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A Conversation with Paul Volcker




ANNOUNCER: Funding for Think Tank is provided by the John M. Olin Foundation, the Lynde and Harry Bradley Foundation, the Smith Richardson Foundation, and the Donner Canadian Foundation.

(Musical break.)

MR. WATTENBERG: Hello, I'm Ben Wattenberg. We are in New York City to talk with one of the giants of American finance, the former Chairman of the Federal Reserve Board, Paul Volcker.

More than a few experts give substantial credit for America's extended economic boom to Paul Volcker. When President Jimmy Carter appointed Volcker Chairman of the Federal Reserve Board in 1979, the inflation rate was running at more than 13 percent, the economy was sluggish. Volcker's mission was to break the back of inflation. His weapon was control of interest rates, and the money supply. By 1981 interest rates had soared to record levels, recession and criticism of Volcker soon followed. But, when the dust settled so had inflation. Volcker had laid the groundwork for economic growth. In 1983 Paul Volcker was reappointed by President Reagan. When he left the Federal Reserve in 1987, bond markets fell on uncertainty about his successor, Alan Greenspan. Not to worry. In all Paul Volcker, premier public servant, spent almost 30 years in the federal government serving under 5 American presidents.

The topic before the house: Paul Volcker, the fed, and the new economy, this week on Think Tank.

(Musical break.)

MR. WATTENBERG: Paul Volcker, welcome to Think Tank. I wonder if we could begin -- if you could tell me where and when you began, a little biography?

MR. VOLCKER: Well, I began in -- I was born and bred in New Jersey, born in one end of the state in Cape May, and then lived in the northern part of the state during my part of the life that I knew what was going on. My father was a city manager in Teaneck, New Jersey, he was one of the early city managers. And undoubtedly that made a big impact on my life, because he was the central governmental figure in this town.

MR. WATTENBERG: That's really interesting because your passion seems to be more public administration than politics.

MR. VOLCKER: There's no doubt about that, and it's a product of my family upbringing. He was known for rescuing the town from bankruptcy and Teaneck was considered in those days rather a model town, and he was the public figure that everybody looked to, which has some great disadvantages when you were a growing teenager. I didn't want to go out with the other boys and aim rocks at the street lamps and so forth, because I didn't want to end up in my father's office being chastised.

MR. WATTENBERG: That's very unfashionable these days to be interested in administration rather than politics.

MR. VOLCKER: You're absolutely correct, but I have -- you can't separate them, administration involves politics, and politics involves administration. That certainly is true if you're a city manager of a city or town. But, my father used to tell me, don't stay in government, go in business, go make some money, but it was monkey see monkey do, rather than listening to what he had to say.

MR. WATTENBERG: What you said before, did that sort of push you into the role of being kind of a goody-good as a kid?

MR. VOLCKER: Yes, a little bit.


MR. VOLCKER: To some extent, yes. I think I missed some adventures that I should have had as a kid.

MR. WATTENBERG: And you went to public high school?

MR. VOLCKER: I went to public high school.



MR. WATTENBERG: And then on to?

MR. VOLCKER: Princeton, and then to Harvard, and then I spent some time at London School of Economics.

MR. WATTENBERG: And then along the way you got married and had children?

MR. VOLCKER: A little bit later I got married, and had children, and so forth, a pretty orthodox life.

MR. WATTENBERG: About half of all Americans today own stock, and when you follow the stock market, as I sometimes do on the various cable channels, at least half the talk is about the fed, interest rates are up, interest rates are down, they're going to tighten, they're going to loosen. It sounds like the engine room of a ship. First question is, is the amount of attention paid to the role of the fed more than it deserves to be?

MR. VOLCKER: Well, I think that's probably true, yes, maybe particularly these days. The economy is pretty stable, it's obviously in very favorable conditions, the changes by my background have been very small and limited in policy, which has probably been a good thing, policy has been pretty steady. But, within the magnitudes of what we're talking now, and given the basic momentum of the economy, and the dominance of technological forces right now, I think the amount of attention given to the Federal Reserve probably is a bit excessive.

