As usual, I have a scowl on my face

Here’s Karl Smith:

Volker’s clout on the FOMC grew the entire time and when he became Fed Chairman in 1979, he dropped the hammer.

.  .  .

The Fed drove the funds rate up from 5% in 1976 to 19% in 1981. I know, I know, Scott Sumner is scowling. Here is the growth rate of NGDP over the same period.

.  .  .

Trending upwards, towards 15%, through the 60s and 70s. Pausing in 1976 and then in two big slams going all the way to a low of 3% in 1982.

I don’t think many people doubt that the policies of the Volcker Fed drove interest rates up and inflation rates down during the early 1980s, but since the general topic of government debt is so contentious its worth reviewing.

I certainly “doubt that.”  The increase in the fed funds rate from 5% in 1976 to 19% in 1981 was caused by easy money policies of Burns, Miller and Volcker, as I explain in this post.  NGDP growth peaked at 19.2% in 1980:4 and 1981:1.

Then in the spring of 1981 Volcker got serious about inflation.  The Fed adopted a tight money policy, and NGDP growth, inflation, and nominal interest rates all began declining, a process that would continue for decades.



16 Responses to “As usual, I have a scowl on my face”

  1. Gravatar of John John
    4. May 2013 at 21:27


    Where are you getting these numbers? Since FRED doesn’t offer straight Nominal Gross Domestic Product, I looked at Final Sales (probably the best proxy for NGDP), Nominal Potential Gross Domestic Product, and Gross Domestic Product. I’ve seen you use Gross Domestic Product in your graphs and since it doesn’t specify real, I assume it refers to nominal. In this graph, none of these proxies for NGDP ever broke above 15% during the period concerned. Even giving you the benefit of the doubt by using Potential Nominal GDP doesn’t get there.

    Looking at CPI and adding real GDP doesn’t work either. In the period you’re discussing, specifically 1980:4 and 1981:1, inflation peaks around 15% as real GDP goes negative.

    Do you have a different source of information that you rely on or were you using some other measurement than percent change from year ago?

  2. Gravatar of Benjamin Cole Benjamin Cole
    5. May 2013 at 01:45

    Excellent blogging.

    You know, today economists often sneer at the 1960s (when real per capita incomes rose by 30 percent) as “having led to inflation.”

    Actually, it was Fed Chief Arthur Burns in the 1970s who concluded that the Fed was powerless against inflation, due to large market makers in labor, retailing, manufacturing, and OPEC. Price stickiness to the max. Burns thought tight money would lead only to declines in real output, while prices rose anyway.

    Burns’ stance led to the double-digit inflation of the 1970s and higher interest rates—but no hyperinflation. And it was an era when half of the labor force was unionized, and trade was only 10 percent of GDP. Those figures are about reversed now, btw. Much less inflationary picture.

    And deregulation has come to transportation (rails, trucks, airlines), banks (Reg Q), telephones, etc.

    The economy is far, far less inflation-prone that in the 1970s. This is an important fact! But even then, with a totally loose Fed, we did not get hyperinflation, only low double digits.

    The lesson from the 1960s and 1970s is not that the 1960s boom-times led to inflation, it is that a clueless Burns made sure we had inflation in the 1970s.

    We can have boom times again, probably this time with moderate inflation at the worst.

    That is what economists and Market Monetarists should be telling America. Not that we must suffer.

    Japan tried suffering. It does not work.

  3. Gravatar of Bill Woolsey Bill Woolsey
    5. May 2013 at 02:15


    Gross Domestic Product _is_ nominal Gross Domestic Product.

    Real Gross Domestic Product has the modifier “real.”

    Nominal GDP is second on the list on the FRED site.

    Again, GDP = NGDP.

    When the BEA gives its press releases, it starts off on the growth rate of real GDP. But still, GDP = NGDP.

