A Note on Paul Volcker and the Standard of Living

In October 1979, Federal Reserve Chairman Paul Volcker initiated a drastic turn to tight monetary policy aimed at ending the “Great Inflation” of the 1970s. This “Volcker shock” is a pivotal moment in most accounts of neoliberalism. In many of these histories, Volcker is quoted as telling a session of the Joint Economic Committee on October 17, 1979 that “the standard of living of the average American has to decline.”¹

In fact, there is some ambiguity about just what he said. Reporting for the New York Times, Steven Rattner paraphrased Volcker’s assertion as “Americans must accept a reduction in their living standards, if inflation is to be reduced.” Rattner also offers a direct quote from Volcker: “‘The standard of living of the average American has to decline,’ he [Volcker] said. ‘I don’t think you can escape that.’” The headline — “Volcker Asserts U.S. Must Trim Living Standard” —reinforced the interpretation that Volcker was announcing a policy objective or an act of political will.

The transcript of the JEC hearing available from the Government Printing Office differs from the New York Times report. Not only does it offer a full transcript as opposed to selected quotes and paraphrases, but it also contains different wording at one key point. The relevant testimony comes in response to a question from Senator Lloyd Bentsen, who asked Volcker how it would be possible to fight inflation without risking unemployment. Volcker responded:

“Let me break your question up into two points. If I may make one general point first, in terms of the need for discipline and sacrifice — a point that doesn’t refer to cyclical development at all, directly. I would point out that productivity growth in this country has actually been negative in a recent, period. And, we have had higher oil prices; of course, we import 50 percent of our oil, so that the higher revenues going abroad do not go to American citizens. Under those conditions, the standard of living of the average American has declined; I don’t think we can escape the effect when we’re producing less with the same amount of effort, according to the statistics and we’re paying high prices abroad.
Now, if we fail to recognize that, and people try to catch up with the existing standard of living or try to increase their standard of living, we get a process going that only feeds inflation, because wages move ahead of prices and then push up costs further, and up go the price levels some more.” (emphasis added)

In this version, both the tense of the verb (“has declined”) and the additional context suggest something different than the New York Times report. Here, Volcker is not calling for a salutary reduction in living standards but observing that living standards have declined. His specific logic is as follows: oil has become more expensive, and since demand for oil is highly inelastic, the consequence of high prices will not be reduced consumption but higher expenditures for the same amount of oil, leaving less money for buying other things. In this situation, even to maintain the original level of consumption would require a growth in productivity, which would lower the real price of non-oil goods. But productivity growth in the U.S. in the late 1970s was low when not negative.

There is yet a third version of Volcker’s remark. In a letter to the editor dated December 18, 1979, R. Duane Saunders, a financial consultant and former Treasury official, took issue with the NYT’s coverage and submitted that Volcker had actually said:

I would point out that productivity growth in this country is actually negative in a recent period, and we have had higher oil prices. And, of course, we import 50 percent of our oil so that the higher revenues going abroad to not go to American citizens. Under those conditions, the standard of living of the average American has to decline. I don’t think we can escape that when we’re producing less with the same amount of effort, according to the statistics, and we’re paying high prices abroad. (emphasis added)

Saunders’s source for the quote is himself (“I was there.”) His version, like the Times’s initial report, has Volcker saying “has to decline.” But the rest of the quote matches the published transcript, and in context this seems to mean that a decline in the standard of living is logically inevitable given low productivity and rising import prices, and not that living standards should be lowered as a palliative.

I have not been able to find video or audio of the hearing that would settle the question of what exactly Volcker said on October 17. But looking at some of his earlier congressional testimony offers circumstantial evidence about what he meant. One of the few to notice this was William Greider, whose otherwise critical book on the Fed dismissed the idea that Volcker had been “suggesting a lower standard of living.” Rather, the Fed chief had made “a simple statement of self-evident economics, an observation that no economist would dispute.” Greider pointed out that Volcker “had said precisely the same thing about productivity and living standards two days earlier before the Senate Banking Committee, but none of the reporters at that hearing found his comments newsworthy.”²

In the October 15 hearings, Volcker brought up the living standards issue in response to a question about whether a balanced budget would by itself solve the inflation problem:

I think a balanced budget alone with an irresponsible monetary policy would not produce price stability, but I think a balanced budget would certainly help ease our task. There are other factors in the inflation. What’s happening in productivity? It was pointed out earlier that the productivity in this country is declining. We know, if productivity is declining and if external oil prices are going up, that translates with mathematical certainty into a decline in the standard of living. People don’t want declines in the standard of living, so they will try to increase their wages to resist that process, which is an inexorable one under those circumstances, and that again is a source of cost pressure and inflationary pressure.

He repeated the point later in the hearing:

As I just mentioned, we have a decline in productivity in the economy of fairly sizable proportions in the last year. We have a high level of employment. The employment is at record levels. We have, in effect, a tax put on the American economy by the increase in oil prices overseas that amounts to roughly 1 percent of gross national product. Now under those circumstances, the standard of living for the average American declines. There’s less output; there’s a tax from abroad. There’s no way that you can avoid a decline in the standard of living for the average American.

