One of the amusing things about the media is their compulsion always to present an alternative perspective to conservative successes, even when they look ridiculous doing so. Only liberal successes are allowed to be presented without some reporter saying, “On the other hand. …” Thus, reports of Ronald Reagan’s accomplishments are always accompanied by boilerplate statements about his alleged failures, whether his inability to cure AIDS, the Iran-Contra scandal, or something else.
Even conservatives sometimes fall victim to this compulsion. Two areas where this often occurs are on inflation and the deficit. It is said that Paul Volcker, chairman of the Federal Reserve Board, deserves all the credit for eliminating inflation, with Reagan as some kind of passive observer. It is also said that large budget deficits prove Reagan’s economic policy was a failure. Both of these perspectives are seriously misinformed.
It is true inflation fundamentally is a monetary phenomenon. The inflation of the 1970s came about primarily because Fed Chairman Arthur Burns gunned the money supply to get Richard Nixon re-elected in 1972. Burns was followed by G. William Miller, appointed by Jimmy Carter, who didn’t have a clue about monetary policy and made the dismal inflation situation he inherited far worse.
Volcker Takes Over
The Consumer Price Index increased 4.9 percent from December 1975 to December 1976, the year Carter was elected. It then increased by 6.7 percent in 1977, 9 percent in 1978, and 13.3 percent in 1979. At this point, Carter realized he had made a serious error in appointing Miller to the Fed. But Miller could not be fired, so he had to be induced to leave voluntarily. Carter fired Treasury Secretary W. Michael Blumenthal, who had been doing a fine job, in order to open the position for Miller, who left the Fed to replace Blumenthal.
Under pressure from Wall Street, Carter reluctantly appointed Paul Volcker to be Fed chairman in 1979. Volcker had been undersecretary of the treasury under Richard Nixon and was serving as president of the Federal Reserve Bank of New York. It is naive to think Carter gave Volcker a free hand. Volcker’s inability to fully implement a tight money policy is why the inflation rate fell only to 12.5 percent in 1980, despite a sharp recession that year.
It was only after the election, when Volcker knew Carter had lost, that he really clamped down on the money supply. This illustrates an important point: Presidents get the Fed policy they want, no matter how “independent” the Fed may be. If there had been any doubt about this, it was settled in 1967, when Fed Chairman William McChesney Martin buckled under pressure from Lyndon Johnson and eased monetary policy even though Martin knew he should be tightening. This caused inflation to jump from 3 percent in 1967 to 4.7 percent in 1968 and 6.2 percent in 1969.
Reagan Institutes Own Policies
Few people now remember how much pressure there was on Reagan to get rid of Volcker and have the Fed run a more accommodating monetary policy. Yet Reagan not only supported Volcker publicly, he appointed like-minded people to the Fed whenever he had the chance. He reappointed Volcker to the chairmanship in 1983 and appointed Alan Greenspan to replace him in 1987.
The result of the Fed’s tight money policy was a far faster reduction in inflation than most economists thought feasible. From 12.5 percent in 1980, inflation fell to 8.9 percent in 1981 and 3.8 percent in 1982. It is difficult to explain just how remarkable this achievement was. Most economists would have considered it impossible in 1980, especially given the big 1981 tax cut, which economists schooled in Keynesian economics generally viewed as pouring gasoline on the fires of inflation.
But Reagan was firm in his belief that the money supply–and only the money supply–fundamentally determined the inflation rate. However, he also knew other policies could ease the transition to a low-inflation economy. Toward this end, Reagan cut tax rates and reduced business regulation to increase the production of goods and services; deregulated the price of oil, which broke the OPEC oil cartel; and fired striking air traffic controllers, which helped get the wage-price spiral under control.
Ironically, the far greater success in bringing down inflation is what really created the deficit problem. It eliminated bracket creep that caused revenues to rise automatically as inflation pushed people into higher tax brackets. This factor alone added $41 billion to the deficit in 1981 and $64 billion in 1982, according to Office of Management and Budget figures.
Breaking the back of inflation was an enormous accomplishment. Reagan deserves much of the credit. Larger budget deficits were an unavoidable consequence.
Bruce Bartlett is a senior fellow at the National Center for Policy Analysis. His email address is [email protected].