Paul Volcker is NOT a good guy

Early in the Obama administration, we saw Paul Volcker hanging around the edges of the economic team trying to convince everyone that he was the "adult" in the room.  And in fact, he might have been—considering the generally absurd characters like Larry Summers who got to make economic policy.

And so we saw so-called "liberals" turn Volcker into some sort of minor hero—much to the disgust of those who remember what the man did to the country in the early 1980s.  I was involved in a start-up in 1981-82.  We had some great dreams.  We worked insane hours.  We were inventive enough to get a patent.  We produced a product that was quite beautiful.  And then the hammer fell.  Suddenly, in the name of fighting inflation, Volcker raised prime interest rates up to 21%.  It was like the economy had hit a wall.  If we had been well established, we might have survived this grotesque economic experiment but we were not and joined the other 300,000 businesses that were sacrificed to "fight inflation."

Volcker delivered a hit to the productive economy of USA that in many ways, we have never recovered from.  Oh sure, some economic indicators showed growth again but real wages would stagnate, small and medium-sized agriculture would never recover, and the great American economic muscle would be reduced to the "rust belt."

Sado-Monetarism

The Role of the Federal Reserve System in Keeping Wages Low
Michael Perelman

Michael Perelman(michael.perelman [at] gmail.com) teaches economics at California State University at Chico. His many books include Railroading Economics and The Invisible Handcuffs of Capitalism, both published by Monthly Review Press.

Author’s Note: My book The Invisible Handcuffs of Capitalism (Monthly Review Press, 2011), from which this article is adapted, tells the story of how orthodox economists have systematically excluded all consideration of work, workers, and working conditions from mainstream economic theory, as well as the damage created as a result of that distortion. Neoclassical economists are concerned about the workers’ transactions with capital, but they care little about the workers themselves or their working conditions. Workers merely accept a wage bargain, go to work, and finally collect a wage. What happens at the workplace is irrelevant. The wage bargain is presumed to be voluntary, agreeable to both workers and their employers. In fact, the relationship between labor and capital is anything but voluntary. Capitalism uses a variety of weapons to make labor conform to its needs. The book compares this control to a Procrustean bed. According to Greek legend, Procrustes was an innkeeper who made his guests fit into an iron bed. He stretched the short ones and amputated the tall ones until they were the proper dimensions. Monetary policy is a Procrustean weapon. What follows is adapted from the book. It tells the story of how the Federal Reserve System sadistically wields monetary policy to keep wages low.

Economist Edwin Dickens has written a series of significant articles analyzing the minutes of the meetings, dating back to the 1950s, of the Open Market Committee of the Federal Reserve Board. (The Committee is the main policy-making body of the Board.) Dickens’s research shows convincingly that the Federal Reserve’s partisan behavior is designed to tilt the economy in the direction of the wealthy by making workers more compliant.

Dickens reported numerous occasions when participants voted to tighten the money supply just before major union contracts were about to expire. The minutes indicate that the specific intent was to force employers to be less generous with their wage offers during contract negotiations.1

A recent study formalized Dickens’s work by attempting to distinguish whether the policy actions of the Federal Reserve were responses to inflation or to low unemployment. The study concluded that “a baseless fear of full employment,” rather than the prevention of inflation, was the guiding principal of the Federal Reserve.2 The conclusion of this study should come as little surprise to people familiar with the Federal Reserve’s obsession with the danger of high wages.

Defenders of such policies justify the temporary restriction of job creation, contending that the Federal Reserve is merely trying to curb excessive growth. According to this school of thought, the Federal Reserve is simply preventing the kind of excesses that lead to severe recessions or depressions. Slowing down growth today may be necessary to provide for a higher sustainable growth rate in the future. Most economists argue that the cumulative effect of even a fairly small increase in growth rate can be substantial—more than enough to compensate for a temporary slowdown.

The defenders are wrong. Periodic slowdowns that the Federal Reserve engineers to undermine wage growth are unlikely to stimulate economic growth. In fact, according to a study by the Bank for International Settlements, slowdowns actually seem to diminish, rather than promote, long-term growth.3 Over and above the dramatic effects of intentionally engineered slowdowns, the steady effort to keep wages in check also probably reduces the rate of growth. As economists continually warn, the cumulative effect of a reduced rate of economic growth can be substantial. This loss must count as another cost of Procrusteanism.

In the 1920s, John Maynard Keynes described the effect of this sort of monetary policy on workers: “the object of credit restriction…is to withdraw from employers the financial means to employ labour at the existing level of wages and prices. The policy can only attain its end by intensifying unemployment without limit, until the workers are ready to accept the necessary reduction of money wages under the pressure of hard facts.”4 Keynes’s description of this policy seemed to frame it as a form of Procrustean class warfare. “Those who are attacked first are faced with a depression of their standard of life, because the cost of living will not fall until all the others have been successfully attacked too; and, therefore, they are justified in defending themselves…they are bound to resist so long as they can; and it must be war, until those who are economically weakest are beaten to the ground.”5 Keynes concluded, “It is a policy, nevertheless, from which any humane or judicious person must shrink.”6

The Federal Reserve’s fight against wages can be intense. In 1979, shortly after taking the reins at the Federal Reserve, Paul Volcker announced new operating procedures and a determination to hold inflation in check. At first, many powerful people doubted whether Volcker would be willing to follow through with his plans, which were sure to create enormous casualties. A front-page story in the Wall Street Journal, “Monetary Medicine: Fed’s ‘Cure’ is Likely to Hurt in Short Run by Depressing Economy, Analysts Say,” expressed this sentiment. The paper noted, “Among those who are skeptical that the Fed will really stick to an aggregate target is Alan Greenspan…who questions whether, if unemployment begins to climb significantly, monetary authorities will have the fortitude to ‘stick to the new policy.’” more

As the article continues, we see that Volcker was absolutely diabolical in his strategy of creating a monetary squeeze just in time to counter any potential growth in the real economy.  It can be said that Volcker is truly the father of USA de-industrialization and Perelman has the goods on him.