Echoes Dispatches From Economic History

Amity Shlaes & Ilan Kolet

On the Fed's Cred and Inflation Targeting: Echoes

about 3 years ago
Managing Inflation Expectations

Credibility matters. It's hard to gain, and easily lost. As we pointed out earlier this week, Paul Volcker managed to harness inflation (and, perhaps more importantly, inflation expectations) in the 1980s through ruthless adherence to high interest rates. In doing so, he established the Federal Reserve's credibility on price stability.

To maintain that confidence in today's era of low interest rates and quantitative easing, should the Fed adopt an explicit inflation-targeting regime?

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John B. Taylor

Paul Volcker's Most Important Lesson: Echoes

about 3 years ago

It's difficult to recall now the seriousness of the U.S. economic slump at the end of the 1970s. Growth was weakening, the dollar was sinking and, even worse, inflation was accelerating rapidly. Confidence in U.S. economic leadership was plunging at home and abroad.

Then, on Aug. 6, 1979, Paul Volcker took over as chairman of the Federal Reserve Board. His appointment came as a relief to the markets because of his experience at the New York Fed and the Treasury, but more importantly because he questioned the common view that a higher inflation rate had favorable effects on employment. He was determined to bring price stability and better economic performance to the Fed.

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Joseph J. Thorndike

Ronald Reagan's Accidental Keynesian Stimulus: Echoes

about 3 years ago

A spate of bad economic news has revived fears of a "double-dip" recession. Since the Great Depression, such a calamity has only occurred once, when the country suffered through a short and shallow recession in 1980, followed by a long and severe one in 1981-1982.

Traditionally, these twin recessions have been laid at the feet of Paul Volcker, then chairman of the Federal Reserve and now an adviser to President Barack Obama. In particular, the Fed's relentless series of interest-rate increases are blamed for bringing the economy to its knees.

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Is our economy headed back into a recession? A look at a past double-dip, the recessions of 1980 and of 1981-1982, suggests we are due. That double-dip also suggests the Federal Reserve should raise interest rates earlier and faster than you might think.

In fact, the 1980s experience points to something horrible: We need a recession to get a true recovery.

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Amity Shlaes & Ilan Kolet

Keeping Recessions in Historical Perspective: Echoes

about 3 years ago
The Long Road to Recovery

Here's a graphical look at how employment has historically recovered following recessions. Something to keep in mind as jobs come to dominate the national conversation in the months to come. Next week, we'll take a look at the recessions of the early 80s, and in particular the Fed's actions leading up to them. Send us your thoughts.

(Amity Shlaes, the author of this post, is a Bloomberg View columnist. The opinions expressed are her own. Ilan Kolet, who created this graphic, is a data editor for Bloomberg News.)

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One of the least-covered aspects of the recession of 1937 is the then-new monetary law under which the country was operating. Marriner S. Eccles of Utah had agreed to be Federal Reserve chairman, but only on condition that President Franklin D. Roosevelt oversee passage of, and sign, new legislation redefining the Fed's job.

In 1935, at a luncheon of the National Republican Club in New York, Theodore Roosevelt, the son of the late president, criticized his cousin Franklin and predicted that the new law, the Banking Act of 1935, was another step toward dictatorship.

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Fiscal and monetary policy aren't the only ways government affects the economy. In 1937 -- the year we've been discussing on Echoes since last week -- the issue nearly everyone was talking about was the audacious legislation that President Franklin D. Roosevelt had proposed in February of that year: his court-packing plan.

Roosevelt's attempt to neutralize the Supreme Court sparked a national outcry and a heated political struggle. Two recent books, "Supreme Power: Franklin Roosevelt vs. The Supreme Court" by Jeff Shesol and "Scorpions: The Battles and Triumphs of FDR's Great Supreme Court Justices" by Bloomberg View columnist Noah Feldman, take up this incident.

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Amity Shlaes

Revisiting FDR and 'Unimagined Power': Echoes

about 3 years ago
First Draft

Last week, reader Chris Ryan wrote to say that in analyzing President Franklin D. Roosevelt's second inaugural address of 1937 my last column contained a "serious factual error." I noted that when Roosevelt said the U.S. sought "an instrument of unimagined power for the establishment of a morally better world," the instrument the president was referring to was the government. Mr. Ryan disagrees.

He argues that FDR wasn't referring to government in this section -- that the president had moved on to matters of the spirit. The suggestion here is that my column made Roosevelt look more aggressive than he was. Mr. Ryan says "such distortions of people’s words are dishonest."

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Amity Shlaes & Ilan Kolet

Strikes, Wages and the Wagner Act: Echoes

about 3 years ago
Work Stoppages and Real Wages

I argued in my last column that the new political power that unions gained with passage of the Wagner Act gave them the confidence to push for higher wages from employers. This chart lays out the timing. The Wagner Act passed in the summer of 1935, giving unions in the industrial sector coequal status with management for the first time. Unions and voters both recognized that this would increase the value of unionizing tremendously, and millions of workers joined unions after the act's passage.

John L. Lewis and his Congress of Industrial Organizations saved their hardest punches until after President Franklin D. Roosevelt won his 1936 reelection campaign. With FDR safely in the White House, the unions increased work stoppages (strikes and other actions), employers recognized the unions' growing power and wages began rising significantly. The Supreme Court's affirmation, in April 1937, that the National Labor Relations Act was constitutional made it clear that union pressure was the new reality for companies.

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Just as economists have debated the causes of the financial crisis, they are now debating the causes of the slow, almost non-existent, recovery. Topping my list of causes are the so-called stimulus packages -- which empirical work shows did little to stimulate -- and other government interventions, which have left an overhang of uncertainty impeding private investment.

