Monday, January 5, 2015

The 1980s Business Cycle was About Paul Volcker Not Ronald Reagan

Every once and awhile, not often, but once and awhile, Paul Krugman slips in an observation in his otherwise terrible analysis that makes sense.  He did it again on Sunday:
[S]erious analyses of the Reagan-era business cycle place very little weight on Reagan, and emphasize instead the role of the Federal Reserve, which sets monetary policy and is largely independent of the political process. At the beginning of the 1980s, the Fed, under the leadership of 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.


  1. Yes, Mr Krugman, we are aware that central bankers are the primary cause of the business cycle. They cause the boom, they cause the bust, and then they blame the free market.

  2. Its always nice how lefties like Krugman dance around the 70s as if that decade just didn't exist. They always start their "serious analysis" conveniently around 1980. Notice how he says "slump/boom" as to imply that things were good, then made bad and then good again. The economy was in a slump way, way before Volker. Of course, admitting that would require a much more in depth look at what significant event may have happened in the 70s to cause such a long slump, which would lead to a very inconvenient truth that would essentially shatter everything people like Krugman have built their careers upon. Volker and Reagan should be viewed as the great can kickers, but little else.

  3. Correct if I'm wrong. But aren't the policies Volcker put in place used to combat the very policies Krugman now advocates? Why do the left wing propagandists all pretend like the late 60's and 1970's never happened?

  4. Again, to repeat myself, again...
    Plz see "The Supply Side Revolution" by Paul Craig Roberts and now some other 'Net Summaries. Volcker and the Supply Siders had a "Gentleman's Agreement" that a reduction in the growth of the supply of money would be given over a 3 year period. Volcker gave the entire reduction package in 6 months. PCR states that it guaranteed a severe recession and guaranteed that the budget would not be in balance at all.

    It's part of the modern package these days to deconstruct Reagan from the Right, as the Left chooses to embrace a bit of Reagan for nostalgia's sake. This part of the Story wasn't about Reagan, it was about the Supply Siders and the establishment, represented by Volcker. The Reagan Derangement Syndrome is still infecting people these days but the History is right out there. Supply Side Economics (See: Wanniski) still has meaning. Friedmanite Monetarism had a Verification Moment in the actions of the Fed. For a short period of time, the Unification of Conservative Economics was possible. It ended up fractured instead. Friedman could've been kinder to the Austrians but chose to veto their ascent at a time when they could have sat at the table.

    No, it wasn't about Reagan. 'Cept it was: Reagan won and the argument raged between the Supply Siders and others because and only because Reagan was in the White House


  5. The Supply-Siders sound good when they think like Austrians (stable money, lower taxes), but in the end they don't really mean it. The message of the Laffer Curve is that the goal is to maximize revenues to the treasury (see: Two-Santa Claus Theory), which is antithetical to the idea that the best government is no government. They are statists through and through.

    That said, they did get an honest-to-goodness tax cut through, which the Austrians, bless them, have never managed, despite being right since approximately forever.


    1. "The Supply-Siders sound good when they think like Austrians..."
      Everybody sounds good when they think like Austrians. I think you make a very good point. This idea was late in coming. Results, results, results. "Ohhh...Mebbe they're right after all..."

      "The Laffer curve maximize[s] revenues to the Treasury..."
      This brings us to the purpose of the State. Somehow we see through the Evil of the Law of 385 that kept the Feudal Poor from moving since Confiscation would have left the State with no farmers at all. We are establishing a New Feudalism and we know how that idea ends. It only took 1000 years to repair the loss. "No State - Little State - Any State": We all have a lot of work to do. In a way, I hope the State does maximize its revenues, through the smallest government ever seen. I disagree here with RW and the "joke" - the "pointer" - that Capitalism breathes through "Loopholes". One man's loophole is another man's Crony Capitalism. It shows that we'll probably never get to a "Pure" Tax Law for the State. The answer here is not to demand more "Purity and Piety" but to not allow the State to intrude into every domain of the lives of the individuals, the individuals who will thrive by being free.

      "...they did get an honest-to-goodness tax cut through..."
      'N we have had a "Tax Cut" these days as well, since we are borrowing a third of each dollar spent by the gummit. "How's that workin' out?" Not too damn swell. To get back to Reagan, remember the "$2 cut for every dollar spent...". There never was a moment when that was going to get accomplished. NEVER. SO: Tax Cuts anytime anywhere all the time. It's just what Friedman always stated: It's not what the government takes in, it's what the government SPENDS.

      'N that's as out of control today as it was in Reagan's time.

      NOTE: I've mentioned any number of times about "Unification of Conservative Economics":

      Wanniski: When an impediment to Free Trade causes Products to pile up on docks and everywhere else (See: Great Depression), only an impediment created by the government would cause that. (Say's Law)

      Friedmanite Monetarism: Monetarism will always fail in a State System that Monopolizes Money and commands the controls on Markets that that Monopoly Power brings. The Variable is Time and Friedman always maintained that a constant Money Supply or constant Small Growth in that Supply would work. This is the Demand School of the State and it is the first violated tenet when things get tough. See: Ben Bernanke The State cannot leave things alone. If progress is to be made, the State will simply have to back off. I'm not optimistic about the US giving up Monopoly Control over Money (even if, at the margin, that idea is meaningless). I just don't have 1000 years to say "I told you so".

      Austrians: "Right since approximately forever..." Yes. Exactly. See: Bernanke and the Dinner for Friedman and Schwartz: "You were right and we will never do it again...". 'N he didn't - until he had his chance to NOT do it again.

      He did it again.

      Thank you, RW,