I.O.U.S.A - Addison Wiggin [120]
recession. It wasn ’ t tight money that caused high interest rates. It was the deferral of the tax cuts. We, unfortunately, made the huge mistake of deferring those tax cuts, which postponed income, and we caused a deep recession/depression in 1981 – 1982. Almost everyone blames Paul Volcker for that, but that is an incorrect accusation. What Volcker did during this period was reestablish credibility in the U.S. dollar by following a price rule. He brought c17.indd 240
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Arthur
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infl ation down and interest rates down, ultimately, in the U.S.
economy. He was just spectacular in monetary policy. To blame Paul Volcker for the recession of ‘ 81 –’ 82 is really incorrect.
Q: Even at the time, he was hung in effi gy. There were people committing suicide in the heartland.
Arthur Laffer: Oh, I know. It was just terrible. It ’ s true that, when we took offi ce, the prime interest rate was 21.5 percent. But Volcker didn ’ t cause the infl ation. For goodness sakes, he came in in ’ 79 and, when he came in, he didn ’ t have total control of the Fed. He was the new guy. It took him quite a while to get control of the Fed. By ’ 80– ’ 81, by the time we were in, he then had control of the Fed and he did a spectacular job. You can ’ t do more than you can do. He ’ s just the chairman — he wasn ’ t the boss of everyone there. But as he gained control, he was able to effectuate really great policies. He did not cause the recession of ‘ 81 – ’ 82, and anyone who tells you that he did, doesn ’ t understand the basics of supply - side economics. Period.
Q: I think you ’ re clear. You were friends with him at that time.
What was he going through when he was being blamed for it?
Arthur Laffer: I like Paul Volcker a lot personally. I think he ’ s a neat, neat guy. I never was a friend of Volcker ’ s. I was a huge fan of Paul Volcker ’ s, but we never went out to dinner together. He and I felt very similarly about monetary policy and making sure to establish credibility in the U.S. dollar. Guaranteeing the value of the dollar was what the gold standard did. We were unwilling to go off gold and were the last ones pushed off, because we both understood the role of guaranteeing the value of the U.S. currency.
What Volcker came in and did in ‘ 79, and really much more in ’ 80
and onward, was establish a price rule for the U.S. dollar. He was able to really bring infl ation down dramatically by making sure that that price rule operates with respect to the monetary base.
Volcker did not control interest rates. The discount rate followed the 91 - day table. He didn ’ t lead it, but Volcker did control the growth rate of the monetary base. He used open market operations perfectly, and you can see exactly the consequences of c17.indd 241
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242 The
Interviews
his policies almost 30 years later. You can see what has happened to infl ation and what ’ s happened to interest rates. We are in great shape because of Paul Volcker ’ s revolutionary change of monetary policy.
Q: In 1971, just after the Wood Accord fell apart, the Fed enacted its dollar index?
Arthur Laffer: Yes.
Q: That, just this fall, has fallen to historic lows. It ’ s never been as low — is that right?
Arthur Laffer: I don ’ t think that ’ s true.
Q: Can you characterize the value of the dollar and the foreign exchanges?
Arthur Laffer: You can look at the worth of a dollar in terms of current goods and services and see the CPI or the producer ’ s price. That ’ s the correct measure. You can look at the value of the dollar in terms of future dollars. There, you ’ re looking at interest rates. That ’ s the way of looking at the current dollar versus future dollars. Or you can look at the value of the current dollar versus foreign currencies.
Today, the value of the U.S. dollar is extraordinarily low. It ’ s not the lowest it ’ s ever been, but it ’ s in the very low range. This is not a purchasing power