  4. Gravatar of Saturos Saturos
    5. May 2013 at 04:31

    Greg Mankiw links to this IMF Direct piece by David Romer, “Preventing the Next Catastrophe: Where do We Stand?

    “Concerning monetary policy, inflation targeting appeared to be a wonderful framework for its first fifteen or twenty years. But we have now had an extended period where it has shown itself incapable of providing aggregate demand at the level that is widely recognized to have been needed. So it seems important to think about whether we should have a different framework for monetary policy. But again, progress has been minimal. The idea of targeting a nominal GDP path has been mentioned on and off for a few years, but the debate has not proceeded to serious quantitative analysis of its costs and benefits and of whether it could make the economy substantially more resilient. And other ideas for significant changes in the monetary policy framework have been discussed even less.”

  5. Gravatar of ssumner ssumner
    5. May 2013 at 04:57

    John, Fred most certainly does have nominal GDP, and I used quarterly changes at an annual rate.

    Bill, That’s right.

    Saturos, Thanks for the link.

  6. Gravatar of Jeff Jeff
    5. May 2013 at 05:34

    The Volker Fed targeted nonborrowed reserves, not the federal funds rate.

  7. Gravatar of John John
    5. May 2013 at 06:29

    Bill and Scott,

    That’s what I thought. Gross Domestic Product on FRED is Nominal Gross Domestic Product. Neither of you addressed my point that NGDP never reached 19% in any quarter. In fact the graph never shows it going above 15%.

    Again, where are you getting these numbers?

  8. Gravatar of marcus nunes marcus nunes
    5. May 2013 at 08:08

    This post charts the ‘right’ numbers, calculated not as annualized quarterly growth but year on year growth:

  9. Gravatar of Geoff Geoff
    5. May 2013 at 11:06

    M3 fluctuated wildly in the late 1970s and early 1980s.

    M3 rapidly increased 1980:4 and 1981:1, right around the time NGDP rapidly increased.

  10. Gravatar of John John
    5. May 2013 at 12:02


    As your charts show, when you calculate it with year on year growth, the numbers are lower than percent change from year ago done quarterly. Using frequency: annual and units: percent change, the highest reading is 13% in 1978.

    Either way, the 19% number in this post appears incorrect.

  11. Gravatar of John John
    5. May 2013 at 12:04

    Just for reference, here’s the chart done as Scott said using nominal GDP quarterly changes at an annual rate. My case stands.

  12. Gravatar of JJriverrun JJriverrun
    5. May 2013 at 14:19

    The data Prof Sumner used are

    ie. 1980-07-01 2785.2
    1980-10-01 2915.3
    1981-01-01 3051.4

  13. Gravatar of ssumner ssumner
    5. May 2013 at 14:32

    Jeff, There’s some dispute about that, but it doesn’t affect my argument.

    John, Yes, I did answer your question, read my answer again.

    Thanks JJriverrun, that’s the data I used. That is a 19.2% growth rate, annualized.

  14. Gravatar of John John
    5. May 2013 at 19:28


    The graphs don’t show 19.2% no matter which “Units” on FRED you use. The closes to this number comes from using continuously compounded annual rate of change but this looks more like 18%. Is there anyway to create a graph using FRED’s units that shows 19.2%?

  15. Gravatar of John John
    5. May 2013 at 20:07


    Let me clarify.

    The percentage change in this list is ((3051.4-2915.3)/2915.3))*100=4.668%. To get the annualized rate without quarterly compounding, ((3051.4-2915.3)*4)/2915.3))*100 = 18.67%. To get the compounded annual rate of change (which comes out to around 20% on FRED), take 2915.3(1.04668)^4 = 3498.9598. Then take ((3498.9598-2915.3)/2915.3))*100= 20.02%. Both these numbers appear correct based on a visual check of the FRED graphs as well. How exactly did you come up with 19.2%?

  16. Gravatar of ssumner ssumner
    6. May 2013 at 05:38

    John, Take the 6 month change, annualize.

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