Paul Volcker

Paul Volcker died on December 9. He was a man of integrity and deserves to be celebrated. The obituaries, however, give him too much credit for breaking inflation in the 1980s and that is very important. First, it was President Jimmy Carter not Volcker who took all the political risks. Carter appointed Volcker to an insulated 14-year term on the Fed knowing what Volcker would do because his staff told him. Volcker would raise interest rates and cause a recession with dire political implications. Carter took the political risk.

More broadly, sky-high interest rates get too much credit for bringing inflation under control. More important, Carter fought bitter political fights to open whole sectors of the U.S. economy to price-dampening competition. He fought a grinding two-year fight to open the energy sector to competition, a fight that has kept natural gas and oil prices down ever since. He supported car dealers who wanted to sell imports and opposed the car companies and their union to keep the U.S. car market open to lower priced and better Japanese cars. He opened the transportation sector to competition --- trucking, railroads and airlines --- breaking price fixing arrangement that dated back to the 1930s. He supported increased competition in telecommunications, retailing, and finance, all of which led to lower prices.

Inflation is a political phenomenon. It happens when leaders are too weak to take on interests that have the power to raise prices. Healthcare is today’s most egregious example of this. Volcker, a good man, gets the credit for breaking inflation but it was Carter willingness to take political risks for the country that really did the job.