{"id":232,"date":"2020-02-21T09:36:42","date_gmt":"2020-02-21T09:36:42","guid":{"rendered":"https:\/\/pide.org.pk\/blog\/?p=232"},"modified":"2020-02-21T09:36:44","modified_gmt":"2020-02-21T09:36:44","slug":"farewell-volcker","status":"publish","type":"post","link":"https:\/\/pide.org.pk\/blog\/farewell-volcker\/","title":{"rendered":"Farewell, Volcker"},"content":{"rendered":"\n

by Mr. Shahid Mahmood[i]<\/a>
<\/p>\n\n\n\n

2019 was a harsh year for the world of\neconomics since it lost four giants of the field \u2013 Paul Volcker, Martin\nWeitzman, Martin Feldstein and Alan Krueger. Their contributions not only\nshaped the policies of governments around the world, but also opened new\navenues of intellectual query. Although intellectual honesty demands mentioning\nthe work of all four, space limitation permits me to limit myself to discussing\nthe work and legacy of Paul Volcker, the most well-known among these four\neconomists.<\/p>\n\n\n\n

Paul Volcker was the former Chair of the\nFederal Reserve (central bank of the US) in the Carter and Reagan years, best\nremembered for taming the beast of high inflation that had cast a pale gloom\nupon the US economy in the 1970s and 80s. An intellectual as well as a physical\ngiant (he stood 6\u2019 7\u2019\u2019 tall), his contributions did not end with Reagan or the\nfederal reserve but kept continuing till his death at the age of 92.<\/p>\n\n\n\n

The 1960s had\nseen the US embark on a loose monetary policy (simply put, low interest rates\nto spur aggregate expenditures) that ushered in a wave of high inflation. The\ncontext of the loose monetary policy was both political as well as theoretical.\nA famous concept in economics, the \u2018Phillips curve\u2019, posits that inflation and\nemployment have a positive relation (i-e, increase in inflation begets increase\nin employment). Not surprisingly, that is sweet music for politicians, whose\nvotes and popularity often depends upon employment and economic performance.\nYet by early 1970s, questions were increasingly lobbed at the concept since\ndespite higher inflation, employment numbers did not show any marked\nimprovement. Then came the oil shock in lieu of the 1973 Arab-Israel war. It\npushed the inflation further up, but job creation all but died down or declined\n(this kind of a situation is technically termed as \u2018stagflation\u2019, something\nthat Pakistan is passing through right now). By early 1980, inflation in the US\nhad surged to 15 percent.<\/p>\n\n\n\n

The situation\nhad reached such despondency that when the Fed Chairman, Arthur Burns gave up\nthe post in October 1979, he accepted that taming inflation may well be beyond\nthe power of central bankers. Enter Volcker, who had served under three\npresidents before as member of US treasury and head of NY reserve bank, who\nproved him wrong after he took up the post. He embarked on the unpopular policy\nof higher interest rates and tighter money supply that significantly increased\nthe cost of borrowing. The higher cost of borrowing, in turn slowed down\naggregate economic activity, with the result that unemployment rate surged to\n10 percent. Despite severe opposition by politicians and public demonstrations\nagainst him (by farmers, for example), he refused to budge.<\/p>\n\n\n\n

To understand the complexity of\nthe task and the enormity of the challenge that Volcker faced, it was not just\nthe public and politicians whose wrath he had to face. Within economics, there\nwere competing narratives on the usefulness of monetary policy, with one school\nof thought (\u2018rational expectations\u2019) advocating that monetary policy has no\neffect upon the real economy (in other words, there is no use of a central\nbank).<\/p>\n\n\n\n

By the end of Volcker\u2019s tenure,\nthere were not many who doubted that monetary policy can be effective. Decades\nof inflationary pressures had been routed, and new narratives on monetary\npolicy and economics gained respect. For example, his era convinced the\neconomic community of the importance of figuring in \u2018inflation expectations\u2019 in\ntheir models (something reflected in the expectations augmented Phillip\u2019s\nCurve). The unorthodox decision to target money supply rather than interest\nrates was greeted with substantial skepticism, but it paid off spectacularly.\nHis achievements lent credibility to the claim that central banks should be\nindependent in their work. Above all, his tough line on inflation ensured that\nthe US economy never had to face high inflationary episodes like the 1970s.<\/p>\n\n\n\n