MR. WATTENBERG: What do they do down there? I mean, you were chairman for --

MR. VOLCKER: I ask that question myself once in a while, they don't move very fast.

MR. WATTENBERG: But, you're a former Chairman of the Fed for almost 10 years, is that right? What do you do?

MR. VOLCKER: When I was there, particularly in the beginning, we had a very rapid rate of inflation. We were trying to deal with that, and it got fairly exciting, and things were pretty volatile. But, there were a lot of regulatory problems, too. The banking system got in problems, the savings and loan got in problems. And when they get in trouble there are a lot of decisions that arise as to how to deal with the problem. Of course, you spend a lot of time testifying before Congress, if you want to know what you do, sometimes in a year.

MR. WATTENBERG: Well, that's the other thing. People say the Fed is independent, and then they say the president either is or is not 'putting pressure on the Fed' and then you have to go testify before Congress. When they 'pressure' you, the Fed, not necessarily you, but you keep reading that, why can't you just tell them to go fly a kite?

MR. VOLCKER: Well, legally you can. But, of course, you live in a big, turbulent democracy, and the Federal Reserve is a public institution.

MR. WATTENBERG: But, independent?

MR. VOLCKER: But independent.

MR. WATTENBERG: Purposely, I mean, designed to tell people to go fly a kite?

MR. VOLCKER: It's designed to be independent. Now, of course, you're appointed by the president, in the first instance, with the advice and consent of the Senate, like other government officials, which you have a fixed term, you can't be removed, except for cause. But, I think the independence of the Federal Reserve is a very valuable asset for the United States, the independence of the central bank is a very valuable asset for other countries. But, it's not written in the Bible, it's not even written in the Constitution. So you have to operate within what I think of as some broad range of what is acceptable, broadly, to the American people and the Congress. And you've got a lot of leeway, but you just can't be arbitrary, you've got to be able to explain yourself. In the end you've got to be credible, you've got to maintain the confidence of the public.

MR. WATTENBERG: Their ultimate threat, though, would be we will pass a law forcing you to do something, they can do that notwithstanding your independence?

MR. VOLCKER: Yes, they could do that.

MR. WATTENBERG: Have they done that?

MR. VOLCKER: No, they sometimes kind of threaten to, but they never do it. And there is a feeling, which I'm sure is true a lot of times, that Congress and politicians like to complain, but they really don't want to make the decisions themselves. Part of the reason you have an independent Federal Reserve is this kind of a recognition of let's stand back, this is a kind of controversial business, maybe we're better off sitting on the sidelines, rather than on the hot seat.

MR. WATTENBERG: Posturing and blaming Volcker or whoever.

MR. VOLCKER: I don't want to exaggerate, but there's some of that element in there.

MR. WATTENBERG: Now, you were appointed in 1979 by President Carter, a Democrat?


MR. WATTENBERG: Are you a Democrat?

MR. VOLCKER: I was sort of a Democrat. I don't know what I am now.

MR. WATTENBERG: Did Carter and his people try -- you immediately, as they say, whatever it means, slammed on the breaks. Inflation was running about 8 or 9 percent, something like that?

MR. VOLCKER: Well, it got up to 15, an annual rate of 15 percent.

MR. WATTENBERG: When you slammed on the breaks, in order to lower inflation, did President Carter or people in the Carter administration try to influence you and say, oh my God, you're throwing us into a terrible recession?

MR. VOLCKER: Well, they weren't necessarily terribly happy. But, I got appointed by Mr. Carter at a time when people were very uneasy about inflation, very uneasy about the economy. He had, ancient history now, gone up to Camp David to think about things, come down, made the great malaise speech, changed a few cabinet members, including Secretary of the Treasury. You know, there was kind of a sense in the country that there was a problem, an inflationary problem. You were put into a semi-crisis situation anyway, and dealing with it, they accepted it.

MR. WATTENBERG: They did accept it. I have heard that when the recession of '81-82 got really tough, it got down to, what did you have, 10 or 11 percent unemployment?

MR. VOLCKER: Yes, Reagan --

MR. WATTENBERG: And you were chairman at that time?


MR. WATTENBERG: Someone has said that the most important act of Reagan's presidency, or one of the top two or three, was when confronted with this situation he did nothing. Meaning, let Paul handle it.

