Newspaper article St Louis Post-Dispatch (MO)

The Fed: Grand Guardian of U.S. Economy

Newspaper article St Louis Post-Dispatch (MO)

The Fed: Grand Guardian of U.S. Economy

Article excerpt

As President Bill Clinton and Congress struggle to create more jobs, 12 unelected officials with the Federal Reserve are raising interest rates so as to impede inflationary forces. They are insensitive to the voters' rampant sentiment for job growth. Pollsters perceive no mandate from the electorate to combat our 3 percent rate of inflation.

Fourteen years ago, the face of Paul Volcker regularly appeared on the cover of weekly news magazines. A survey of the Washington press corps regarded him as "the second most powerful man in Washington." He and his Federal Reserve colleagues pushed short-term interest rates above 20 percent because this would stop the double-digit rate of inflation that agonized America.

In 1981, more than 60,000 businesses and 460,000 individuals filed for bankruptcy. On Dec. 12, 1982, Volcker was the subject of a special television program "ABC News Closeup." He candidly accepted culpability for the greatest recession since the Great Depression. He observed that the "long-term benefits of low inflation would be worth the short-term pain of the recession."

One cannot deny that Volcker accomplished his mission. Inflation plunged from 13.5 percent in 1980 to 3.2 percent in 1983, and it has drifted lower since then. Henry Kaufman, Wall Street's pre-eminent maven on interest rates, praised Volcker as the conquistador of inflation, and virtually every distinguished economist echoed that view.

But Rush Limbaugh teaches us that our delectable rate of inflation is one of the legacies of Reaganomics. Exactly what did Ronald Reagan do to lick inflation? Perhaps it was the ferocity with which Reagan opposed government spending. Despite the rhetoric, spending soared from $591 billion in 1980 to $1.06 trillion in 1988, during which time Reagan did not veto a single regular appropriation bill. (He vetoed two tiny supplemental spending bills amounting to less then $5 billion.)

In 1980, Candidate Reagan demonized the $40 billion deficit sustained in 1979. When asked what he would do to reduce inflation, he confidently proclaimed, "Inflation comes from government spending more than it takes in. When government stops doing that, inflation will go away. …

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