The news media has recently focused its attention on Barack Obama’s choice of his previous arch nemesis, Hilary Clinton, for Secretary of State. While a significant cabinet pick, might I suggest that we direct our enthusiasm toward Obama’s selection of economic giant Paul Volcker for his Economic Advisory Chair. The man who was largely responsible for the defeat of stagflation, which no doubt helped the reelection of Ronald Reagan, now graces Obama’s administration during one of the toughest economic downturns of modern history. While the Clintonites’ uncanny return to Washington is making the bulk of the headlines, the selection of Volcker is one of the most brilliant decisions Obama has made thus far.
During the 1970s, following Jimmy Carter’s presidency, the U.S. was facing an unprecedented economic crisis in the form of stagflation. Stagflation was the bizarre combination of rampant inflation and a stagnating economy, a disastrous scenario that economists were previously unaware was even possible. The extremely unpopular Carter lost his bid for reelection to Ronald Reagan, but during the transition of power, Reagan decided to keep Carter’s Democratic fed chairman, Paul Volcker. Volcker was tasked with defeating stagflation, and he did so by using interest rates to target inflation.
Volcker raised interest rates so high that he triggered a crippling recession, making his chairmanship, and the president that decided to keep him in his job, extremely controversial. Harangued by Congressional Democrats, Volcker merely responded by telling them that the recession was necessary in order to eliminate uncontrollable inflation. That it did, and in 1983, two years after inflation had peaked at 13.5 percent, the wise chairman presided over an inflation rate of only 3.2 percent. Combined with the prosperity brought about by the Reagan tax cuts, the economy soared, giving the incumbent administration huge popularity and a successful reelection campaign.
The hard medicine Volcker implemented to cure the ailing economy did not result in instant gratification. During the early 1980s, unemployment had reached its highest level since the Great Depression. Times were tough, and if it wasn’t for the market’s incredible comeback, Reagan could have easily lost his chance at a second term. However, Volcker understood that sometimes the best solution for a struggling economy was a natural economic contraction. Similarly, sometimes the best cure for a failing corporation is not bailout, but Chapter 11 bankruptcy, which produces a far more efficient and competitive industry. Sometimes, the most effective way to jump-start an economy and produce long term economic growth is for a government to forego short term revenue and cut taxes, as seen in the economic policy of President Kennedy. And sometimes the special interest lobbies and ideological whims of a party must be put aside in the pursuit of pragmatic, long-term solutions.
Obama’s selection of Volcker suggests that he understands this need to focus on long-term answers, or at the very least, is willing to have somebody on his Economic Advisory Board that will continually remind him of it. While Obama will ultimately be the policy maker within his administration, it is encouraging to know that he is unafraid of a diverse range of thought within the White House, nor is he threatened by filling his cabinet with experienced Washington veterans. If Obama listens to the advice of Volcker and conquers this economic downturn with sensible pro-growth policies, he will have far more allies than enemies come 2012.