- The Washington Times - Sunday, June 13, 2004

One of the amusing things about the liberal media is their compulsion to always present an alternative perspective to conservative successes, even when they look ridiculous doing so. Only liberal successes are allowed to be presented without some reporter saying, “On the other hand … .”

Thus, reports of Ronald Reagan’s accomplishments are always accompanied by boilerplate about his alleged failures, whether his inability to cure AIDS, the Iran-Contra scandal or something else.

Unfortunately, even conservatives sometimes fall victim to this compulsion. Two areas where this often occurs are on inflation and the deficit. It is said Paul Volcker, chairman of the Federal Reserve Board, deserves all the credit for eliminating inflation, with Mr. Reagan as some kind of passive observer.

It is also said large budget deficits prove Mr. Reagan’s economic policy was a failure. Both perspectives are seriously misinformed.

It is true inflation fundamentally is a monetary phenomenon. The inflation of the 1970s came about primarily because Fed Chairman Arthur Burns gunned the money supply to get Richard Nixon re-elected in 1972. He was followed by G. William Miller, appointed by Jimmy Carter, who didn’t have a clue about monetary policy and only made far worse the dismal inflation situation he inherited.

The Consumer Price Index, which rose 4.9 percent in 1976, the year Mr. Carter was elected, jumped steadily to 6.7 percent in 1977, 9 percent in 1978 and 13.3 percent in 1979. At this point, Mr. Carter realized he had made a serious error appointing Mr. Miller to the Fed. Since he could not be fired, Mr. Miller had to be induced to leave voluntarily. Therefore, Mr. Carter fired Treasury Secretary W. Michael Blumenthal, who had been doing a fine job, to open that position for Mr. Miller, who then left the Fed to replace Mr. Blumenthal.

Under pressure from Wall Street, Mr. Carter reluctantly appointed Paul Volcker chairman of the Federal Reserve Board in 1979. Mr. Volcker had been treasury undersecretary under Richard Nixon and was then president of the Federal Reserve Bank of New York. However, it is naive to think Mr. Carter gave Mr. Volcker a free hand. Mr. Volcker’s inability to fully institute a tight money policy is why the inflation rate fell only to 12 percent in 1980, despite a sharp recession that year.

It was only after the election, when Mr. Volcker knew Mr. Carter had lost, that he really clamped down on the money supply. This illustrates an important point: Presidents get the Fed policy they want, no matter how “independent” the Fed may be. If there had been any doubt about this, it was settled in 1967, when Fed Chairman William McChesney Martin buckled under pressure from Lyndon Johnson and eased monetary policy even though Mr. Martin knew he should be tightening. This caused inflation to jump from 3 percent in 1967 to 4.7 percent in 1968 and 6.2 percent in 1969.

It is not remembered how much Mr. Reagan was pressured to get rid of Mr. Volcker and have the Fed run a more accommodative monetary policy. Yet he not only supported Mr. Volcker publicly, he appointed like-minded Fed members when he had the chance. He reappointed Mr. Volcker as chairman in 1983, and replaced him with Alan Greenspan in 1987.

The result of the Fed’s tight money policy was a far faster reduction in inflation than most economists thought feasible. From 12 percent in 1980, it fell to 8.9 percent in 1981 and 3.8 percent in 1982. It is hard to explain just how remarkable this achievement was. Most economists would have considered it impossible in 1980, especially given the big 1981 tax cut, generally viewed as pouring gasoline on the fires of inflation by economists schooled in Keynesian economic theory.

But Mr. Reagan was firm in his belief the money supply — and only the money supply — fundamentally determined the inflation rate. However, he also knew other policies could ease the transition to a low inflation economy.

To this end, Mr. Reagan cut tax rates and reduced business regulation to increase output of goods and services; deregulated the oil price, which broke the Organization of Petroleum Exporting Countries oil cartel; and fired striking air traffic controllers, which helped control the wage-price spiral.

Ironically, the far greater success in bringing down inflation is what really created the deficit problem. That eliminated bracket-creep that caused revenues to rise automatically as inflation pushed people into higher tax brackets. This factor alone added $41 billion to the deficit in 1981 and $64 billion in 1982, according to Office of Management and Budget figures.

Breaking the back of inflation was an enormous accomplishment. Mr. Reagan deserves much of the credit. Larger budget deficits were an unavoidable consequence.

Bruce Bartlett is senior fellow with the National Center for Policy Analysis and a nationally syndicated columnist.

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