Volcker\u2019s contributions to\neconomics and public service did not end after he left the job as Federal\nReserve\u2019s chairman. About three decades ago, he and a few colleagues set up the\n\u2018National Commission on Public Service\u2019 (\u2018Volcker Commission\u2019). He used his own\nearnings to set up and run the commission rather than ask for financial commitments\nor government subsidies (which he could easily have got). It was his sense of\npublic duty and belief that governments can have tremendous impact upon the\nlives of its citizens that propelled him to take that initiative. Paul\u2019s\nservices were called upon by President Obama in the aftermath of the Great\nRecession (2008) that caused tremendous tumult in the global economics. He\nhelped frame the laws that put a ceiling between investment and traditional\nbanking in an attempt to discourage risk-taking behaviour.<\/p>\n\n\n\n

There are some other lessons\nbesides economics that one can learn from his life. What the public never knew\nwas that he and his family had to sacrifice a lot to let him do what he did. On\nappointment as Fed\u2019s Chairman, Volcker had to move into a small apartment being\nused by his daughter. His wife was forced to take up a menial job just to make\ntheir ends meet. In the apartment, Volcker would use discarded cardboard packs\nas his tables. Just imagine the fact that this was a person whose words moved global\nmarkets, and who could have made billions if he wanted to. Yet, Volcker\ndedicated his life to public service and ameliorating the ills afflicting US\neconomy. And he never complained about it! It is quite humbling to realize that\nhis family agreed to sacrifice their comfort for a greater cause. How many of\nus would be willing to do that?<\/p>\n\n\n\n

But even more astonishing, at\nleast for me, was the realization that his distaste for inflation was informed\nmore by his moralistic bend than his technical knowhow. In his memoir (Keeping\nat It), he recalls how his mother used to bemoan the power of the government to\ndebase citizens\u2019 hard earned money. That lesson stayed with Volcker throughout\nhis life, and was the basis of his dislike for loose monetary policies. This is\na good reflection of the power of ideas inculcated at an early age that tend to\nremain unchanged throughout life of an individual.<\/p>\n\n\n\n

Another name mentioned in the\nopening paragraph was that of the late Alan Krueger, Obama\u2019s chief economist,\nwho committed suicide at a relatively young age of 52. Here was a star\neconomist, professor at MIT and a person with little or no financial troubles.\nYet, despite all the monetary security and fame, he couldn\u2019t find inner peace.\nThis failure to quell his inner insecurities led him to end his life.\nIrrespective of profession, cast or ethnicity, it is a lesson for all of us\nthat money or fame may help you get what you desire, but it does not\nnecessarily buy you internal peace and satisfaction, which should be the most important\naspect of our rather busy, entrenched lives.<\/p>\n\n\n\n

Volcker\u2019s name, along with the\nother three, will now forever be a part of economic lexicon.<\/p>\n\n\n\n

\n\n\n\n

[i]<\/a> Mr. Shahid is a regular writer on economic issues since the last 6 years, in leading newspapers of Pakistan. This piece was originally published in the Friday Times: https:\/\/www.thefridaytimes.com\/farewell-volcker\/<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

by Mr. Shahid Mahmood[i] 2019 was a harsh year for the world of economics since it lost four giants of the field \u2013 Paul Volcker, Martin Weitzman, Martin Feldstein and Alan Krueger. Their contributions not only shaped the policies of governments around the world, but also opened new avenues of intellectual query. Although intellectual honesty […]<\/p>\n","protected":false},"author":2,"featured_media":236,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":[],"categories":[1,8],"tags":[87,90,91],"yoast_head":"\nFarewell, Volcker - PIDE Blog<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/pide.org.pk\/blog\/farewell-volcker\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Farewell, Volcker - PIDE Blog\" \/>\n<meta property=\"og:description\" content=\"by Mr. Shahid Mahmood[i] 2019 was a harsh year for the world of economics since it lost four giants of the field \u2013 Paul Volcker, Martin Weitzman, Martin Feldstein and Alan Krueger. 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