Here, we have yet another verb tense — “the standard of living declines” — but the meaning is clearly the same. It seems safe to conclude that in Volcker’s famous statement that “the standard of living of the average American has to fall,” the words “has to” should be understood along the lines laid out in his less famous testimony two days earlier: “If productivity is declining and if external oil prices are going up, that translates with mathematical certainty into a decline in the standard of living.” There is little to suggest that he was announcing, or justifying, an attack on living standards.

— — — — — — — — — — — — — — — — — — — — — — — — — — — — — — —

Unsurprisingly given these discrepancies, UPI reported that “Many Americans seem to be confused by Volcker’s statement. They say inflation already has made a shambles of the family budget.” Asked about Volcker’s statement at a press conference October 20, even Jimmy Carter, the man who appointed Paul Volcker, seemed confused and wary.

MS. RICHARDSON. Mr. President, you’ve been talking about inflation. This past week Paul Volcker, the Chairman of the Federal Reserve Board, said that Americans must accept a lower standard of living if the inflation rate is to be controlled. Why should people be asked to accept a lower standard of living? Isn’t that the job of government, to control inflation? And how can you ask people who had very little to do with the causes behind inflation to tighten their belts?
THE PRESIDENT. I don’t agree with Paul Volcker. I think I know more about the people of this country than he does. I think I know more about the Nation than he does. And I’m not sure what he meant. In my own experience, in dealing with the people through the press and making an offhand statement, quite often a statement can be taken out of context and distorted from the intention of the speaker’s that the speaker had when he made it. This may be the case with Paul.
If he meant that Americans can no longer avoid saving, then I think he’s right. If a person measured a standard of living by saying, “I’ve got to be able to drive 75 miles an hour in a large, fancy, heavy automobile by myself,” then he’s right. Americans are already beginning to decide we’ve got to use public transportation when it’s available, we ought to have three or four people in a car instead of one, we ought to obey the speed limit, and we’re shifting toward smaller and more efficient automobiles. So, in that case he would be right. It depends on what the person thinks is a standard of living. (emphases added)

Speaking to ABC news on October 29, Volcker offered his own clarification:

MR. CORDTZ: You recently made a public appearance at which you spoke the unspeakable and said that the American people, the average American, has to look forward to a period of decline in his living standard?
MR. VOLCKER: That is corrected [sic];I never said look forward to. The point I was making is the one I just made³: When we have declining productivity, and now we have the additional complication of higher oil prices which are in effect, a tax coming from abroad, and indeed just in the past year that tax amounts to something like one percent of our GNP; but we are producing less. In fact, producing less per capita. We have more people at work than ever before, but we are producing less per capita. That means the average worker has less income, inevitably.

The quote continued to follow Volcker. In 1981 hearings pursuant to the 1978 Humphrey-Hawkins Full Employment and Balanced Growth Act, Rep. Henry B. Gonzalez (D-TX) challenged Volcker on his 1979 remarks:

Yet you, that is, the Fed, the Board, told us that it is you who are in control, you are the central bank. You are independent and you boast of it.
We have craven Congresses and craven and controlled presses, and therefore the people’s interest is totally forgotten.
Now, I know the philosophy, and I don’t want to dispute that. You have expressed it. The last question I had, you stated the ordinary folk can wait, and they should wait until this other big demon, inflation, has subsided and we can address ourselves to their needs.
Also, you were quoted as saying at the outset of the policy changes, Mr. Stanton referred to a couple of years ago, that, of course, what it meant and what was inherent in meaning was that the standard of living of some Americans would have to be sacrificed, or depressed.
Well, the question is, what Americans? Certainly not the most affluent sector of our country. (emphasis added)

Volcker responded:

Let me just pick up the point on the standard of living. There was some discussion about my remarks on this some time ago. My point was a very simple one; if productivity in the economy is declining, there is no room or ability to increase people’s standard of living. We had to realize that, that was what was going on. In fact, that was an outgrowth in large part of the inflationary problem and the related distortions that had appeared. Our object is quite the opposite, to create conditions in which we can have growth, we can have employment, and we can have a rising standard of living. You are not going to be able to do that if the economy is operating with poor productivity and poor performance in many respects. I think you have entirely misconstrued the object of the policy and the sense of those statements I have made from time to time when asked about the implications of low and declining productivity in the economy.


[1] See, for example, Jefferson Cowie, Stayin’ Alive (301), Judith Stein, Running Steel, Running America , Laura Kalman, Right Star Rising (331). I have also quoted the decontextualized statement on two occasions.

[2] William Greider, Secrets of the Temple (740)

[3] By “the one I just made,” Volcker was referring to the following statement in the same interview:

A lot of things about the economy concern me, and very basically. Look, in this country we are used to having a three percent productivity growth, and that is what really brings a higher standard of living in the end. But that productivity growth has slowed down in the last 10 or 15 years. In the last year we have had no growth in productivity at all. We have actually had a decline. That is a serious underlying problem for this economy. It is nothing that is directly susceptible to monetary policy. (emphasis added)
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