The Volcker shock looms large in the mythology of central banking: the moment when neoliberal Zeus slew the old economic Titans standing in the way of progress. Volcker’s rate hikes sent the US economy into the worst recession since the Great Depression during the early 1980s, but it eventually recovered into what’s called the “Great Moderation”: a more than three-decade stretch when inflation seemed banished even as economic growth returned.
Powell’s Fed has raised interest rates throughout 2022, and looks like it wants to channel Volcker, at least in spirit. But this “great man” story of inflation-fighting that gives the credit for stable prices to technocratic central bankers fiddling with interest rates leaves out a good deal of context that explains not only why inflation cratered, but why it stayed down.
Central bankers can engineer a sudden shortage of credit, but they can’t necessarily address knottier distributional questions, like whether workers should have the legal means to demand higher wages. Nor can they build the systems and infrastructure that increase productivity and access to cheap stuff, which are the product of decades of investment and coordination.
In other words: The monetary tightening inaugurated by Volcker was one part of an entire deflationary policy repertoire that also included union-busting and the creation of a global supply chain to hold down the costs of labor, components, and commodities.
Neither of those options outside the realm of monetary policy is really available right now. While wages have risen, unions aren’t the real force pushing up pay anymore. And the global supply chain that gave us cheap imports from anywhere in the world is part of the problem: It’s currently breaking down. The Fed might be able to choke off credit to slow investment and job creation, but it can’t create the real-world political, legal, and logistical systems that in the past have kept prices down even amid economic growth.
To truly tame prices, we can’t just turn off the money hose. We have to plan for more concrete long-term solutions to a lack of labor, commodities, and goods.