The Lessons of Volcker and Greenspan

As the quarter century of inflation-free prosperity under the monetary policies of Federal Reserve
Board Chairmen Paul Volker and Alan Greenspan comes to a close with the retirement of Greenspan,
Steve Chapman
reviews the lessons learned.

Back in 1980 people believed that there was a tradeoff between inflation and unemployment. It
was the precipitate of a generation of Keynesian economics.

Back then, the conventional wisdom was that we had to choose our poison.
If we wanted a prosperous economy and low unemployment, we had to accept inflation. If we wanted
low inflation, we would have to put up with a sluggish economy and sentence millions of people to
a life on the dole.

But evil conservative economists protested. “‘Inflation is always and everywhere a monetary phenomenon,’”
wrote Milton Friedman. So Paul Volcker, appointed to the Fed chairmanship in 1979 put this concept into
practice. It produced bone-chilling interest rates and then 11 percent unemployment until the other
leg of post-1980 economics kicked in: the Reagan tax rate cuts. Ever since, the US and the rest
of the the world has enjoyed bold, persistent economic growth.

The great discovery of the last quarter-century is not that the government
should do nothing, but that it should focus on doing certain essential tasks -- one of
which is to avoid debasing the currency on which all economic activity depends. Long after
Messrs. Greenspan and Volcker are forgotten,
Americans will still be in debt to them for that lesson.

Actually, there are four legs to the economic stool:

• Sound money, i.e., Volcker-Greenspan policy


• Low tax rates, i.e., Reagan-Bush tax rate cuts


• Affordable government, i.e., keep government share of economy low


• Even playing field for intense business competition, i.e., hack away at subsidies and privileges

Pretty simple, isn’t it?