Paul Volker is a Democrat, and that might be enough for him not to be placed in Paul Krugman's cross hairs in future columns. However, for now it is interesting to see the difference between the last Fed Chairman to really get inflation under control and an "economist" who today claims that inflation is the answer.
Volker today writes in a NYT op-ed:
...now we are beginning to hear murmurings about the possible invigorating effects of “just a little inflation.” Perhaps 4 or 5 percent a year would be just the thing to deal with the overhang of debt and encourage the “animal spirits” of business, or so the argument goes.When Volker became Fed Chairman in the summer of 1979, inflation was running in double digits and the economy was moribund. G. William Miller, Volker's predecessor, believed that the way to "stimulate" the economy was to crank up the printing presses, and the results were obvious. Volker, on the other hand, was willing to slow the presses and within a few years, inflationary expectations were near-zero.
It’s not yet a full-throated chorus. But remarkably, at least one member of the Fed’s policy making committee recently departed from the price-stability script.
The siren song is both alluring and predictable. Economic circumstances and the limitations on orthodox policies are indeed frustrating. After all, if 1 or 2 percent inflation is O.K. and has not raised inflationary expectations — as the Fed and most central banks believe — why not 3 or 4 or even more? Let’s try to get business to jump the gun and invest now in the expectation of higher prices later, and raise housing prices (presumably commodities and gold, too) and maybe wages will follow. If the dollar is weakened, that’s a good thing; it might even help close the trade deficit. And of course, as soon as the economy expands sufficiently, we will promptly return to price stability.
Well, good luck.
Yet, the economy recovered. During the recession of 1982, there were liquidations as the economic landscape in places like Cleveland and Pittsburgh changed drastically. (Pittsburgh has recovered well, while Cleveland stays with the old model of thwarting entrepreneurs -- it takes well over a year to get new business permits there -- and looking to government spending as its own rescue fairy. The results speak for themselves.)
According to Krugman, however, one cannot have any liquidations AND recovery. No, the only way to have an economic recovery is for government to borrow, print, and spend. His most recent claims that the U.S. Government is on an "austerity" program simply don't wash. The federal government has ramped up spending in the days of Obama, and the president promised us that if Congress would pass his 2009 plan, unemployment would not rise above 8 percent.
In calling for yet more spending and more "stimulus," Krugman writes:
In the United States, the modest federal stimulus of 2009 has faded out, while state and local governments have slashed their budgets, so that over all we’ve had a de facto move toward austerity not so different from Europe’s.The cure? He declares:
Strange to say, however, confidence hasn’t surged. Somehow, businesses and consumers seem much more concerned about the lack of customers and jobs, respectively, than they are reassured by the fiscal righteousness of their governments. And growth seems to be stalling, while unemployment remains disastrously high on both sides of the Atlantic.
The answer is that we need a major push to get the economy moving, not at some future date, but right now. For the time being we need more, not less, government spending, supported by aggressively expansionary policies from the Federal Reserve and its counterparts abroad. And it’s not just pointy-headed economists saying this; business leaders like Google’s Eric Schmidt are saying the same thing, and the bond market, by buying U.S. debt at such low interest rates, is in effect pleading for a more expansionary policy.And how will government finance this policy? It cannot come from the primary bond market, as that would be nothing more than a simple transfer.
No, what Krugman wants is for the Fed to purchase short-term government debt, and lots of it, and to do it on the primary market. He has not said so directly, as the Federal Reserve Act of 1913 expressly forbids the Fed from doing so. However, I believe that what Krugman wants is for Congress either to change the law or for Obama to declare an emergency or to issue a convoluted executive order like what FDR did when he confiscated gold.
Like it or not, that is Krugman's end game in which the Fed simply buys government debt on the primary market. While Krugman might claim that this constitutes a "free lunch" and the promise of prosperity, Volker knows better. It will be interesting to see when and where the collision between them occurs.