By Robert J. Samuelson Wednesday, June 9, 2004; Page A21
It's a magnificent irony. Amid all the affection and adulation for Ronald Reagan, one of his greatest achievements stands all but overlooked. He helped subdue double-digit inflation, setting the stage for the prolonged economic expansions of the 1980s and 1990s. High inflation largely brought Reagan to power; low inflation made his presidency popular and successful.
We forget now how much inflation once frightened Americans. In 1979 Daniel Yankelovich -- a leading student of post-World War II public opinion -- wrote this: "For the public today, inflation has the kind of dominance that no other issue has had since World War II. The closest contenders are the Cold War fears of the early 1950's and perhaps the last years of the Vietnam War. But inflation exceeds those issues in the breadth of concerns it has aroused among Americans. It would be necessary to go back to the 1930's and the Great Depression to find a peacetime issue that has had the country so concerned and so distraught."
What unnerved people was not merely that inflation was high (13.3 percent in 1979) but that it was rising (in 1976, it was 4.9 percent) at an unpredictable pace and that no one could stop it. President Jimmy Carter had fumbled with a host of confusing policies -- including wage-price guidelines -- to little avail. The steady upward march of prices fed the sense that Carter had lost control of events, an impression reinforced by his handling of the Iranian hostage crisis.
Of the two issues, inflation counted for more politically. In the last monthly report before the election, the consumer price index rose 1 percent; prices were 12.7 percent higher than a year earlier. In a September 1979 survey, 67 percent of the public said that "holding down inflation" was a bigger problem than "finding jobs" (21 percent). On Election Day 59 percent of Reagan's supporters said that inflation was a "determining issue for them," according to the New York Times/CBS exit poll.
When Reagan asked, "Are you better off than you were four years ago?" he was referring mainly to inflation. Since 1976 the economy had created 10.6 million jobs. In 1980 the unemployment rate (7.1 percent) was lower than in 1976 (7.7 percent), though it had jumped sharply from 1979 (5.8 percent). But people detested inflation's stress and uncertainty. They couldn't know whether their salaries and savings would keep pace with rampaging prices. Interest rates seemed astronomical. In 1980, 30-year fixed mortgages averaged 12.7 percent. All this sapped Americans' confidence in their leaders and the future.
By 1982 inflation was down to 3.8 percent. On an annual basis, it has never again topped 6.1 percent (1990). From 1969 to 1981 (12 years), there were four recessions. In the 1973-75 recession, monthly unemployment reached 9 percent; in 1981-82 it hit 10.8 percent. Since 1982 there have been two recessions (1990-91, 2001). The highest monthly unemployment rate was 7.8 percent in June 1992.
The suppression of double-digit inflation liberated the economy from stop-go policies: bursts of expansion followed by punishing slumps. It restored a sense of order and predictability. It made government -- here's a giant paradox of the Reagan era -- seem competent again. All of Reagan's optimistic rhetoric and his 1984 campaign slogan ("It's morning again in America'') would have rung hollow with 12 percent inflation. In 1984 the unemployment rate (7.5 percent) was actually higher than in 1980.
None of this has merited much attention. In its 10,820-word obituary, the New York Times mentioned inflation four times. The Wall Street Journal's retrospective of "Reaganomics" virtually ignored inflation. It got a paragraph in Time's cover story, which was more than in Newsweek's.
There are reasons. One is Reagan's murky role in reducing inflation. He was not the principal agent. The Federal Reserve, then headed by Paul Volcker, was. Volcker pushed interest rates skyward, triggering a devastating recession that was calculated, through gluts of goods and unemployed workers, to depress wage and price increases.
On paper, the Fed is "independent." In practice, it can never be entirely. Volcker has written: "No central bank [the Fed] can -- or should, in my judgment -- conduct policies for long that are out of keeping with basic, continuing objectives of the political system."
There was much criticism of Volcker's Fed: from Democrats and Republicans in Congress; from home builders, farmers, unions and business; from some Reagan administration officials. But not from Reagan. In private meetings with Volcker and others, he favored tight money. In public, he supported Volcker by muting any criticism. The Fed could proceed with the wrenching -- and necessary -- job of purging inflationary expectations. Reagan provided the essential political cover.
Inflation also gets neglected because it doesn't fit anyone's political agenda. To the right, Reaganomics means lower taxes and smaller government. But Reagan didn't shrink government, and lower inflation -- not lower taxes -- mainly revived the economy. To the left, Reaganomics means smaller (and meaner) government, irresponsible tax cuts and big, destructive budget deficits. But again, Reagan didn't shrink government, and Presidents John Kennedy and Lyndon Johnson started persistent (though smaller) deficits, which in any case didn't destroy the economy. Still, the media often heed rhetoric more than reality, so the basic story is missed.
No other major leader -- Republican or Democrat -- would have then done what Reagan did. "The President stands almost alone among Washington's current politicians in his instinctive comprehension that inflation is a profoundly destructive phenomenon," wrote David Stockman, Reagan's first budget director, in an otherwise critical 1986 book. Giving "Volcker the political latitude to do what had to be done . . . was a genuine achievement." More than genuine, it was magnificent.