As my colleagues Gary Becker, George Shultz, Michael Boskin, John Cogan and I explained last summer:

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Nikolai Krylov

Depression Regression: Echoes Book of the Week

about 3 years ago

"If the gov't continues its spending etc. it means ultimate inflation and crash. If the gov't stops spending, balances the budget, it means bad business during the period of adjustment but ultimately a sound recovery. Either way the outlook is not promising." That sounds like a pundit commenting on Federal Reserve Chairman Ben Bernanke's speech yesterday.

It was actually written on Nov. 22, 1937, in the diary of Benjamin Roth, a lawyer from Youngstown, Ohio.

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Joseph J. Thorndike

How Social Security Prolonged the Depression: Echoes

about 3 years ago

Social Security began its life as a tax increase, not a spending program. In 1937, the federal government started collecting a 2 percent payroll tax, but benefits didn't start flowing until 1940. For more than three years, Social Security siphoned money from consumers' pockets into government coffers while offering almost nothing in return.

This transfer helped tip the nation into a new recession. From 1934 to 1936, the economy had been growing smartly as the nation began to claw its way out of the Great Depression. But in August 1937, progress came to a halt, with industrial production, corporate profits and the stock market all sinking like stones.

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Amity Shlaes

What Paul Krugman Misses About 1937 Redux: Echoes

about 3 years ago

What if it just keeps going? That’s the question Americans are asking as they consider last month's 9.1 percent unemployment rate, still so high 33 months after the crash of September 2008. Scholars of economic history are asking another question: Are we repeating 1937?

That year, when Americans were expecting their economy to finally pull out of the Great Depression, the stock market dove again, with the Dow Jones Industrial Average dropping from the 190s in March 1937 to less than 100 in March 1938. Nonfarm private unemployment, the measure of Roosevelt's industrial economy, increased to more than 18 percent. Industrial production plunged by a third.

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Amity Shlaes & Ilan Kolet

Social Security's Finances, Past and Future: Echoes

about 3 years ago
oil_democ051211

When President Franklin D. Roosevelt created Social Security, Americans typically had more children, and died younger, than Americans today. As our demographics have changed, the balance of retirees to workers has shifted along with them. Lawmakers, as this chart shows, have not shifted the tax structure sufficiently to respond to this change.

The relationship between the amount workers pay into the Social Security system and the amount they receive as benefits is known as the replacement rate. The original American commitment was that Social Security payments to seniors should be correlated to some degree to the wages they had paid into the system, so that higher earners who had paid more in taxes would get somewhat more in retirement.

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John B. Taylor

A History Lesson for Entitlement Reform: Echoes

about 3 years ago

This week, House Republicans visited the White House and pressured President Barack Obama to reduce government spending as part of a deal to raise the debt limit. Everyone agrees that cutting spending will require difficult decisions on entitlements. And here is where presidential leadership is so essential -- at least that's the lesson from history as I have learned it from my colleagues, the historian David Kennedy and the budget expert John Cogan.

The relevant historical period here is the 1930s, and the president is Franklin D. Roosevelt. This may have been the only time in American history when the federal government was able to seriously cut entitlement spending. The cut was part of Roosevelt's Economy Act of March 10, 1933. Note that this predates the creation of Social Security, so the only federal pension program in existence was the military pension. It amounted to 25 percent of the federal budget, according to Kennedy's book "Freedom from Fear."

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Nikolai Krylov

Social Security, Clarified: Echoes Book of the Week

about 3 years ago

Apropos of this week's discussion on the Echoes blog about Social Security's history, I'd recommend Charles Blahous's useful guide, "Social Security: The Unfinished Work."

Blahous, a public trustee for the Social Security and Medicare programs and a former deputy director of the National Economic Council, admirably explains the competing proposals to remake Social Security and cuts through the thicket of actuarial balance estimates and accounting controversies to show that the program's future is at risk.

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Joseph J. Thorndike

Revisiting FDR's Regressive Side: Echoes

about 3 years ago

Want to build a welfare state to stand the test of time? Then don’t be afraid to use regressive taxes to pay for it.

That’s the lesson we can take from Franklin Delano Roosevelt's decision to fund Social Security with a payroll tax.

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Not enough trust in government. That's the reason the Tea Party exists. And that lack of trust is what animates Republicans' plans to overhaul entitlements.

Since government is no longer trustworthy, their logic goes, we must make it smaller, and undo all those New Deal and Great Society promises the government can no longer honor.

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Katherine Brown & Ilan Kolet

Oil And Democracy, Continued: Echoes

about 3 years ago
Oil Production

Most of the world's oil is produced in states that are undemocratic. The U.S., Canada and Norway are the exceptions (see chart).

So does oil inhibit democracy? This is perhaps the central question of our discussion this week about the historical lessons the Arab Spring nations should pay attention to.

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John Campbell

Echoes: Norway, Nigeria and the Lessons of Oil

about 3 years ago

When I was serving in Nigeria as U.S. ambassador, I once asked a Norwegian diplomat a seemingly simple question: Who became rich from oil in his country? He replied, "Nobody and everybody."

He then described how Norwegians use oil revenue to lift all boats over the long term. I asked him where rich Norwegians actually made their money. He replied, "Oh, shipping, banking and timber -- you know, the modern economy."

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About Echoes

Echoes is Bloomberg View's economic history blog. It is edited by Stephen Mihm, an associate professor of history at the University of Georgia and the author, with Nouriel Roubini, of "Crisis Economics: A Crash Course in the Future of Finance," and of "A Nation of Counterfeiters: Capitalists, Con Men and the Making of the United States."