MR. VOLCKER: I think there is credibility in that statement, I look at it from a particular perspective. But, I have no doubt they were very difficult times. Interest rates were very high, the economy was in recession for a while. There were a lot of complaints about the Federal Reserve and a lot of complaints coming out of the Treasury, and a lot of complaints coming out of the White House, without names attached to them. And some of it got pretty strong.

MR. WATTENBERG: So some of those Reagan people did put heat on you?

MR. VOLCKER: Well, they did indirectly by talking to the press or whatever. But, I always had the feeling that they undoubtedly at times prompted the president to say something at a press conference, or to say something to me directly, and he never really did. And why not, I just think he had a kind of a simple minded feeling that he was against inflation, the Federal Reserve was against inflation, we were trying to do something about it. It would be misinterpreted if he criticized us, and he never did. I mean, he may have come close at times, but he never did.

MR. WATTENBERG: He described the inflation, and many other people did, he said, we have been on a 30 year binge. What does that mean? There are all these terms, slam on the breaks, binge. What does that mean, we're on a binge?

MR. VOLCKER: Well, you know, there's no precise definition to that. But, what he meant was a lot of people thought we were spending more money than we had the ability to produce very easily, and we were not very disciplined in savings, we weren't very disciplined in consumption, and we let, among other things, inflation get ahead of us.

MR. WATTENBERG: Is inflation currently overstated? There was that whole Boskin Commission, and they said it's too high, the Bureau of Labor Statistics, lower it a little bit.

MR. VOLCKER: I have the cynical view that maybe it's understated.

MR. WATTENBERG: Is that what you think?

MR. VOLCKER: I think it's very hard. You know, you've go a loaf of bread or something you can measure it, you don't change a loaf of bread, is it going up in price. And if all the loaves of bread are going up in price you've got inflation. But, what do you do when something like medical care, a classic case, okay, the price of a hospital bed is way up. But, they say, you only have to stay there now four days instead of staying there a week or two weeks. You've got an expensive new drug, it has the potential of increasing your life, how do you price that? What value do you put on the possibility that your life is increasing? I'm taking the most difficult areas.

MR. WATTENBERG: I'm going to ask Paul Volcker, he must know the answer to that.

MR. VOLCKER: Well, there is no -- I think it all gets very fuzzy. And I am inclined to think we ought to put more emphasis on things you really can measure, recognizing that it's incomplete. The big question in the inflation area is how do you measure the quality of the computer? And computer prices, let's assume, are staying the same, nominally, but the computer operates twice as fast. So the assumption is, it must be twice as good as last year's computer. Therefore, the price is going down, the nominal price. So it costs $300 but your output is doubling. Is the output really doubling because the computer goes twice as fast? There are other limitations on how much you can use the computer.

MR. WATTENBERG: Pat Moynihan likes to say, there are always going to be four people in a string quartet. You can't get any more efficient in certain deals.

MR. VOLCKER: So there are some limitations no matter how fast, in this case, the computer can operate technically.

MR. WATTENBERG: How did you get interested in this whole field that many of us regard as arcane?

MR. VOLCKER: The whole field of economics?


MR. VOLCKER: I took a couple of courses in college that kind of intrigued me.

MR. WATTENBERG: At Princeton?

MR. VOLCKER: Princeton, yes.

MR. WATTENBERG: And then you went from there to where?

MR. VOLCKER: Well, I went to Harvard, but I --

MR. WATTENBERG: Did you study economics?

MR. VOLCKER: Well, I had a big debate as to whether to go to law school, or go to study economics, or go to study public administration. I ended up in what is now the Kennedy School. But, it was a very different school at Harvard then.

MR. WATTENBERG: What year are we talking about?

MR. VOLCKER: We're talking about 1949. Harvard Graduate School of Public Administration it was called then, which was really a combination of the Harvard government department, and Harvard economics department. And I took a lot of economics, but I was formally in the School of Public Administration.

MR. WATTENBERG: So do you have a Ph.D. in economics?

MR. VOLCKER: I never wrote the thesis.

MR. WATTENBERG: You never wrote the thesis?

