Tag Archives: inflation

On Paul Volcker

A dozen years after anyone in the United States last got worked up about inflation, it’s hard to remind people what it is that made Paul Volcker so important. The best I can do is repeat an anecdote reported by William Silber in his 2012 biography of Volcker. The Fed chairman was on a fly fishing trip in Montana in 1982 when he stopped at a restaurant off in the woods, the parking lot filled with motorcycles and pick-up trucks. Three large men stood up at nearby tables and approached Volcker. One pulled a ten-dollar bill from his pocket, extended it towards Volcker, and said, “Excuse me, sir, but I was wondering whether you could sign this…considering that it’s still worth something only because of you.”

That anecdote captures much about those times. Prices were rising at double-digit rates: consumer prices in the United States more than doubled during the 1970s, spreading panic as inflation destroyed the value of retirees’ savings, ate away at wage increases, and made car loans unaffordable. I recall a real estate agent telling me that houses would sell only if the seller provided financing — indeed, that’s how I bought my first home. And this wasn’t merely an economic matter. Serious people had serious concerns that inflation was destabilizing society. Talk of hyperinflation was not unusual.

As I relate in An Extraordinary Time, central bankers, not least Volcker’s predecessors as Federal Reserve chairman, believed there wasn’t much to be done about it. Arthur Burns, Fed chairman from 1970 to 1978, went so far as to say in 1978 that inflation had nothing to do with the central bank. Many economic experts of the day shared that view, losing sleep over whether the country faced “cost-push” inflation or “demand-pull” inflation or monetary inflation or some other variety. “Jawboning” — attempting to talk inflation down — was a favorite remedy, along with price controls, credit controls, and other measures premised on the hope that the government could simply order inflation to stop. The record of success was abysmal.

When Volcker was first suggested to Jimmy Carter as a potential Fed chairman in 1979, Carter’s response was, “Who’s Paul Volcker?” In their first meeting, Volcker made clear that if he took the job, he would act against inflation. Carter, alarmed at an inflation rate headed towards 13 percent, nominated him anyhow. Volcker was true to his word. Carefully navigating the politics, he pushed interest rates sky high. Businesses closed. Auto sales collapsed. The housing market died in the deepest recession since World War II, as millions of people lost their jobs.

The price was high, but inflation broke. Only once since 1982 have consumer prices increased more than 5 percent in a single year. Mortgage interest rates of four percent — unimaginable back then — seem normal. Prices don’t seem higher every time we go to the store. Americans plan their lives without assuming that rampant inflation will destroy their dreams. Those too young to have lived through the 1970s do not realize what a luxury that assumption is.

Paul Volcker did much else before he died on December 8. We owe him an enormous debt of gratitude.

A Museum Worth 100 Marcs

Economists are forever complaining about the public’s ignorance of economics. You can’t really blame the public: most of what academic economists produce these days is incomprehensible to anyone who hasn’t earned an A in advanced econometrics, and far too much of what economists say in less technical settings is driven more by political biases or commercial interests than by conclusive research. There’s a lot economists don’t know, and too often you won’t find them admitting it.

That said, there are some important economic concepts that people need to grasp to reach their own judgments about economic issues. Many U.S. high schools now seek to teach such things, with mixed success. On a recent trip to Mexico City I saw what might be a more promising approach than classroom lectures, the Interactive Museum of the Economy, known by its Spanish acronym as MIDE.

MIDE, housed in an eighteenth-century convent in the center of Mexico City, claims to be the world’s first museum dedicated to economics. Its target audience is high school students, large numbers of whom come to visit each week. Costs are covered by a modest admission fee and substantial contributions from the Banco de Mexico, the central bank, and private financial institutions.

The museum is short on artifacts, long on hands-on activities that introduce such concepts as scarcity, division of labor, comparative advantage, and the trade-off between consumption and investment. Exhibits don’t just talk about the role of banks in society and the effects of inflation, but offer screens students can use to explore how bank deposits are invested and see how prices for different commodities change at different rates. Docents barely older than the visitors roam the exhibit halls, answering questions and drawing together small groups to play table games that also teach economic ideas, while more experienced educators offer brief programs in screen-filled rooms just off the exhibition floor. After you’ve learned about the role of money in society, you can order up a hundred-peso note issued by the Bank of the Bethlehemites–the religious order that formerly owned the building–and featuring your own image.

Mexico, of course, is a vast country, and most high school students will never have the opportunity to visit the museum. MIDE is now developing an app to make itself accessible to students all over the country.

I’ve never come across a museum quite like this before. Sure, many central banks operate their own museums, but most of them are, to be polite about it, places a teenager would never think of setting foot in. There’s much to be said for making learning about economics a fun social activity rather than an unpleasant obligation. Washington, where I live, has museums about everything from the bible to the U.S. Navy. A hands-on museum about how the economy works would be a fine addition.

Running Hot

This morning I had a great opportunity to discuss my new book, An Extraordinary Time, live on the C-Span program Washington Journal. The host, John McArdle, was thoroughly prepared, and I found it a great relief to be able to talk about the history of the 1970s and 1980s without ending up in a conversation about Donald Trump. You can see the program here.

Viewers phoned in with a number of good questions. A key point I tried to make in responding is that the basic economic trends I write about, the slowdown in productivity growth after 1973 and the related slowdown in income growth, occurred across all the wealthy economies in Western Europe, North America, and Japan. Every day, it seems, we hear comments from politicians that they know exactly how to make our economy grow as fast as it did in the good old days. Some of the callers to Washington Journal echoed those views, blaming slow growth on something they don’t like–President Obama’s environmental policies, high CEO pay, budget deficits, tax treatment of carried interest, and so forth. I think it’s useful to point out to such people that since the end of the Golden Age in 1973 we’ve seen slower growth and higher unemployment in countries where none of those policies are in place. You may not like the low tax rate on carried interest, but it’s a considerable stretch to claim that it is causing our economy to grow at 2% a year rather than 5%.

Sometimes we get a bit carried away with our own power and insist we can make the economy roar like we think it ought to. The current lingo for this is to “run the economy hot.” What advocates of that approach seem to mean is that we should accept a higher inflation rate as a tradeoff for lower unemployment and big wage increases. As I explain in my book, this is not a new idea. We spent most of the 1970s believing that we could keep unemployment low if we were willing to accept just a little more inflation. That ended badly, and I’m not eager to repeat the experiment.