Paul Volcker Did Not "Rejuvenate" the U.S. Economy

I have appreciated many of the comments that former Federal Reserve Board chairman Paul Volcker has made in recent months about the banking system, but I still am not prepared to rewrite history. What does this sentence in a Washington Post article mean?

"He [Volcker] led the fight to rejuvenate the U.S. economy after the high inflation of the 1970s."

Let's put the facts on the table. The U.S. economy had high inflation in the late 70s primarily because the OPEC price increases. (The fall in the dollar, due to a trade deficit, and measurement issues in the consumer price index also contributed to inflation.) However, the economy was actually growing at a relatively healthy pace until Volcker sent interest rates through the roof in an effort to wring inflation out of the economy. Volcker's interest rate hikes gave us a worst recession since World War II (until now), pushing the unemployment rate above 10 percent.

Was this recession necessary? My view is that inflation could have been brought into check at a much lower cost (ask one of the people who lost their job during these years what they think of Volcker), but that doesn't matter. The point is that the policy that he is most often given credit for was wringing inflation out of the U.S. economy. It is a bit of historical jujitsu to describe this as leading the fight to rejuvenate the economy.

[Addendum: For those with bad memories, year over year growth in 1977, 1978, and 1979 was 4.6 percent, 5.6 percent, and 3.2 percent, respectively. These are not growth rates that are generally described as stagnation. In addition, the investment share of GDP hit a post-war record in these years, so firms were not shy about investing.]

--Dean Baker

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