Paul Volcker & Ray Dalio | State of the US Economy & Government

It took one last year of sticking with tight monetary policy that was necessary to complete the inflation fight, demonstrating the importance of sustained commitment despite mounting pressure.

“And it ended pretty quickly. But it took that last year of sticking with it that I think was necessary to do the job.”

Inflation was very stubborn and unemployment was very stubborn in responding to the initial tightening, and Volcker made one or two false moves that had to be reversed, but he could not back off or all efforts would be for naught.

“It took a long while, actually, for the unemployment rate to go up. It was very stubborn and the inflation rate was very stubborn, and we made one or two false moves that we had to take back... I felt that we were stuck, we couldn't back off or all the effort we were making would be for naught.”

Inflation had been rising for more than a decade with only feeble efforts to control it during the Ford administration ('Whip Inflation Now' campaign had more buttons than policy), creating a persistent conflict between fighting inflation and risking unemployment.

“For more than a decade, there were kind of feeble efforts to deal with it. During the Ford administration, they handed out buttons. Whip Inflation Now, but it had more buttons than policy. And there was always this conflict, it's always existed, don't tighten monetary policy too far, you'll get some unemployment.”

In the current government, about 700 potential presidential appointments exist (including secretaries, assistant secretaries, judges, etc.), and about one-third of these positions remain unfilled, leaving departments leaderless and run de facto by civil servants without senior leadership oversight.

“There's something like 700, maybe more, potential presidential appointments in the new government. All the secretaries and the secretaries assistants, secretaries judges, so forth and so on. About a third of those offices have failed. Now, nobody's paying attention... who's running those departments while the civil servants are left there, maybe in good form, maybe not, but leaderless, basically.”

Volcker had more support for his policies than commonly remembered, evidenced by his reappointment: the first nomination was unanimous, and the second (after the inflation fight) had 8 Democratic and 8 Republican votes against him with 84 supporting, representing proportional support across ideological lines.

“I was first nominated, it was unanimous. Nominated four years later, it was not unanimous, I had eight democrats voting against me, eight republicans... and 84 votes with me. And I think that was a fair representation that people, things were getting better then, but people tolerated what it took to deal with the inflation problem.”

The unemployment rate rose to 10% during the tightening in the early 1980s, and the economic downturn was the worst period since the Great Depression.

“You set an M1 target of 5.5%... interest rates went up to 20%... You tighten monetary policy like that, it drove the unemployment rate up to 10% and it caused the worst downturn in that period of time since the Great Depression.”

In August 1982, Mexico announced it could not pay its debts, triggering a Latin American debt crisis involving bankrupt borrowers and international banks with 1.5 to 2 times capital exposed to Latin American lending.

“We had a bankrupt Latin America, and the banks had head over heels in lending to Latin America. They had one and a half to two times the capital... One day Mexico said, we can't pay anymore. August, 1982.”

States are being squeezed financially, which makes addressing infrastructure challenges all the more difficult without federal support.

“The states are all being squeezed financially, which makes it all the more difficult.”

There is an enormous number of conflicts of interest in banks and elsewhere in finance that have not been adequately addressed.

“An enormous number of conflicts of interest that have developed in banks, and elsewhere in finance.”

The Latin American debt crisis was resolved through 1982-1991, with capital restoration and debt reduction, finishing with the Brady Plan under Nicholas Brady.

“You could roll things forward from 1982 until 1991 when they had the Brady... capital had been restored, some of the debts had been lowered, and he could finish it off with the so-called Brady Plan”

The inflation-fighting effort of 1979-1983 broke the back of inflation, reducing it from 14.8% in March 1980 to 3% by 1983 and initiating a decade of prosperity with strong growth and low inflation.

“You broke the back of inflation, and in 1983, that inflation rate went down to 3% inflation, at that time. And we began a decade of prosperity, of strong growth with low inflation.”

The U.S. faces problems including fake news creating epistemic confusion, presidents making outrageous statements without regard for truth, and a Congress unable to function effectively.

“We have fake news, you don't know what to believe, what not to believe. You got presidents that don't seem to mind either personal behavior or making outrageous statements, true or not. You have a Congress that's been unable to function effectively.”

Both Republican and Democratic presidents post-WWII were willing to lead NATO, lead the World Trade Organization, and lead counter-terrorism efforts with basic policy agreement, despite debates over details.

“There was a willingness, of both Republican and Democratic presidents, to lead NATO, lead the World Trade Organization, lead the whole effort to reduce terrorists, that all went hand in hand.”

Economics lost prestige in recent years, rightfully so, due to missing the 2008 financial crisis and its underlying causes.

“Economics, it was a prestigious, I hesitate to call it a science, but it's got great prestige, or it did, until it missed the 2008 crisis pretty completely. Economists have lost a lot of prestige, I think, in recent years, and rightfully so.”

U.S. world leadership overlooked domestic problems stemming from accepting large imports, which benefited Wall Street and coastal areas (like California) but harmed small and mid-sized manufacturers across the country, creating significant political resentment.

“During our period of leadership, we tended to overlook, in our own country, some of the problems that world leadership implied in terms of willing to accept a lot of imports... It bothered all those small manufacturers, and not so small manufacturers, that were losing out... didn't bother Wall Street, doesn't bother California, but it bothered all those small manufacturers”

Volcker decided the only way to break inflation was to 'tighten monetary policy like a bulldog biting at it, straight out,' with no wavering despite mounting pressure to back off.

