I think you have Reagan confused with another guy by the name of Paul Volcker.
The WSJ actually called for Volcker to ease up when inflation sank below 5 percent, and many Reaganauts wanted Volcker not to be re-appointed. They thought he was too tight.
Forgotten today is that Volcker was actually a Carter appointee, and then re-appointed (barely) by Reagan. Ronald Reagan chose not to re-appoint Volcker a second time.
Yes, Obama has wrested the (dubiously-applied) title of "Inflation-Fighting King" from Reagan hagiographers.
If the GOP solon Taylor was sincere, he would rave about the successful combo of Bernanke and Obama, who have steered us out of the Great Bush jr. Recession and brought inflation to zero.
In fact, I think Obama and Bernanke (mostly Bernanke) have flubbed seriously, Obama by relying on fiscal policy, and Bernanke by fixating on inflation.
But Taylor is a wonder. inflation is at zero–Taylor should be exultant. Perhaps he is just disoriented by the euphoria and ecstasy he feels at this supreme accomplishment. Zero inflation! Nirvana!
I think you are missing the point that (some) critics of the Fed are making. It is not that inflation today is unacceptably high, but that the Fed is creating material risk of very high inflation in the future.
Those preconditions restrain the central bank from creating positive real rates in response to accelerating inflation. If the central bank attempted to do so, out-year deficit projections would blow out, and the resulting term premium would create yet higher unemployment, which would lead to yet higher deficit projections, etc…This is known as the "debt doom loop". The only solution to that problem is 1) allow inflation to accelerate; or 2) don't get into the problem in the first place.
Very good. I quote you in my blog.
Frank, Actually I can tell them apart quite well. Volcker is a lot taller, and Reagan had a lot more hair. I said "Reagan is also viewed as the slayer of inflation and the very paragon of a sound money man." I was not speaking for myself, but for those who hold his memory sacred. In fact, they are not entirely mistaken on that point. If go back and check, Volcker became Fed Chairman in 1979. Volcker did not make a dent in inflation for the first two years of his chairmanship; it was only after Reagan became President that Volcker had the political backing he needed to pursue the anti-inflation strategy that he wanted to implement. So Reagan was hardly irrelevant. But I have no desire to apportion the credit between them.
Benjamin, I remember that by 1987, the relationship between Volcker and Regan had soured, but I was not aware (or have forgotten) that there was any sentiment for replacing Volcker within the Reagan administration. I have no theory to explain Taylor's policy utterances since Obama took office. I don't understand his position.
David, You make a valid point. However, given the current state of the economy, it just seems that the risk that future inflation would spin out of control is being greatly exaggerated compared to the potential for increasing growth and employment by tolerating a temporary increase in inflation above the Fed's (in my view) arbitrary target. In my view increased inflation (along with increased nominal GDP growth) eliminate or at least ameliorate all three of the preconditions that you cite.
David, why not accept the call for "price stability"? We John Taylor will go along accepting two conditions. 1) We only talk about the inflation caused by the Fed – demand inflation. 2) We talk the price LEVEL. Then the Fed would be targeting what I have called a Quasi-Real Price Index (QRPI). The QRPI measured from PCE is at the moment 10% BELOW pre-crisis 2% growth path. If John Taylor is serious about price stability he should be arguing for massive monetary easing!
Excellent post! On the question of Reagan's relationship to Volcker, my point of reference is Bob Woodward's book Maestro (which I cannot recommend, but which I do trust as far as the gossip about scheming and backstabbing go). According to Woodward's sources, the administration put frequent pressure on Volcker to lower interest rates, and there was a clique within it that viewed Volcker as a disloyal saboteur, and ultimately won his ouster. The fact that Greenspan's lowering of the inflation target, and his influence on congressional policy occurred later, under the Clinton administration, also suggest a relatively inflation-friendly Gipper.
The fact that the frame of reference for most people is A) Zimbabwe/Weimar, and B) the 70s, when inflation was accompanied by counterproductive wage and price controls, distorts the public's view. We lack media that highlight the *good* side of inflation.
Lars, I am not sure that I agree with the implementation of your QRPI, but I basically agree with your point, though I also think that there is a case for inflation just to strengthen household balance sheets and to punish the banks.
Will, Thanks for the added background. When Greenspan was appointed to be Fed Chairman, my own fear was that he would turn out to be another Arthur Burns, who, like Greenspan, had a long history as an economic adviser to Republican Presidents and Presidential candidates, and turned out to be a willing (or perhaps not-so willing) tool of Nixon's inflationary strategy for re-election in 1972. Greenspan turned out to be a better political operator and Fed chairman than Burns, but he didn't have to match up against Nixon.