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Talking with Paul Volker




A.

While reading the conversation of Paul Volcker with the interviewer, jot down the main points. Based on your notes, be ready to perform as Paul Volcker in the class and answer the students’ questions about the monetary policy of the Fed in the1980-ies.

Paul Volcker served as chairman of the board of governors of the Federal Reserve System from 1979 to 1987, a time when double-digit inflation was gripping the U.S. economy. Michael Parkin spoke with Mr. Volcker about his experience as chairman of the Fed and about his vision and concerns for the future of the economy.

 

I.: Mr Volcker, what originally attracted you to economics?
P.V.: I was an undergraduate immediately after the Second World War. I think a lot of people at the time got interested in economics because they hoped of the idea that after the war things must be able to work better than they had during the Depression, and they were filled with a zeal for doing better. That was part of my thinking, but just as important, economics seemed to me, of all the social sciences, to have a little more precision. I thought I could combine this practical, logical structure with an instinct for public service. In retrospect, I'm sure I overestimated the logic and coherence!
I.: What are the economic principles that you, learned in school that have proved useful in your professional life?
P.V.: Some economic principles are eternally useful. Economics does teach you the discipline of understanding that the direct immediate effects of some action may not be the full story — that without close analysis and study you may have unintended and unanticipated effects later on. Those later "side effects" may be greater than the immediate effects. Finally, the concept of looking at the margin — at incremental effects — is very important in terms of actual policy.
I.: Is a background in economics, familiarity with economic principles, mandatory for a chairman of the Federal Reserve?
P.V.: I haven't been able to detect any correlation in performance between chairmen that were economists and those who were not. The chairman doesn't have to be a trained economist if he or she has a staff of very good economists. Without that, you'd really be in trouble.
I.: There must be as many opinions about what the Fed should be doing as there are economists. How do these controversies among macroeconomists affect the Fed's job? Are they relevant for the conduct of monetary policy?
P.V.: Oh, I think they're relevant. The internal technical debate doesn't make that much difference. But to the extent that economists' positions on public policy influence public opinion and differ widely, you lack a consensus against which to conduct policy, in a political context, some of these different points of view become politicized. That's part of the environment in which the Fed must operate. The one advantage when you're the chairman of the federal Reserve Board is that you can sometimes influence — or can lead yourself and everyone else into thinking that you can influence — the nature of the consensus about economic policy, as it is actually reflected in public opinion.
I.: There has certainly not been consensus about the consequences of the Fed's policy in fighting inflation during the late 1970s and early 1980s, while you were chairman. When you embarked on your war against inflation, did you expect to be presiding over the longest peacetime recovery in U.S. history?
P.V.: I thought then, and think now, that inflation is the enemy of sustained expansion. But dealing with these things always turns out to be more difficult, more complicated, and to take longer than you expect. I guess I did misjudge how long we could put up with internal government deficits and external trade imbalances.
I.: What were you missing?
P.V.: In part I think there is a much more fluid international capital market than we had recognized. I would not have guessed that the United States could borrow, or that the Japanese would be willing to lend, so much money year after year without more uncertainty about the dollar. I would not have guessed that the value of the dollar could come down from its high level as much as it has without more disturbance in interest rates and inflation. We've been very fortunate in being able to manage that big a decline in the value of the dollar with as little inflation as we've had.
I.: Did your war on inflation cost more in human terms than you had thought?
P.V.: Stopping inflation is never easy. What I object to is that people said that the Federal Reserve caused the recession in the early 1980s and all its pain and suffering. But, in my view, we were going to have the pain anyway. It was just a question of when and how. We thought it would be less if we dealt with the inflation earlier rather than later. One of my predecessors, Bill Martin, once described the Fed's job as taking away the punch bowl just when the party's getting good. You avoid the hangover that way, or reduce it anyway.
I.: Do you bring the punch bowl back if the party starts to fade?
P.V.: My critique of Federal Reserve history is not that it was always too harsh and brought all these expansions to an end when they could have gone on forever. But sometimes the Fed was overeager to get the party started. Once you get in a recession, the pressures on the Fed are very strong. Even after you come out of the recession, the temptation is to overstimulate. But policy only works with a lag and the lags catch up with you. You're off to another jolly party again. We tried to avoid this last time, I think with some success.
I.: We've talked a bit about the government's budget deficit. Did the government's need to finance its budget deficit affect your job as chairman of the Fed?
P.V.: I do not believe that the Federal Reserve was forced into inflationary financing. In retrospect, the government's budget deficit position did not in fact appear to impair our ability to achieve a record expansion. But if you look at whether the expansion can be carried on for another seven years, you have to get concerned about our relatively low level of investment, our low productivity, and our dependence on foreign lending and investment. None of these can be dealt with by monetary policy alone. Fiscal policy gives you an expansionary thrust, which then has to be countered by tighter monetary policy — by higher interest rates. This leaves you with a vulnerable economy, increasingly dependent on money borrowed from overseas.
I.: Our economic relationship with other countries also includes the exchange of goods and services. In recent years we have been experiencing a substantial decline in net exports. What do you see as the principal cause of the external trade deficit?
P.V.: It's an internal imbalance between our ability to produce and our propensity to spend. Our spending is mostly consumption, personal and public. Investment is, at best just so-so a period of expansion. So a major policy challenge is to find a way of cutting consumption. On the other hand, there are imbalances in the opposite direction in other economies. The Japanese are doing a good job in beginning to deal with this problem. But it is true that there is a bias in the trading world toward less openness. If you took a snapshot of the world trading scene, you'd have to agree that the United States is by far the most open market of all, and our trading partners are more closed. How do you deal with that complaint? You can't ignore how these imbalances are aggravated by our own internal economic policies, our own consumption.
I.: What will improve the situation?
P.V.: We've got to contain domestic spending and we've got to see foreign markets open up so that foreign expenditure for our goods increases. Of course, just opening foreign markets wouldn't induce any change in our own spending by itself. Moreover, changing our spending pattern can't be done just by monetary policy, by high interest rates. Monetary policy won't move spending from consumption into investment. That means you've got to bring fiscal policy to bear. More taxes or less spending or both. But now you've got a lot of political choices. You'll have to make some political bargains in order to get expenditure cuts.
I.: When a college student seeks your advice on the choice of a career, what do you suggest?
P.V.: I'd strongly encourage him or her to consider a career in public service. There are so many important jobs for people in the government. Who do we look to for the solution of problems like AIDS? The government. Who's going to solve the drag problem, if anyone can? The government. We need young people who recognize the challenge and excitement and satisfaction of service to the public. Without their contributions, we will have a serious problem in this country.

 

Ex. 1. Match the words in A with their definitions in B.

1) consumption a) The state of being legally acceptable
2) precision b) An amount used
3) coherence c) A period of economic decline in a country
4) correlation d) Accuracy
5) recession e) The action of becoming or making smth. greater in size, number, or importance
6) expansion f) A mutual relationship
7) validity g) Sth. (of ideas, thoughts, speech etc.) logical or consistent
8) vulnerable h) A tendency to behave in a certain way
9) propensity i) Exposed to being attacked or harmed

 




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