MR. VOLCKER: I went abroad to write the thesis, but never wrote it.

MR. WATTENBERG: What was the thesis going to be on?

MR. VOLCKER: The thesis was going to be on comparing the transmission of monetary policy in Britain and in the United States, because Britain had a very different structure of the banking system. I went to London, and found London very intriguing, but I didn't write a thesis.

MR. WATTENBERG: And then you spent most of your career in the U.S. government?

MR. VOLCKER: I spent about 30 years either in the Treasury or the Federal Reserve, yes.

MR. WATTENBERG: You've made the point that the nature of government service, and the quality of people in government service has declined?


MR. WATTENBERG: You headed a commission on that, didn't you?

MR. VOLCKER: Yes, this is a preoccupation of mine, and I think it's gotten worse since the commission. I headed the commission when I left the Federal Reserve, and we had a very distinguished commission who studied this problem, and worried about it, and made some recommendations, which were very incompletely enacted, anyway. But, I think it's gotten worse. It's part of a whole malaise, to use that word, about government, I think. And I was brought up in an atmosphere of respecting government, respecting public servants, seems to me that's the way it should be. But, everybody is very cynical these days, including me.

MR. WATTENBERG: You know, there's a theory of history, I think, and if there isn't I'll invent one right now, which is that the people who were around 30 or 40 years ago were always so much better than the people that are now. These guys are just a bunch of turkeys, but back in the good old days. And I would guess that back in your good old days they were saying, wow, in the 1920s we really had people who cared. Yes, no?

MR. VOLCKER: I don't think that's true. I think there is a tendency to think of the good old days, they were always better. But, I think I grew up at a time, and served in government at a time that was unusual in American history. It was after World War II. We were king of the mountain, and we thought we had the answers to the problems around the world. We were going to make the world safe for democracy, and show them how to run economies, and run the system. Then that died down a little bit, you had Kennedy with all that enthusiasm that surrounded him. Then you had a feeling that government was constructive, and people working in it was a legitimate profession and an honorable profession. A lot of that has been lost.

MR. WATTENBERG: Except that you accomplished those goals, more or less?

MR. VOLCKER: Well, we accomplished some, anyway.

MR. WATTENBERG: The big ones.

MR. VOLCKER: Some of them.

MR. WATTENBERG: I mean, beat the Soviet Union, we're expanding democracy. I mean, it's been a pretty good half century.

MR. VOLCKER: Well, I agree with that.

MR. WATTENBERG: About a decade ago a professor of history at Yale, Paul Kennedy, wrote this book. And the phrase that captured the imagination was, America is not going to be number one anymore, and we have to learn how to manage our decline gracefully. Did you believe it then, do you believe it now?

MR. VOLCKER: Well, I worried about it. I wrote a book myself at the time with a Japanese friend of mine which raised that question a little bit, that was a time when we weren't feeling so good about the United States, a long period of sluggishness in productivity, and obviously concerns of that sort were a little premature to say the least.

MR. WATTENBERG: I mean, let's suppose the four tigers, or Japan, or whatever, suppose they had a higher GNP per capita, or a higher however you want to measure the economics of it, those are not competitors in national greatness to the United States, even if they make more money per capita. Why is that the index?

MR. VOLCKER: I think it's only one index, but those are small countries. The United States has a big mass. We're a big continental country.

MR. WATTENBERG: And a global culture?

MR. VOLCKER: And a global -- I think our culture is so relatively dominant. Our money is so relatively dominant, somehow it's a source of wonderment to me that you can wander around the world these days and the dollar has had its ups and downs in a technical sense, but it's just so widely accepted as a currency, so everybody is -- if it's not the number one currency in a particular country, it's always the number two currency. And that's a great reflection of the influence of the United States, the relative stability, not just GNP, but the relativity of our government, of our society, the force of the culture. But, you know, those things don't change very rapidly, but they can change. Ten years ago, and it was only ten years ago, if you were sitting here you would be talking about not the dominance in a cultural sense, but the economic success of Japan.

MR. WATTENBERG: Paul, just hold on for one minute, I want to talk to our viewers, we at Think Tank depend on your mail to make our show better. Please do take a moment and send us at email at thinktank@pbs.org.

