Election 2008

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J. Pat Carter/AP
Former Federal Reserve Board Chairman Paul Volcker looks on as Democratic presidential
candidate Barack Obama, D-Ill., speaks during an economic summit, Tuesday, Oct. 21,
2008, in Lake Worth, Fla.

Volcker and Obama: A Balanced Economic Partnership

October 22, 2008 03:45 PM
by Anne Szustek
Former Fed Chief Paul Volcker has emerged as a key economic adviser to Barack Obama, a position that could assuage economic conservatives.

Paul Volcker Joins Obama “Rock Star” Tour

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Volcker, associated by many with the boom economy of the 1980s, appeared with Democratic presidential candidate Barack Obama on Tuesday at a roundtable discussion with voters in Florida, along with Google CEO Eric Schmidt and Democratic governors from battleground states.

Volcker was an early signee onto the Obama camp—literally. His endorsement of the Illinois senator, granted in January, during the height of the Democratic primary against N.Y. Sen. Hillary Clinton, was written in longhand.

Once Obama became the official Democratic presidential nominee, he increasingly consulted Volcker for financial advice. Austan Goolsbee, Obama’s economic adviser and fellow University of Chicago faculty member, saw an increase in emails from campaign aides and strategists asking for Volcker’s phone number. It’s just as well that the former Fed chief and Obama chat via cell phone—Volcker does not have a computer, his assistant prints out his emails for him.

According to The Wall Street Journal, Obama’s first major campaign speech on the economy, given at New York’s Cooper Union in March, was speckled with “Mr. Volcker’s fingerprints.” In a policy plug reminiscent of Volcker’s early 1980s meetings with the Fed, Obama in his speech called for a “revamped” regulatory framework and pointed to deregulation as a cause for the economic slump, both hallmarks of Volcker’s drives while Fed chief.

Key Player: Paul Volcker (1927–)

The former Fed chief commands cachet from both sides of the aisle. Originally tapped in 1979 for the Federal Reserve’s top spot by President Jimmy Carter to deal with the stagflation that characterized the 1970s economy, he was reappointed by President Ronald Reagan in 1983. Stagflation occurs when an economic downturn overlaps with a period of high inflation. The phenomenon is difficult to deal with, as inflation and stagnation call for conflicting remedies.

Economists have given a mixed review to his legacy. In a move to stabilize the inflation side of stagflation, he sharply increased interest rates. Critics of the move argue that the subsequent decrease in money supply aggravated the stagnation side in stagflation, however, and was the cause of the recession in the early 1980s—the country’s deepest since the Great Depression.

Tamny, a Republican and supporter of supply-side economics, which favors tax cuts to spur production and subsequent economic growth, was quoted as saying by The Wall Street Journal, “Volcker whispering in Obama’s ear will make even Republicans comfortable, because he’s a hero of the right and a supporter of a strong dollar.”

Inflation dropped from some 13.5 percent in 1981 to 3.2 percent in 1983. And Volcker is largely associated with the roaring economic times that colored much of the 1980s—coinciding with Reagan’s term.

John Tamny nevertheless points out in a RealClearMarkets article that Volcker did not necessarily endorse Reagan’s economic policies. “Given his skeptical views about the Reagan tax cuts, Volcker lobbied in secret against their passage owing to his view that they would lead to a massive revenue shortfall,” he points out.

After his tenure as Fed chief ended in 1987, Volcker has served as chair of New York investment bank Wolfensohn & Co. and as a professor of economics at Princeton University, his alma mater. The United Nations asked Volcker in 2004 to serve as an investigator into possible corruption in the UN Oil For Food Program. He is a founding member of the Trilateral Commission, a non-governmental organization that researches U.S., European and Japanese foreign policy.

Related Topic: Stagflation

Economic data at the start of 2008 suggested that the United States could be on the verge of stagflation.
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