Enter Volcker. He suppressed inflation the old-fashioned way: through tight, punishing credit. Banks’ interest rates to prime customers topped 20 percent; home mortgage rates rose to 15 percent. The economy dived. The monthly unemployment rate peaked at 10.8 percent, still the highest since the Great Depression. Though widely vilified, Volcker maintained the credit squeeze to purge inflationary psychology: the belief by workers and firms that they could raise wages and prices with impunity. Volcker was supported by Ronald Reagan; no other plausible president, Republican or Democrat, would have permitted Volcker to continue austerity until it achieved its goal.
By the summer of 1982, this seemed within sight. Volcker relaxed credit. That year, inflation was less than 4 percent, down from 13 percent in 1979. The subduing of double-digit inflation triggered a 25-year economic boom. As important, it demonstrated that government could govern. Seemingly intractable problems (in 1980 runaway inflation was the country’s No. 1 problem) could be mastered.
The problem, of course, is real. Polls are unambiguous. At the end of the Eisenhower administration in the late 1950s, nearly three-quarters of Americans said they trusted the government to “do what is right” all or most of the time. Now that’s only 26 percent, according to a Pew survey done in January. To be sure, some gloom reflects the prolonged economic slump. Specific events also have depressed trust: the war in Vietnam; Watergate and President Nixon’s resignation; President Clinton’s impeachment; the wars in Iraq and Afghanistan.
But these familiar explanations don’t really explain the confidence collapse. With the exception of the immediate aftermath of the Sept. 11, 2001, terrorist attacks, the trust index has been below 50 since the early 1970s. It jumps around — it doubled after the Volcker/Reagan victory over inflation — but has never approached its previous highs. Something more pervasive has occurred. Our political system has changed. Rather than admit this, many Americans blame the actors. In the Pew poll, 56 percent of respondents agreed with this statement: “The political system can work fine, it’s the members [of Congress] that are the problem.”
On the contrary, it’s not the people; it is the system.
Since World War II, American government has assumed more responsibilities than can reasonably be met. Some are unattainable; others are in conflict. Government is, among other things, supposed to: control the business cycle, combat poverty, cleanse the environment, provide health care, protect the elderly, subsidize college students, aid states and localities. There are more. Most are essentially postwar commitments. As I’ve written before, government becomes almost “suicidal” by pervasively generating unrealistic expectations. The more people depend on it, the more they may be disappointed by it.
Unfortunately, political leaders find it almost impossible to confront government’s over-commitment. They find it difficult to withdraw or modify promises previously made and programs previously created — to define what really matters and discard or shrink what’s secondary, outdated or ineffective. In the budget debates, spending cuts have mostly involved across-the-board changes that exempt Congress or the White House from making explicit decisions about which programs to favor and which to reduce or dismantle. Everything, or almost everything, is preserved. This may spread the pain in ways that are politically expedient in the short run while making government less effective in the long run. It will not resuscitate trust.
We come full circle to Volcker. What he’s creating is an institute that will focus on the “nuts and bolts” of implementing policies effectively: for example, having better-trained bank examiners. Although this cannot hurt, it’s not the essence of our problem, which is being more rigorous about defining what government can and should do. Democracies must have the capacity to take actions that, though unpopular and painful in the present, are desirable for the society’s ultimate well-being. This defined the triumph of Volcker and Reagan in the 1980s. It’s conspicuously missing today.