Nearly Embraced Reagan's Political Transformation by Carter
Nearly Embraced Reagan's Political Transformation by Carter
The accolades for President Carter credit him greatly for appointing Paul Volcker as chairman of the Federal Reserve in August 1979. The grueling period of stagflation, marked by three consecutive years of double-digit inflation (1979-1981) amid a recession, allegedly met its match on the inflation front, thanks to Volcker's Federal Reserve taming inflation during the 1980s under President Reagan. Reagan handled the stagnation side via tax cuts and military spending increases. But the conventional wisdom is up for debate.
Critics argue that Carter's appointment of Volcker is excessively praised as a historical turning point. The Federal Reserve was ineffective in driving productive policies while taxes remained high (top rate at 70% throughout the 1970s) and the dollar abandoned the gold standard in 1971. The global panic over the dollar's instability rendered all monetary policies ineffective during the '70s. Discussing Arthur Burns, William Miller, and Volcker as successive Federal Reserve chairmen from 1977 onward is pointless as no one valued the dollar.
Volcker's success in the 1980s – on the inflation front – can be attributed primarily to one transformative development: drastic tax cuts. The capital gains rate dropped from 49% to 20%, the top income rate slid from 70% to 28%, and the corporate rate plummeted from 48% to 34%. The income tax code was adjusted for inflation, and depreciation reforms were instated. These changes occurred during the 1980s. With low tax rates, it was effortless to manage monetary policy. Supply money, and people would flock to obtain it as the post-tax return on income and investment surged. Even if Volcker had been a poor Fed chair, his ineffectiveness would have been irrelevant in the '80s. If the Fed had been overly stringent or loose, there would have been ample capital to finance the Reagan Revolution and counter the Fed's policies.
Inflation subsided in the 1980s due to, in part, tax cuts that rendered it highly profitable to employ dollars productively. Once you earned money, you kept it. This dampened demand for hedges against the dollar, which helped extinguish inflation. Yes, yes, Volcker gained control of the Federal Reserve board, shifted to price targeting, and was committed to eliminating inflation. However, the Reagan tax rate cuts were pivotal.
The Reagan tax cuts (which Carter could have signed in October 1978) would have significantly decreased inflation had Carter not vetoed the bill in House-Senate conferences that reshaped the details. The Oct. 1978 bill included a 30% across-the-board income tax cut and a reduction in the capital gains tax rate, which passed both Houses comfortably. Had Carter signed the bill, it would have resulted in a surge in the dollar's value from November 1978 until 1985. The tax rate reduction set the stage for investors to be drawn to the dollar.
Had Carter not blocked the passage of the tax bill, it is plausible that inflation would have decreased in 1979 instead of spiking to 11%. The bill included spending triggers that would have hindered implementation, so there is a chance that markets and the economy would not have taken it seriously. The immediate 60% cut in property taxes in California's Proposition 13 in June 1978 suggested that the real world favors drastic, unconditional tax rate cuts. This would have sparked a substantial inflow of investment.
If Carter had signed the full tax bill in October, coupled with sternness about spending, he would have had three years of 10% tax rate cuts in 1979-1981, as well as the capital gains tax cut, which would have caused inflation to implode – the allure of productive activity with dollars would have been too compelling. Ignore Volcker.
Carter's significant deregulation of industries contributed substantially to the 1980s disinflationary boom, along with the 1978 capital gains tax cut (which Carter reluctantly approved). Discussing Volcker as the main catalyst overlooks the grandees in favor of the real drivers of change. The tax rate cuts implemented from 1978 and continued under Reagan, combined with deregulation, transformed an environment hostile to inflation.
- Despite the praise for President Carter's appointment of Paul Volcker as Fed chair in 1979, some critics argue that the Federal Reserve was ineffective during the 1970s due to high taxes and the abandonment of the gold standard.
- Volcker's success in taming inflation in the 1980s can be attributed in part to significant tax cuts under President Reagan, which saw the capital gains rate drop from 49% to 20%, the top income rate slide from 70% to 28%, and the corporate rate plummet from 48% to 34%.
- Had President Carter signed the tax bill in October 1978, including a 30% across-the-board income tax cut and a reduction in the capital gains tax rate, inflation would have likely decreased in 1979 instead of spiking.
- Carter's deregulation of industries also played a significant role in the 1980s disinflationary boom, as it transformed an environment hostile to inflation by encouraging productive activity and investment.
- The Reagan Revolution, with its emphasis on tax cuts and deregulation, created a favorable environment for managing monetary policy, making inflation easy to control even if the Federal Reserve had been ineffective.