Paul Volcker's voodoo economics

Paul Volcker died this week.  He will go down in history as being the tallest Fed chair, and also the smoker of the smelliest cigars, but not much else.

Financial writers of his obituary insist that his policies beat inflation in the 1980s.  They did no such thing.  Volcker was a prisoner of the real "voodoo economics," Keynesianism, especially the thoroughly discredited Phillips Curve, which posits low unemployment as the cause of inflation.  Keynes's followers have also long insisted that tax cuts cause inflation, another piece of nonsense.

Volcker himself had sketchy academic credentials, becoming a Fed economist in the 1950s on the basis of a government degree from Harvard and never completed course work at the London School of Economics.  Naturally, he was an unquestioning follower of conventional liberal economics ever after, to the extent he maintained any consistent economic beliefs at all.

When it became his turn to run the Fed in the late 1970s, he set out on a disastrous hiking of interest rates and tight money, leading to sky-high interest rates and recession — first for Jimmy Carter in 1980 and then for Ronald Reagan in 1981.  Unemployment reached double digits in 1982, and Reagan's working majority in the U.S. Congress lost the elections that fall.  Thankfully, the long awaited Reagan tax cuts (delayed for years by the idiot inflation fears) kicked in for 1983, and Jack Kemp, Volcker's longtime nemesis, finally convinced the White House to rein in the Fed and ease monetary policy.

The resulting 1980s boom, tax cuts without inflation, was a grand slam for supply-side economics, and a humbled Volcker was given another face-saving term at the Fed once he promised to play nice.  Sadly, his unthinking acceptance of Keynesian stupidity has been passed down to a lot of people today running Wall Street and the Fed. 

Fortunately, President Trump, in one of his best moves, has been a consistent critic of the Volcker-style, recession-making Fed.  He is quite right to call the current Fed a bunch of "boneheads."  There is no inflation in sight; the world economy is in a long-term slow-down; and our own country, with more modest growth this last year, needs looser, not tighter, federal monetary policy.  In fact, the Fed has caused a major problem in contracting its balance sheet lately, likely needing a year-end QE 4 or else risking a major market meltdown later this month.  The Grinch-like ghost of Paul Volcker may appreciate the irony of more Fed bungling, but none of us mortals will enjoy that one.   

One can only hope that at some point, the D.C. establishment will understand it's the job of the Federal Reserve, as our nation's central banker, to follow along with monetary policy that supports the country's private economy — not to serve the whims and silly notions of unaccountable bureaucrats.   

Frank Friday is an attorney in Louisville, Ky.

Image: Edmond J. Safra Center for Ethics via Flickr.

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