George P. Shultz was interviewed recently in the Wall Street Journal. In the piece he was described as follows:
George Shultz has one of the most preposterously impressive résumés in recent American history. World War II Marine (1942-45); distinguished academic economist; business executive; secretary of labor (1969-70); director of the Office of Management and Budget (1970-72); secretary of the Treasury (1972-74); chairman of Ronald Reagan’s economic transition team; and the secretary of state (1982-89) who wound down the Cold War.
Robert Pollock wrote the article which delves into many of our current problems and how Shultz believes they might be solved. The following excerpt deals with what I believe is the biggest obstacle to a solution — political cowardice. Ronald Reagan, whether you liked him or not, had principles and governed by them rather than pandering for votes:
“It took long-term thinking,” Mr. Shultz emphasizes. “I’ll give you an example. [Reagan] knew and we all advised him you can’t have a decent economy with the kind of inflation we’ve got. . . . The political people would come in and say ‘You’ve got to be careful, Mr. President. There’s gonna be a recession [if the Federal Reserve tightens the money supply]. You’re gonna lose seats in the midterm election.’
“And he basically said, ‘If not us who? If not now when?’ And he held a political umbrella over [Fed Chairman] Paul Volcker, and Paul did what needed to be done. And by late ’82 early ’83, inflation was under control, the tax changes that he made were kicking in, and the economy took off. But it took a politician with an ability to take a short-term hit in order to get the long-run results that we needed.”
The commitment to stopping inflation was not a minor one. Inflation was in the high teens and interest rates were above 20% when Reagan took office. The conventional wisdom (and political advice) was that it would take ten years to bring inflation down. Reagan and Paul Volcker (a Carter appointee) didn’t believe that and set about to bring it down immediately. The Fed’s “cold-turkey” policy did just that, although at the cost of a deep (but short) recession. Reagan knew economics (he was a closet Austrian) and knew politics. He knew the risks he was taking.
The actions taken by Reagan, Shultz and Volcker were a true “profile in courage.”
I see no one in either party who would be willing to do what Reagan did. Ultimately his greatness was that he was willing to stand on principles and “to take a short-term hit in order to get the long-run results that we needed.” Fortunately his principles were correct, he had a good supporting cast and he stayed the course.
Until those qualities can be found again, this economy will continue in the doldrums (like Japan which is into its third decade of malaise) unless financial collapse occurs first.