Paul, there has been so much criticism of the way the government works now, you look back at the last ten years and the general comment has been there's not only this nasty bickering, but there has been gridlock, government doesn't work. And yet first here is this economy booming along. And secondly, you know, when you look back over the last 10 or 20 years, this fuddy-duddy government that does nothing but bicker has deregulated just about the whole damn economy. How bad is it?

MR. VOLCKER: Well, it's hard to argue with success. And in some ways the relative gridlock, the Congress under control of one party, the executive under control of another party, has prevented either side from doing things that might have been damaging, in my view. Republicans don't let the Democrats spend money, and the Democrats don't let the Republicans reduce taxes. The result is a wonderful surplus in the budget, as the economy grows, and it lends a certain stability to things. But, what worries me is there are a lot of things the government has to do, and should do. And just for sheer efficiency, for one thing, there are a lot of social problems, economic problems, environmental problems that I don't think are being dealt with as well as they should be. And there's a certain, coming out of my background, a certain lack of professionalism, a loss of continuity, a loss of experience, loss of really professionalism within the ranks of government.
MR. WATTENBERG: You felt by the time you left the Fed after 10 years, '79 to '88, you must have felt a great sense of satisfaction.

MR. VOLCKER: I felt -- yes.

MR. WATTENBERG: I mean, inflation was at about 15 percent and it went down to what?

MR. VOLCKER: The year before I left it went down to 1, temporarily, because the oil prices went down. But, it wasn't totally under control, but it was pretty much under control.

MR. WATTENBERG: Inflation in itself, of and in itself is a menace?

MR. VOLCKER: I think we've learned that, of course one of my fears now is, if you talk to someone under 35 they don't remember inflation, they don't remember any period when stock prices were going down instead of going up, and you get used to it, and you get relaxed. And I always have a concern if we get a little relaxed about inflation, because it's very difficult to deal with once it gets entrenched in thinking.

MR. WATTENBERG: When you were in the saddle you achieved a great deal of attention, but what's going on with Alan Greenspan now is another order of magnitude. What do you think of this process of lionization and constant attention, this drumbeat of minutia?

MR. VOLCKER: Well, it's exaggerated. But, you know, that's true of a lot of things, but maybe particularly true in this case. People forget the Federal Reserve is a rather complicated animal. It's almost inexplicable short of a three-hour session. But, there is a board, there are Federal Reserve Bank presidents around, the decisions are collective. And the chairman can certainly exercise disproportionate influence. And the more media attention he gets, that kind of helps the disproportion of the influence. But, the idea that it's entirely a one-man show is exaggerated.

MR. WATTENBERG: Let me ask a last question. There are people who say that the business cycle has ended. If we are, in fact, growing at 4 or 5 percent a year, it is plausible then to say that we're out of this thing of business cycles.

MR. VOLCKER: Well, if you grew at 4 or 5 percent a year forever.

MR. WATTENBERG: But, it gives you wiggle room to go down a couple of points.

MR. VOLCKER: Of course, certainly, you could argue you'd better go down the couple of points, because you can't sustain the 4 or 5 percent in a stable way. That's what the debate is all about, whether you can or whether you can't. And I'm a little skeptical. But, there may be things that tend to make the economy more stable. The typical, garden variety recession historically has been in so-called inventory recession. Companies build up more inventories than they really need. For some reason the economy slows a little bit, they want to dump inventories, production goes down, you have a recession. The older build factories, when they get a little ahead of the game something slows down, so they cut back on factories, you've got a recession.

The economy these days is less manufacturing, relatively, less inventories, partly due to computers and so forth, less investment in the kind of plant and equipment we just talked about, factories, machines, more investment in computers. Maybe this gives a more stable environment. So I think there are reasons to think that the business cycle in a modern economy maybe attenuated, maybe less frequent. But, I don't think it's going away.

MR. WATTENBERG: Okay. Paul Volcker, thank you so very much for joining us on Think Tank.

And thank you. We at Think Tank depend on your email to make our show better. For Think Tank, I'm Ben Wattenberg.

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