How Ronald Reagan (Not to Mention Republicans, Conservatives and the Wall Street Journal Editorial Board) Learned to Stop Worrying and Love Moderate Inflation

In my previous post, I pointed out that inflation (measured by both the GDP price deflator and the Personal Consumption Price Index) in the fourth quarter has fallen back to a level well below the Fed’s 2% target.  Indeed, it is running at nearly the lowest rate since the end of World War II. Later, when reading this post by Noah Smith commenting on this post by John Taylor’s (also see Taylor’s op-ed in the Wall Street Journal), it occurred to me that, viewed from the perspective of the current rhetoric about sound money and proposals to eliminate the dual mandate of the Fed and impose on the Fed a single unambiguous mandate of maintaining price stability, it is hard to understand why some people are so harshly critical of Mr. Obama’s record as President. If price stability is really the alpha and omega of monetary policy, then, based on his success in keeping inflation low, shouldn’t Mr. Obama be rated the most economically successful President in living memory?

If, despite President Obama’s stellar record in suppressing inflation – either directly or through his re-appointment of Ben Bernanke as Fed Chairman — is not enough to mollify the critics who loudly assert that the only macroeconomic objective of the Federal Reserve Board should be to ensure price stability, doesn’t that suggest that they actually care about more than price stability and that calls for the Fed to stop paying attention to anything but the rate of inflation are perhaps less than 100% sincere?  After all, inflation is lower now than it was during the administration of Ronald Reagan, and aside from his reputation as the quintessential Conservative, Reagan is also viewed as the slayer of inflation and the very paragon on a sound money man.  So I thought that it might be useful to go back and see what the Reagan administration itself had to say about inflation while it was in office.

So herewith I provide a few excerpts from the  Annual Reports of the Council of Economic Advisers published in the Economic Report of the President during the Reagan Presidency.

Economic Report of the President 1984

The tendency toward a slight increase in inflation over the year was also registered by the producer price index. Over the 6 months ending June, the index for total finished goods fell at annual rate of 0.9 percent,but over the second half of the year this index rose at 2.0 percent annual rate. Even so, inflation by this measure was lower than that in the recession phase of the cycle. The GNP implicit price deflator, the broadest measure of inflation, rose by 4.0 percent over the four quarters of the year. (p. 190)

The gradual reduction in inflation assumed by the Administration does not depend on a policy assumption that such a result will be “forced” by deliberate actions to choke off economic growth whenever there is any sign of a rise in inflation. Rather, the decline in inflation is the anticipated outcome of the assumed steady and predictable monetary and fiscal policies. As with real growth, it is expected that inflation may sometimes be higher and sometimes lower than the Administration assumption, but that the trend will be downward as indicated. (p. 199)

Economic Report of the President 1985

Although it is common for inflation to fall somewhat during the early stages of business cycle recoveries, few observers anticipated that the inflation rate would remain so low during a recovery as rapid as that experience in 1983-84. The inflation rate rose slightly in the second half of 1983 and early 1984, but there was no apparent tendency for the rate to rise further. Indeed, over the course of 1984 the inflation rate declined somewhat. However, inflation is still higher than desireable, and it worth noting that the services component of the CPI in 1984 showed some signs of slightly rising inflation. (p. 44)

The inflation outlook for 1985 is good. With moderate expansion in the money aggregates and continuing real growth, the inflation rate, as measured by the GNP deflator, is expected to average 4.3 percent over the four quarters of 1985. (p. 62)

Economic Report of the President 1986

After being lower than expected in 1985, the inflation rate, as measure by the GNP deflator, is expected to rise somewhat in 1986. Rapid monetary growth throughout 1985 as well as the depreciation of the dollar are expected to place upward pressure on prices. The projected rise in near-term inflation, however, is expected to be temporary, provided that a policy of gradual money-growth reduction is pursued. (p. 23)

The unsatisfactory economic performance associated with the rise of inflation and the adjustment problems that arise during disinflation provide a clear lesson: reacceleration of inflation must prevented. The surest way to avoid the costs of both inflation and disinflation is to avoid the policies that lead to an acceleration of inflation. Moreover, the experience of the past 3 years has indicated that substantial economic growth can occur without rekindling inflation. (p. 70)

Economic Report of the President 1987

More than 4 years of economic expansion, with the inflation rate remaining near or below 4 percent and interest rates declining to their lowest levels in 9 years, have laid te foundation for sustainable real growth with moderate inflation. (p. 19)

