Taxes and Inflation

Powerline ^ | Feb 11 ,2011 | Steven Hayward

[Hojczyk]

Newsweek and Washington Post columnist Robert Samuelson is the best economics writer in the mainstream media today. He nearly always gets things right, and has the numbers to back it up. His column this week on Reagan and inflation is right to draw our attention to an aspect of the Reagan story that has tended to be overlooked during Reaganpalooza, namely that Reagan's steadfast backing of Paul Volcker's campaign to wring inflation out of our economy as a crucial accomplishment, and one that few if any other presidents would have had the stomach to see through:

No other possible president at the time, Democrat or Republican, would have so steadfastly supported Volcker. Reagan faced enormous pressure from both Republicans and Democrats to push the Fed to relent. He was vilified in the press; his approval rating fell to 35 percent. Reagan and Volcker, though lacking a close personal relationship, did share a common conviction: America could not thrive with high inflation. "Unlike some of his predecessors," Volcker later remarked, "he had a strong visceral aversion to inflation."

Without Reagan, Volcker would have failed. But this story confounds the preferred narratives of both liberals and conservatives. The lesson liberals draw (and urge Obama to imitate) is that Reagan's political success reflected his optimistic presidential stagecraft. It wasn't policy, it was presentation. Wrong. Reagan earned his success the hard way -- by backing policies that, though initially unpopular, served the nation's long-term interests. That's called leadership, a quality Obama has yet to demonstrate.

In my own account of this in The Age of Reagan, I cite Milton Friedman and others on this point:

[henkster]

Good point about Reagan. Without stifling inflation, the usurious interest rates would not have fallen, either. The “Reagan economy” that Clinton inherited was built on a stable currency.

[SteelTrap]

Thanks for posting this. Samuelson is perpetuating a myth when it comes to Volckler. Volckler is given credit for wringing out inflation by jacking up interest rates. This is not correct. His strategy was a failure up until the moment he realized he had to change course in order to save Mexico (and their US creditors) from default.

Jude Wanniski was there and reported what happened:

In June 1982, Mexico advised its U.S. banks that it could not pay its dollar debts because the oil price had declined when it was supposed to have risen -- and Mexico depended on oil sales for hard currency. This would have meant bankruptcies of some of our major banks and a likely Depression rivaling the 1930s. Volcker went to Treasury Secretary Donald Regan and told him he would have to buy Mexican bonds with fresh dollar liquidity, so that Mexico could pay the U.S. banks. He also told Regan he could no longer aim at the monetarist targets. I not only assured Volcker (and Polyconomics clients) that easing would cause the bond market to strengthen, not weaken as the monetarists predicted. I also bought government bonds and made enough money in a few short weeks to build a wing on my home in Convent Station, N.J., which I named "The Volcker Wing." The recession ended and the Reagan boom began.

Samuelson is the faux fiscal conservative at the Post and the Magazine That Sold For One Dollar. Another snippet from Wanniski referring to Samuelson:

Indeed, those who are principally concerned with maintaining their wealth, power and status are most likely to be aligned with the interests of State corporatism and the Old Paradigm. There is much support in this power elite for slow growth, which is less disruptive to the social strata than explosive, entrepreneurial growth. The ideal would be to maintain the Fortune 500 roster exactly as is, with perhaps a bit of shifting within the list from year to year. A respected journalist, Robert Samuelson of Newsweek, last year seriously argued that a low capital gains tax would cause economic inefficiencies because many of the big corporations would lose some of their best people to small new enterprises, most of which would ultimately fail. Of course, the two of every five start-up enterprises that survived in the '80s created all of the 20 million new jobs; the Fortune 500 shed employees as they were driven toward efficiencies in order to compete in this vibrant, entrepreneurial climate. Would Newsweek's Samuelson prefer that the Sam Waltons and Bill Gates's and Steve Wynns stayed where they were, on someone else's payroll?