Originally posted by JBA
CONTROVERSY SWIRLS AROUND CBS REAGAN FILM; SCRIPT REVEALED
Mon Oct 20 2003 20:30:29 ET
In the upcoming CBS telefilm on President Ronald Reagan producer fail to mention the economic recovery or the creation of wealth during his administration, nor does it show him delivering the nation from the malaise of the Jimmy Carter years.
Is that so.
"Myth: Carter ruined the economy; Reagan saved it.
"Fact: The Federal Reserve Board was responsible for the events of the late 70s and 80s.
Summary
Carter cannot be blamed for the double-digit inflation that peaked on his watch, because inflation started growing in 1965 and snowballed for the next 15 years. To battle inflation, Carter appointed Paul Volcker as Chairman of the Federal Reserve Board, who defeated it by putting the nation through an intentional recession. Once the threat of inflation abated in late 1982, Volcker cut interest rates and flooded the economy with money, fueling an expansion that lasted seven years. Neither Carter nor Reagan had much to do with the economic events that occurred during their terms.
Argument
In 1980, the "misery index" -- unemployment plus inflation -- crested 20 percent for the first time since World War II. Ronald Reagan blamed this on Jimmy Carter, and went on to win the White House. Reagan then caught the business cycle on an upswing, for what conservatives call "the Seven Fat Years" or "the longest economic expansion in peacetime history."
Were either of these presidents responsible for their fortune with the economy? No. Carter battled the peak of an inflationary trend that began in 1965. In the following chart, take special notice of the long, slow climb in the inflation column:
Year Inflation Unemployment (1)
-------------------------------
1961 1.0% 6.7%
1962 1.0 5.6
1963 1.3 5.6
1964 1.3 5.2
1965 1.6 4.5 < Vietnam war spending increases
1966 2.9 3.8
1967 3.1 3.8
1968 4.2 3.5
1969 5.5 3.5
1970 5.7 5.0
1971 4.4 6.0
1972 3.2 5.6
1973 6.2 4.9
1974 11.0 5.6 < First oil crisis
1975 9.1 8.5
1976 5.8 7.7
1977 6.5 7.1
1978 7.6 6.1
1979 11.3 5.9 < Second oil crisis
1980 13.5 7.2
1981 10.3 7.6
1982 6.2 9.7
1983 3.2 9.6
1984 4.3 7.5
In 1965, President Johnson started increasing deficit spending to fund the Vietnam war. This fiscal policy (as predicted by Keynesian theory) increased inflation and reduced unemployment.
Unfortunately, inflation is a self-fulfilling prophecy. If business owners expect it, and raise their prices by the anticipated amount to compensate for it, then they have created the very inflation they fear. This process forms a vicious circle -- inflationary expectations and price increases feed off each other, with the potential of creating hyper-inflation. Unfortunately, economic theory at the time was such that economists didn't know how to stop it, at least safely.
Growing inflation in the 70s received two huge boosts: the first comprised the late-1973 and 1979 oil shocks from OPEC (the Organization of Petroleum Exporting Countries). Soaring oil prices compelled most American businesses to raise their prices as well, with inflationary results. The second boost to inflation came in the form of food harvest failures around the world, which created soaring prices on the world food market. Again, U.S. companies that imported food responded with an inflationary rise in their prices.
All this was accompanied by a growing crisis in monetary policy at the Federal Reserve. Traditionally, the Fed has fought inflation by contracting the money supply, and fought unemployment by expanding it. In the 60s, the Fed conducted an expansionary policy, accepting higher inflation in return for lower unemployment. It soon became clear, however, that this strategy was flawed. Expanding the money supply created jobs because it put more money in the hands of employers and consumers, who spent it. But eventually businesses learned to expect these monetary increases, and they simply raised their prices by the anticipated amount (instead of hiring more workers). The result was that the Fed gradually lost its ability to keep down unemployment; the more money it pumped into the economy, the more businesses raised their prices. As a result, both inflation and unemployment started growing together, forming a twin monster that economist Paul Samuelson dubbed "stagflation."
Stagflation happened to reach its peak on Carter's watch, spurred on by the 1979 oil shock. How Carter can be blamed for a trend that began a decade and a half earlier is a mystery -- and a testimony as to how presidential candidates often exploit the public's economic ignorance for their own political gain.
However, Carter did in fact take a tremendously important step in ending stagflation. He nominated Paul Volcker for the Chairman of the Federal Reserve Board. Volcker was committed to eradicating stagflation by giving the nation some bitter medicine: an intentional recession. In 1980, Volcker tightened the money supply, which stopped job growth in the economy. In response to hard times, businesses began cutting their prices, and workers their wage demands, to stay in business. Volcker argued that eventually this would wring inflationary expectations out of the system.
The recovery of 1981 was unintentional, and with inflation still high, Volcker tightened the money supply even more severely in 1982. This resulted in the worst recession since the Great Depression. Unemployment in the final quarter of 1982 soared to over 10 percent, and Volcker was accused of the "cold-blooded murder of millions of jobs." Even high-ranking members of Reagan's staff were vehemently opposed to his actions. Congress actually considered bringing the independent Fed under the government's direct control, to avoid such economic pain in the future. Today, economists calculate that the cost of Volcker's anti-inflation medicine was $1 trillion -- an astounding sum. But Wall Street demanded that Volcker stay the course, and that may have been the only thing that saved him.
In the late summer of 1982, inflation looked defeated, so Volcker sharply expanded the money supply. Once as high as 14 percent in 1981, the Fed's discount rate fell from 11 to 8.5 percent between August and December 1982. Within months, the economy roared to life, and took off on an expansion that would last seven years. Because the recession had been so deep, and the number of available workers so large (with not only laid-off workers waiting to return to work, but also a record number of women seeking to join the workforce), the recovery was guaranteed to be long and healthy.
Interestingly, Volcker was transformed from villain to hero after the victory over inflation. His reputation and integrity were so unquestioned that when his term as Chairman came up for renewal, Reagan renominated him with overwhelming popular approval. Another interesting tidbit is that although Volcker's intentional recession was a classically Keynesian approach to combating inflation, he did so under the name of "monetarism". (The policies recommended by the two theories converged at this point.) Milton Friedman, the creator of monetarist theory, and other conservatives were pleased that the Fed had finally converted to monetarism. However, they were outraged in late 1982 when Volcker threw off the cloak of monetarism and openly returned to Keynesian policies for expanding the economy. Most economists now accept that the Fed was not monetarist at all during this period, and that the label was merely political cover for drastic but necessary action.
Of course, conservatives have a far different interpretation of these events. Let's review their arguments:"
con't.