The inflation rate is 1987 is forecast to return to the 3.5 to 4 percent range of recent years, before the decline in oil prices temporarily depressed the inflation rate in 1986. Specifically the GNP deflator is forecast to rise at a 3.6 percent annual rate during 1987, after a 2.2 percent rate of increase during 1986. (p. 58)

Economic Report of the President 1988

Higher oil prices and higher import prices increased the 1987 inflation rate (as measured by the CPI) above the very low rate recorded in 1986. Higher import prices also are expected to contribute to consumer price inflation in 1988. However, after a year of slow growth of monetary aggregates, and in view of the expected slowing of real economic growth, acceleration of inflation is not seen as a likely danger in 1988. On a fourth-quarter to fourth-quarter basis, the CPI is forecast to rise 4.3 percent in 1988, a small decline from the rise in 1987. The GNP deflator, which is not affected directly by import prices, is forecast to rise 3.9 percent in 1988. (pp. 48-49)

Economic Report of the President 1989

An important legacy of this Administration is the refocusing of economic policy. The Administration deemphasized short-run stabilization policies; worked to provide a stable policy environment with market-based incentives for productive behavior, including low inflation; and attempted to extricate private markets from burdensome regulations. The strength and durability of the current expansion bear testimony to the soundness of these policies. In December 1988, the current economic expansion entered its seventh year, making it the longest peacetime expansion and the third longest on record. Most impressively, the inflation rate has not risen during this expansion, but has remained in the neighborhood of 3 to 4 percent. (pp. 258-59)

So it seems that President Reagan and his economic advisers thought that they were doing well to keep inflation at 4 percent a year.  Sure, they would have liked to get the inflation rate down a  bit, but they weren’t prepared to risk even a slowdown in the rate of decrease in unemployment to reduce inflation, much less tolerate any increase in the unemployment rate.  Promised reductions in the rate of inflation below the steady 3.5-4% rate that prevailed for the most part after the recovery started in 1983 just kept getting deferred further and further into the future.  Is that a record that John Taylor would like the next President of the United States to emulate?


11 Responses to “How Ronald Reagan (Not to Mention Republicans, Conservatives and the Wall Street Journal Editorial Board) Learned to Stop Worrying and Love Moderate Inflation”

  1. 1 Frank Restly January 29, 2012 at 8:30 pm

    “After all, inflation is lower now than it was during the administration of Ronald Reagan, and aside from his reputation as the quintessential Conservative, Reagan is also viewed as the slayer of inflation and the very paragon on a sound money man.”

    I think you have Reagan confused with another guy by the name of Paul Volcker.


  2. 2 Benjamin Cole January 30, 2012 at 8:48 am

    Excellent blogging.

    The WSJ actually called for Volcker to ease up when inflation sank below 5 percent, and many Reaganauts wanted Volcker not to be re-appointed. They thought he was too tight.

    Forgotten today is that Volcker was actually a Carter appointee, and then re-appointed (barely) by Reagan. Ronald Reagan chose not to re-appoint Volcker a second time.

    Yes, Obama has wrested the (dubiously-applied) title of “Inflation-Fighting King” from Reagan hagiographers.

    If the GOP solon Taylor was sincere, he would rave about the successful combo of Bernanke and Obama, who have steered us out of the Great Bush jr. Recession and brought inflation to zero.

    In fact, I think Obama and Bernanke (mostly Bernanke) have flubbed seriously, Obama by relying on fiscal policy, and Bernanke by fixating on inflation.

    But Taylor is a wonder. inflation is at zero–Taylor should be exultant. Perhaps he is just disoriented by the euphoria and ecstasy he feels at this supreme accomplishment. Zero inflation! Nirvana!


  3. 3 David Pearson January 30, 2012 at 8:59 am

    I think you are missing the point that (some) critics of the Fed are making. It is not that inflation today is unacceptably high, but that the Fed is creating material risk of very high inflation in the future.

    Ask yourself the question: “what are the preconditions that are necessary to create future high and variable inflation?” One set is as follows:
    -persistently high budget deficits and high debt/gdp
    -negative real interest rates
    -stagnant/weak economy and high unemployment

    Those preconditions restrain the central bank from creating positive real rates in response to accelerating inflation. If the central bank attempted to do so, out-year deficit projections would blow out, and the resulting term premium would create yet higher unemployment, which would lead to yet higher deficit projections, etc…This is known as the “debt doom loop”. The only solution to that problem is 1) allow inflation to accelerate; or 2) don’t get into the problem in the first place.


