Reagan was a great guy, but that’s surely not what’s important for current debates….
I don’t agree on the political story…. 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… the key point is that the great disinflation of the 1980s was essentially a monetary affair, and fully consistent with Keynesian economics…. Samuelson doesn’t disagree…
I went to the New York Times archives and searched for mentions of Reagan and Volcker in the same article in 1982. The first four results that came up were:
-
: G.O.P. Chiefs Warn Reagan on Budget–See Possible Shift:
“Paul A. Volcker, chairman of the Federal Reserve Board, told the Senate Banking Committee today that the prospect of the big deficits for the next several years posed a threat to the financial markets. He suggested a combination of new taxes and spending cuts to achieve a $20 billion decrease in the 1984 deficit…” -
:
Reagan and Volcker in Talks: “President Reagan and the chairman of the Federal Reserve Board, Paul A. Volcker, met Monday…. The meeting comes after recent tension between the Fed and the Administration, highlighted by the Administration’s contention that the Fed’s erratic management of the money supply was pushing up interest rates and Mr. Volcker’s response that it is the threat of large budget deficits that is affecting interest rates…. Senator Howard H. Baker Jr., the Senate majority leader, recently called for a meeting between Mr. Reagan and Mr. Volcker to coordinate economic policy…. Many economists outside the Government say that the Fed and the Administration are on a collision course on economic policy because the tight monetary policy promised by the Fed will not allow for the relatively strong economic growth the President has forecast…. Mr. Volcker in an interview Sunday said that he did not think the economy would come ‘roaring’ back, as Treasury Secretary Donald T. Regan predicted…. David R. Gergen, director of communications, even refused to confirm whether the meeting had taken place…” -
:
Aides Minimize Reagan’s Remark: “The Reagan Administration and the Federal Reserve today sought to play down the President’s apparent breach of confidence Tuesday when he said that Paul A. Volcker, chairman of the Federal Reserve Board, had told him that interest rates would drop by three to four percentage points by summer…. Reagan said the Fed chairman had made the prediction during a private talk between the two. Senators at Tuesday’s meeting repeated the forecast afterward…. One Administration official said the President wanted to make clear that he had not intended to violate the confidence of a private meeting…. The White House apparently was also concerned because the President may not have quoted Mr. Volcker accurately or fully…” -
: Reaganomics and the Presidents’ Men:
“As the economy went into its nose dive Secretary of the Treasury Donald T. Regan publicly questioned the wisdom of the Federal Reserve Board’s tight-money actions; perhaps Chairman Volcker had overdone things, he said. Yet it was an awkward position to take. From the start, Mr. Volcker had the President’s blessing for his tight-money policy, and the Fed chairman had frequently made clear his conviction that the Administration should do its part in combatting inflation by curbing the deficit. This the President had failed to do. Mr. Volcker told an associate that he found Secretary Regan’s criticism ‘astounding’…”
This is much more consistent with Paul Krugman’s story than with Robert Samuelson’s. In these stories, Paul Volcker is openly and publicly opposed to Ronald Reagan’s supply-side fiscal policies as creating a risk of forcing him to either abandon his fight against inflation or accept a permanent low-investment economy with slow growth. The Reagan administration as a whole is quietly and sotto voce via leaks blaming high interest rates and consequent high unemployment on “erratic management of the money supply” by Paul Volcker. The Reagan Treasury Department under its head Don Regan and the Republican Senate majority under its head Howard Baker are openly and publicly opposed to Paul Volcker’s tight-money fight-inflation-first policy. Ronald Reagan in his private meetings with Paul Volcker appears to be pressing him to promise that interest rates will come down–and come down soon.
As I understood it then and understand it now, five things were happening:
- Paul Volcker was trying back in 1982 to do what Alan Greenspan did in 1993–to condition a lower interest-rate policy on the administration’s taking the first step and committing to long-term deficit reduction, and the Reagan administration was stonewalling.
- Ronald Reagan’s Treasury Department was engaged in a quiet and seeking a public administration-wide Reagan-led campaign to convince the Federal Reserve to lower interest rates.
- Ronald Reagan’s communications staff was engaged in a quiet campaign to convince the Federal Reserve to lower interest rates, but was opposed to any public Reagan-led pressure as bad for Reagan’s image as a man in control of the government.
- Reagan’s Council of Economic Advisors was on Paul Volcker’s side.
- Reagan’s own personal papers are singularly unilluminating as to what he thought and was trying to do.
Does this seem to you like a situation fairly and accurately portrayed by Robert Samuelson’s:
[Reagan supported the Fed…. ‘I have confidence in the announced policies of the Federal Reserve.’ This patience enabled Volcker to succeed…. It’s doubtful that any other plausible presidential candidate, Republican or Democrat, would have been so forbearing…. There were many congressional proposals… to curb the Fed’s power, lower interest rates or fire Volcker. If Reagan had endorsed any of them, the Fed would have had to retreat…. Volcker and Reagan accomplished… an economic and political triumph… showed that leaders can take actions that, though initially painful and unpopular, served the country’s long-term interests.
?
No. It doesn’t seem that way to me either.
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