As the Federal Reserve leads the world’s central banks through a cycle of interest rate tightening the likes of which we have not seen since 2006, commentators from across the political spectrum are noting the Fed Chairman’s affection, Jerome “Jay” Powell, for his legendary predecessor, Paul Volcker. On the left, the comparison is frightening; in the center and on the right, it is that of admiration. But the circumstances do not really bear comparison.
Upon taking office in October 1979, Volcker declared that “the standard of living of the average American must fall” as a result of the chronic inflation war of the 1970s. He quickly set to work to achieve this. pushing interest rates towards 20% and creating the deepest US recession since the 1930s.
This compression ended high inflation, but at enormous social cost. Six million people lost their jobs over the next three years, pushing the unemployment rate from 6% to nearly 11% by the end of 1982. The cost was not just short-term. About half of those job losses were classified as permanent, as opposed to temporary layoffs, many of them in the heart of manufacturing. The term “rust belt” has come into common usage.
Volcker was nominated by Jimmy Carter, who seemed to have no idea what he was getting into. His friend and adviser, Georgian banker Bert Lance, prophetically warned him that he was reducing his prospects in the 1980s election. But Carter listened to the consensus of Wall Street and the political class – Volcker was the man to rein in inflation, which hovered around 13% at the end of 1979. The United States had experienced such high inflation rates before, but never outside of major wars or their immediate aftermath. Inflation, which was below 2% in 1965, had risen unabated for 15 years, barely stopping even during the nasty recession of the mid-1970s. Contrary to popular belief on the left, inflation n was not favorable to the workers. Wages lagged far behind prices, and real average hourly earnings fell 14% between 1973 and 1980.
There are some similarities between the present and 40 years ago. Then, as now, food and energy prices were important factors in triggering inflation, but either way, even if you remove these two volatile components, severe inflation remains. And in both cases, the polls showed that inflation was deeply unpopular.
But there are also important differences, especially in the labor force. By the end of the 1970s, nearly a quarter of all workers were unionized; now only about a tenth are. Then, an average of 22,000 working days were lost due to strikes each year; last year, there were only 1,500, a drop of 93%. The recession of the early 1980s hammered the bargaining power of the working class. Unions were broken up and we moved from a time when Take This Job and Shove It could be a hit song (as it was in 1977) to a time when workers were grateful to have any what a job, however tenuous and poorly paid. . When the recession ended in late 1982, the stock market took off and the corporate class began a 40-year celebration of its triumph.
That’s not the world Powell finds himself in. Inflation has been a problem for nearly 15 months rather than 15 years, and while there are some tentative signs of life in the labor movement – notably at an Amazon site and a few hundred Starbucks outlets (out of 9,000 ) – the share of the workforce represented by unions fell last year, and strike activity so far in 2022 is about a third lower than in 2021. Unlike the inflation of the 1970s, this is not the kind of wage push (to use the jargon). It was first driven by supply chain lockdowns, thanks to Covid, and extended by embargoes on Russian energy exports, and most workers watch helplessly as their paychecks fail to keep up with increases of price.
There is also another difference: we are coming out of a decade of extremely lenient monetary policy. Coming out of the Great Recession, the Fed kept short-term interest rates near zero between 2011 and 2021, with the brief exception of pushing them to just over 2% in 2017 and 2018 (still quite low by historical standards). On top of that, the central bank injected more than $3tn (£2.7tn) into financial markets between 2008 and 2015, and nearly $5tn between the start of 2020 and the start of 2022. The earlier pumping was aimed at preventing a financial implosion after the sub. -primary crisis, and the second to counter the threats of the first months of the pandemic. But the result of both has been to spur wild asset price inflation – stocks, crypto, unicorns, housing – a remarkable waste of capital and one that can be very risky to deflate. Decades of bailouts have convinced financial market participants that the Fed will always come to their rescue, and reversing that mentality may require Volcker-style austerity for Wall Street — politically hard to imagine.
What Powell is so far bears almost no resemblance to Volcker’s repression. The federal funds rate, the interest rate at which banks lend money to each other overnight — which is the Fed’s most direct policy target — went from just over 0% to a just under 4% after raising the target rate by another 0.75 points this week. That’s almost 15 points below the Volcker peak. In real terms – deducting the rate of inflation – Volcker’s peak was almost 10%, much higher. Right now, the real fed funds rate is around -4% (yes, that’s a negative sign). Powell may look up to Volcker, but next to him he’s a pikeman.
The monetary policy debate overlooks a more important issue. This decade of cheap money has obscured many of the fundamental problems of the US economy: low levels of public and private investment, massive polarization between rich and poor, and unstable employment for much of the labor force. These must be addressed with serious public policy, not by printing money. It would be nice if we talked about it, but given the degraded state of American political discourse, I have no hope.
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Doug Henwood is a Brooklyn-based business journalist. His radio show, Behind the News, airs on KPFA radio in Berkeley and is available on all standard podcasts.
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