Paul Volcker - Left Wing Icon: Christine Romer edition
Hitting that target required pushing interest rates to unprecedented levels. Unemployment rose past 10 percent, and Mr. Volcker was pilloried. At one point, farmers on tractors blockaded Fed headquarters to protest the high rates.
But the policy worked. Inflation fell from 11 percent in 1979 to 3 percent in 1983, and unemployment returned to normal levels. Even my father, who lost his job as a chemical plant manager in the 1981 recession, views Mr. Volcker as a hero. His bold moves ushered in an era of low inflation and steady output growth.[ Christine Romer in the New York Times October 2011]
Here’s the BLS graph of total manufacturing employment in the USA since 1950 and the peak, the place where we begin the long slide is the start of the Volcker era
Pushing up borrowing costs and then the exchange rate of the dollar killed American manufacturing and provided incentive for manufacturing companies to invest overseas. It also had devastating effects on third world nations who had been persuaded to sell bonds with floating exchange rates. Latin America, in particular was battered and economic chaos was accompanied by renewed military dictatorship. Note that the graph shows raw total manufacturing employment during a period that US population grew significantly. While apologists for the “service economy” like Robert Reich always blame automation for the drop in manufacturing employment (as if automation was a new thing in manufacturing - something like claiming wetness to be a new thing in water) whole manufacturing sectors have disappeared. And a lot of that is due to economic policies that favored finance over manufacturing - policies in which Paul Volcker, the protegee of David Rockefeller’s Citibank, was instrumental.
Whatever the exact details of the palace intrigue might turn out to be, it’s clear that Romer was a strong advocate for pressing the pedal to the metal on recovery efforts. At a time when many of the President’s advisers, including Summers, have urged him to put on the brakes to mollify the (fictitious) “bond vigilantes”, Romer was a beacon of sanity. To the extent that her departure makes it less likely that the administration will push Congress to accelerate jobs creation, losing her voice will be a double whammy, jeopardizing the economic recovery and the White House’s political fortunes along with it [DailyKos laments Romer’s departure from the White House]
The people who are always wrong about fucking everything maintain power.[ Atrios (Duncan Black) laments Romer’s departure from the White House]
Romer has become a kind of folk hero to a certain segment of the “left” (I certainly don’t think that to be her fault) - the anti-Geithner who, according to legend, pushed for the larger stimulus that the nation really needed, not the wimpy version that the hated Geithner and more hated Rahm Emanuel insisted on for nefarious reasons. Volcker is also popular amongst those who think that Geithner is an ally or dupe of the “banksters” and President Obama is his hapless puppet. That’s is, Romer represents a lot of “left/liberal” economic critics of the White House and she is considered a good counterpoint to the bad neoliberals in the White House by many of the supposed “left critics” of the Obama administration. The Times op-ed cited here brings up Volcker as an example of how the current Fed Chair, Ben Bernanke should operate and it suggests he support a program called “nominal GDP targeting”. This program has also been taken up by a number of supposedly left/liberal critics of the President.
At the end of 2011, key liberals like Christina Romer and Paul Krugman started talking about a new way of doing Federal Reserve policy based on “nominal GDP targeting,” which would allow for higher inflation in weak economic times. [Mike Konzcal writing in The Nation about the President’s “lost year”]
Romer’s idea is that the hapless Bernanke should channel his inner Volcker and
make a lot of Brazilians poor I mean, implement the following policy.
It would work like this: The Fed would start from some normal year — like 2007 — and say that nominal G.D.P. should have grown at 4 1/2 percent annually since then, and should keep growing at that pace. Because of the recession and the unusually low inflation in 2009 and 2010, nominal G.D.P. today is about 10 percent below that path. Adopting nominal G.D.P. targeting commits the Fed to eliminating this gap.
HOW would this help to heal the economy? Like the Volcker money target, it would be a powerful communication tool. By pledging to do whatever it takes to return nominal G.D.P. to its pre-crisis trajectory, the Fed could improve confidence and expectations of future growth.
So the policy recommendation is that the Fed should say it wants more inflation and that it will do stuff to make there be more inflation because:
But in the current situation, where nominal interest rates are constrained because they can’t go below zero, a small increase in expected inflation could be helpful. It would lower real borrowing costs, and encourage spending on big-ticket items like cars, homes and business equipment.
So this is, in essence, a theory that (a) the Fed can create inflation on its own, primarily by saying it wants inflation, and (b) that a little inflation will make people and businesses spend more by reducing their borrowing costs. Since American consumers are highly indebted, this may not work on the consumer side - assuming anyone wants to lend them money at low rates. And since business already has a lot of money in the bank, it’s not clear what she expects business to do either. The reason business won’t spend money on new equipment and on hiring is because it does not think there will be sufficient demand and so we’re hoping that consumers start borrowing more, I guess. The underlying problem is that Congress, with the GOP controlling the House and sabotaging the Senate will not permit “fiscal” stimulus, so Romer is trying to find a way for the FRB to step in. I don’t find it very convincing.