Federal Reserve chair Janet Yellen (SAUL LOEB/AFP/Getty Images)
Last year, the Federal Reserve finally showed some restraint. It raised an interest rate and tied off “quantitative easing,” the big buying of Wall Street’s housing-market paper which former Fed chair Ben Bernanke had been so fond of. The initial results came in a little harrowing. Stocks dived and the hiring of full-time workers across the economy fell well below norms.
After six years of paltry 2% national economic growth since the trough of the Great Recession in 2009, it appeared, in 2015 and early 2016, that the Fed had to concede semi-stagnation. The monetary blowouts of the previous years had done nothing to prompt real economic expansion. Now it was time for the Fed to make small moves in the opposite direction, to ward off the danger that Bernanke’s actions had always been courting: a collapse of confidence in the dollar. If the result of successor Fed chair Janet Yellen’s policies had to be a stock-market haircut and more tiny job and wage growth, so be it. Such an outcome would be consistent with the mediocre new normal of the previous six years under President Obama.
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And yet how odd it is that the Fed of recent years, through Bernanke and Yellen, has been nothing but ineffective. It uses its apparently awesome powers to the max, and crickets chirp. The Fed’s labors are full of sound and fury and signify nothing.
Big-time monetary infusions: slow growth. A lurch toward monetary probity: slow growth. Weakness against major currencies and gold (through 2013): slow growth. Strength against the same (through 2016): slow growth. Isn’t the Fed supposed to be—powerful? In this puzzling era of ours, the Fed puts on a show of trying vastly different things, while we have to endure the same result: mediocrity in the economy.
The last time, before the Great Recession, that the Fed was notably activist and experimental was the first phase of the Paul Volcker chairmanship, from the time President Jimmy Carter appointed Volcker to head the Fed in August 1979 until the summer of 1982. Over these just about three years, as the nation experienced the nastiest stagflation in its history—11% per annum inflation during a double-dip recession in which unemployment also surged to 11%—Volcker went wild with new policy.
In 1979, Volcker raised interest rates in defiance of objections from his board. In 1980, he assisted the administration in imposing capital controls and limits on bank lending. In 1981 and 1982, he experimented with the full range of monetary quantity targets (to Milton Friedman’s exasperation), having the money supply grow rapidly and having it grow not at all, even negatively.
Rarely in Fed history had so many approaches to the central-bank craft been sampled, as in 1979-82. But the result was maddeningly standard: stagflation a spot worse than that of the previous double-dip recession of five years before, 1973-75, when inflation hit 11% but unemployment only 9%.
Try, try, try, and stagflation became entrenched—the Volcker-real economy dance of 1979-82. Try, try, try, and the new normal of secular stagnation fills out all eight of the Obama years—the Bernanke/Yellen dance of 2009-16. The pertinent question is: what ended Paul Volcker’s misery in 1982?
That summer, that July 1, 1982, the first big phase of the tax-rate cut that President Reagan had signed into law on Rep. Jack Kemp’s guidance the year before took effect: a 10% reduction in all rates of the income tax. A year after that, on July 1, 1983, another 10% reduction in these rates would kick in. In 1985, the original Reagan tax cut provided for the permanent indexing of the income tax structure against inflation. Two big marginal tax cuts and a guarantee against future marginal rate increases, all begun in earnest on July 1, 1982.