  4. 4 Luis H Arroyo January 30, 2012 at 11:51 am

    Very good. I quote you in my blog.


  5. 5 David Glasner January 30, 2012 at 1:57 pm

    Frank, Actually I can tell them apart quite well. Volcker is a lot taller, and Reagan had a lot more hair. I said “Reagan is also viewed as the slayer of inflation and the very paragon of a sound money man.” I was not speaking for myself, but for those who hold his memory sacred. In fact, they are not entirely mistaken on that point. If go back and check, Volcker became Fed Chairman in 1979. Volcker did not make a dent in inflation for the first two years of his chairmanship; it was only after Reagan became President that Volcker had the political backing he needed to pursue the anti-inflation strategy that he wanted to implement. So Reagan was hardly irrelevant. But I have no desire to apportion the credit between them.

    Benjamin, I remember that by 1987, the relationship between Volcker and Regan had soured, but I was not aware (or have forgotten) that there was any sentiment for replacing Volcker within the Reagan administration. I have no theory to explain Taylor’s policy utterances since Obama took office. I don’t understand his position.

    David, You make a valid point. However, given the current state of the economy, it just seems that the risk that future inflation would spin out of control is being greatly exaggerated compared to the potential for increasing growth and employment by tolerating a temporary increase in inflation above the Fed’s (in my view) arbitrary target. In my view increased inflation (along with increased nominal GDP growth) eliminate or at least ameliorate all three of the preconditions that you cite.

    Luis, Thanks.


  6. 6 Lars Christensen January 31, 2012 at 5:35 am

    David, why not accept the call for “price stability”? We John Taylor will go along accepting two conditions. 1) We only talk about the inflation caused by the Fed – demand inflation. 2) We talk the price LEVEL. Then the Fed would be targeting what I have called a Quasi-Real Price Index (QRPI). The QRPI measured from PCE is at the moment 10% BELOW pre-crisis 2% growth path. If John Taylor is serious about price stability he should be arguing for massive monetary easing!

    See my QRPI here:


  7. 7 Will January 31, 2012 at 6:33 pm

    Excellent post! On the question of Reagan’s relationship to Volcker, my point of reference is Bob Woodward’s book Maestro (which I cannot recommend, but which I do trust as far as the gossip about scheming and backstabbing go). According to Woodward’s sources, the administration put frequent pressure on Volcker to lower interest rates, and there was a clique within it that viewed Volcker as a disloyal saboteur, and ultimately won his ouster. The fact that Greenspan’s lowering of the inflation target, and his influence on congressional policy occurred later, under the Clinton administration, also suggest a relatively inflation-friendly Gipper.

    The fact that the frame of reference for most people is A) Zimbabwe/Weimar, and B) the 70s, when inflation was accompanied by counterproductive wage and price controls, distorts the public’s view. We lack media that highlight the *good* side of inflation.


  8. 8 David Glasner February 1, 2012 at 1:55 pm

    Lars, I am not sure that I agree with the implementation of your QRPI, but I basically agree with your point, though I also think that there is a case for inflation just to strengthen household balance sheets and to punish the banks.

    Will, Thanks for the added background. When Greenspan was appointed to be Fed Chairman, my own fear was that he would turn out to be another Arthur Burns, who, like Greenspan, had a long history as an economic adviser to Republican Presidents and Presidential candidates, and turned out to be a willing (or perhaps not-so willing) tool of Nixon’s inflationary strategy for re-election in 1972. Greenspan turned out to be a better political operator and Fed chairman than Burns, but he didn’t have to match up against Nixon.


  1. 1 Economist's View: Links for 2012-01-30 Trackback on January 30, 2012 at 12:07 am
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About Me

David Glasner
Washington, DC

I am an economist in the Washington DC area. My research and writing has been mostly on monetary economics and policy and the history of economics. In my book Free Banking and Monetary Reform, I argued for a non-Monetarist non-Keynesian approach to monetary policy, based on a theory of a competitive supply of money. Over the years, I have become increasingly impressed by the similarities between my approach and that of R. G. Hawtrey and hope to bring Hawtrey’s unduly neglected contributions to the attention of a wider audience.

My new book Studies in the History of Monetary Theory: Controversies and Clarifications has been published by Palgrave Macmillan

Follow me on Twitter @david_glasner


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