Everyone loves Paul Volcker. Everyone is wrong.

(Image credit: Spencer Platt/Getty Images)

published 4 December 2018

If you're looking for an emblem of old-school good government, many people from both sides of the aisle would point to Paul Volcker. As chairman of the Federal Reserve from 1979 to 1987, Volcker oversaw a massive interest rate hike that plunged the economy into a deep recession in 1981. But it's considered by Republicans and Democrats alike to be a bit of necessary pain that tamed the inflation crisis of the 1970s.

Volcker is now 91 and in ill health, but he still managed to release a new memoir in October to yet another round of bi-partisan acclaim. Charles Morris' assessment in The Atlantic is dramatic but typical: "If there were a Nobel Prize for government service, Paul Volcker's name would surely be on the short list." Martin Wolf, the influential Keynesian pundit, was similarly effusive — but so was James Grant, an austerian and tight money champion. Even the hard-right libertarian Mises Institute is a fan.

Subscribe to The Week

Escape your echo chamber. Get the facts behind the news, plus analysis from multiple perspectives.

SUBSCRIBE & SAVE

https://cdn.mos.cms.futurecdn.net/flexiimages/jacafc5zvs1692883516.jpg

Sign up for The Week's Free Newsletters

From our morning news briefing to a weekly Good News Newsletter, get the best of The Week delivered directly to your inbox.

Tight money is usually the cause célèbre of the American right. When the Fed dropped interest rates to zero and started up quantitative easing to boost the recovery from the Great Recession, eventual House Speaker Paul Ryan and the rest of the Republican Party were apoplectic, repeatedly warning that hyperinflation was just around the corner. More than a few members of the GOP would like to see a return to the gold standard. So when Paul Volcker criticizes the Fed's modest 2-percent inflation target as an ill-advised flirtation with dollar debasement, he's speaking the American right's language.

But it's also tempting to read Volcker's monetary policy decisions as a kind of no-nonsense progressivism. After all, this is a guy who rails against big banks and wants to see Wall Street more strictly regulated. Plus, his "sound money" devotion sounds a lot like good old middle-class integrity and discipline. Volcker was even nominated to be Fed chair by Democratic President Jimmy Carter, another emblem of mid-century liberal rectitude. (Volcker was then protected by Republican President Ronald Reagan, even as enormous pressure mounted to ease off interest rates.)

Yes, Volcker successfully tamed inflation. The question is whether there was a better way to do it than setting off a massive recession. At the time, America was dealing with oil shocks, a broken consumer price index, the fallout from funding the Vietnam War, the end of the Bretton Woods system, and a new political enthusiasm for massive tax cuts for the wealthy. Any combination of these factors could have been driving the price spiral.

But Volcker's solution destroyed the American working class for a generation. Unemployment peaked as high or higher than in the Great Recession. Unions, already in decline, went into free fall. Volcker explicitly viewed breaking the power of organized labor as a critical piece of his anti-inflation crusade. "The standard of living of the average American has to decline," Volcker declared shortly after becoming Fed Chair. Trace the modern trends in wage stagnation and inequality, and they lead back to Volcker's recession.

There's also the lesson Volcker taught the Fed. In many ways, the institutional culture of the Fed remains fixated on the moral narrative of the 1970s inflation and guided by Volcker's tough-love disciple. Fed Chair Alan Greenspan, Volcker's successor, argued that keeping workers "traumatized" was key to restraining prices. When Greenspan did enrage inflation hawks by keeping interest rates low in the late '90s, it wasn't out of sympathy for labor; it was based on his libertarian faith in elite entrepreneurs' ability to keep productivity rates high. Some of Greenspan's Fed colleagues at the time — including Janet Yellen, who would become chair under President Obama — viewed Greenspan's rates as too loose.

Granted, the Great Recession delivered a massive shock to the Federal Reserve. Years of zero interest rates and three rounds of quantitative easing were indeed a dramatic detour from the central bank's standard small-c conservatism. But compared to the scale of the human catastrophe, it was still grossly inadequate. Increasing the inflation target to 3 or 4 percent was never seriously considered, nor were other experiments. To the extent the Fed did think far outside of the box, it was to save elite financial institutions around the globe, not rebuild Americans' livelihoods. As modest as the Fed's rate hikes since December 2015 have been, they've almost certainly been too much too fast. It's still the bank that Volcker built.

The Fed's dual mandate is to maximize both employment and stable prices. In theory, you could imagine a world with full employment without any inflation — where robustly-rising wages for all workers are drawn solely from rapid productivity growth. But the economy is both far more complicated and far less just, and the policymakers assigned to manage it are only human. Officially, modern macroeconomics has understandably concluded that some inflation is the price of a prosperous and equitable economy.

But review the actual results of the last few decades, and it's clear the central bank takes the "stable prices" part of its job far more seriously. Volcker himself treated the instruction to "maximize employment" with more or less open contempt. "[W]hat was the economic purpose, and for that matter the morality, of the government ... intentionally debasing the nation's currency a little every year?" he wrote in his memoir about inflation. "My mother would see through that."