Leaning against What Inflationary Wind?

Abstract

After a dozen years of structural budget deficits and low private sector saving by U.S. families and corporations, economic history and economic science concur in the diagnosis that monetary policy rather than fiscal policy should be the major macroeconomic weapon for assuring a healthy 1993-96 recovery and for restoring the share of capital formation in the American economy. The last five years will go down in the textbooks of economic history as a period of disappointing performances by central banks. America's central bank, the Federal Reserve, began the decade of the 1980s with a stellar report card. Under Chairman Paul Volcker, from 1979 to 1982, remarkable progress was made in wringing out of our economy the double-digit stagflation that had built up in the 1970s. Then in 1982 and 1983, as I shall describe for its peculiar relevance today, the Fed fired up the American locomotive in a prudent way, leading the United States and the global economies into a needed expansion. Again, in the epoch when Chairman Alan Greenspan took over the helm from Paul Volcker, the nasty stock market crash of October 19, 1987 was brilliantly addressed by well-timed and judicious central bank support. What began as a potential worldwide disaster, fully as perilous as the October 1929 Wall Street Crash, by good policy and good luck was contained from being the prelude to serious recession.