ONE CYR'S VIEW: Jackson Hole Conference and our economic future

The annual conference of central bankers and others engaged with economics at Jackson Hole, Wyoming, August 21-23, has been especially noteworthy. Federal Reserve Chairman Jerome Powell indicated more clearly than in the past that a cut in interest rates is likely at the September meeting of the Federal Reserve Board Open Market Committee.

Powell, skillful at opaque Fed-Speak, nonetheless signaled a simulative change is likely. He was specific in reference to revised employment data from the U.S. Bureau of Labor Statistics, indicating job creation this year has been considerably below what was reported earlier.

This is particularly newsworthy in part because Powell has been consistent heretofore in giving emphasis to the priority need to restrain inflation. Cutting rates tends to spur inflation as well as economic growth.

These conferences began in 1978, the initiative of the Federal Reserve Bank of Kansas City, one of nine regional banks in the Federal Reserve System. The relatively slow summer months can provide harried bankers, economists, and other executives and professionals at least a little more time for reflection and comprehensive analysis. Arguably, the change of scenery also aids reflection, or at least provides a welcome change of context.

Paul Volcker, an earlier Federal Reserve chairman, participated in the 1982 gathering, the first held at Jackson Hole. From that time forward, the annual event has garnered media attention, often justified.

Volcker, a dedicated public servant, held senior posts in the Kennedy/Johnson, Nixon, and other administrations. He is rightly credited with breaking the enormously destructive combination of high inflation and high unemployment, termed "stagflation," that gripped the U.S. and other economies during the 1970s. That in turn provided central banks and associated monetary policies center stage in public policies.

Previously, fiscal policies – the taxing and spending activities of government – had received prime attention. In 1958, Professor William Phillips of the London School of Economics identified a powerful inverse correlation between inflation and unemployment, traceable decades back in British data.

The Phillips Curve was seized upon by many in the United States as a reliable new guide to fiscal policy, congruent with established and widely accepted Keynesian theory. Democrats, notably Senator John F. Kennedy of Massachusetts, found useful material for criticism of the allegedly cautious Republican Eisenhower years.

Professor Walter Heller of the University of Minnesota, who led the Council of Economic Advisers in the Kennedy administration, compared managing the economy to driving a car. Spending can be expanded when the economy is slow, contracted when inflation grows.

The problem is human behavior, which tends to be unpredictable. Phillips had never presumed his correlation to be some sort of "law" of economics. Keynes himself noted that politicians are much more comfortable expanding than reducing government spending.

By the end of the 1960s, inflation and unemployment were both rising. Presidents Lyndon Johnson and Richard Nixon proved an unfortunate combination. LBJ, aided by Defense Secretary Robert McNamara, willfully concealed the true costs of the Vietnam War for political reasons.

Nixon literally threatened Federal Reserve Chairman Arthur Burns to force liberal monetary policy despite rising inflation.

The oil price increases by the Organization of Petroleum Exporting Countries (OPEC) in 1973 and 1979 also significantly fueled inflation. This was partly in retaliation for vital U.S. support of Israel during the 1973 Yom Kippur War.

Paul Volcker raised interest rates and kept them up until the inflationary spiral was broken.

The importance of courageous, firm, honest leadership was reconfirmed.

Arthur I. Cyr is the author of "After the Cold War – American Foreign Policy, Europe and Asia" (NYU Press and Palgrave/Macmillan). Contact [email protected]