“I saw no other way to approach this, other than kind of a bulldog biting at it, straight out.”

Similar failures of constructive debate and process integrity are happening across multiple policy areas, as evidenced by morning news accounts.

“That seems to be true in other areas as well. I just refer you to the morning press if you wanna know a description of how effective government is these days.”

The quality of cabinet and sub-cabinet appointees is not up to standard—when polluting company lobbyists are named head of anti-pollution agencies, it indicates incoherent governance.

“The quality of the people appointed to cabinet offices, and sub cabinet offices, I think by any estimation is not up to scratch... when you see lobbyists for polluting companies named head of the agency for anti-pollution, you wonder about the coherent nature of the appointment.”

Who is going to view the United States as a leader if we don't seem to be able to manage our own affairs at home?

“Who is going to appreciate the United States as a leader if we don't seem to be able to manage our own affairs at home?”

Public administration is now a devalued field—universities have lost sight of how to teach it and what curriculum should include, with schools having largely abandoned public administration programs while maintaining business administration schools.

“Public administration's a bad word now. People associate public administration with a bunch of time servers, sitting in some government office, producing nothing useful... But we have a problem in these schools. Many of them have lost sight of how to teach. What are they teaching, what should the curriculum be?”

The Volcker Alliance is attempting to create a new marriage between universities and government (state, local, and federal) to develop stronger interest and efficiency in public administration.

“This little Volcker Alliance is trying to get a kind of marriage, a new marriage, between universities and the government. State and local government as well as federal government, to see whether we can develop a stronger sense of interest and efficiency.”

Government civil servants are not respected, lack good career paths, receive inadequate training, and face difficult conditions for recruitment and retention, which undermines government system effectiveness.

“They're not respected, and, also, how it's difficult at universities, and various places, to get them to be attracted in there because they're not given a good career path, they're not given good training, and they're not given much respect. And that that is undermining the effectiveness of the system.”

Schools should teach government managers how to oversee outsourcing, manage effectively, debate issues, write good memoranda, and work across departments, but many public administration schools have lost clarity on curriculum.

“How do we train people to oversee all that outsourcing? Hundreds of billions of dollars being outsourced. Who's minding the store? Are people equipped to do that? Have we taught them the right thing? Have we taught them how to manage? Have we taught them how to debate issues as a right of good memorandum? How to deal with other people, other departments.”

This pattern of conflicts of interest in appointments—putting lobbyists in charge of agencies meant to regulate their former industry—happens too often.

“And it's happening too often.”

When Volcker took over the Federal Reserve, existing policies were not working, inflation was accelerating and approaching 15% annual rate, and if policymakers 'pussy-footed' longer, inflation would reach 20%.

“It was obvious that existing policies weren't working... I decided we had to change in approach and we've got to stop worrying about increasing unemployment at any time, we've got to deal with this inflation or it's going to get worse and worse. 'Cause it was accelerating when it got close to 15% annual rate. And if we pussy-footed much longer, we're going to be 20%.”

By summer 1982, the money supply came down and inflation rate began coming down, with the economy entering recession but showing signs of recovery by end of year.

“Fortunately, by the summer of '82, the money supply came down, inflation rate became coming down, we had a recession. But by the end of the year, it looked like the recession could be over, or at least stop getting worse.”

Of the 700+ potential presidential appointments in the current government, far less than half have even been nominated, indicating systematic failure of the appointment and confirmation process.

“Of all the presidential appointments, far less than half anybody's even been nominated, much less appointed.”

A major tax bill was rammed through Congress without debate at midnight on December 31st, with almost nobody in Congress knowing what was in it, violating norms of constructive legislative process.

“We rammed through a massive tax bill... shouldn't be rammed through the Congress without any debates, at midnight, on December 31st, or whatever was done. With almost nobody in the Congress having a very good idea of what was in the bill”

The civil service has more potential for effectiveness than commonly assumed, but improving it is a hard lesson to sell and requires structural improvements.

“It's much more effective, potentially, with a better staffing than I thought. But that's a hard lesson to sell, generally. And it's not always true. We have to improve the damn thing and that's what I'm after.”

Many businessmen who enter government as secretaries or undersecretaries initially assume government is inefficient and ineffective, but after 2-3 years discover that there are many talented government workers who can execute effectively, changing their initial perceptions.

“One of the observations that's often struck me is there's a feeling by many business men, the government's not efficient, doesn't do things right... after two or three years in government say I didn't realize there were so many people in the government that knew what they were doing, and can do it effectively.”

Young people selected for civil service jobs often cannot start until the next fiscal year, forcing them to wait months without pay or take private sector jobs instead, exemplifying the structural problems that need repair.

“People who want to go in the civil service often can be selected, maybe in a school or public administration, say, okay, you got a job, it's February, but we can't have you, we can't pay you until the new fiscal year, which is six months away. So, these people can't sit around with no pay or anything for six months, so they go get a job on Wall Street, or some place, instead.”

Universities need to review what they're doing to educate effectively for government service, and government needs to cooperate with universities to specify what people need, how they should be trained, and ensure they can be employed with minimal red tape and delays.

“These universities have to review what they're doing to see how they can really educate effectively. And the government has to cooperate with them and see what kind of people they need and how they need to be trained. How they can be employed with a minimum of red tape and delays”

Universities have more resources than the Volcker Alliance and should be investing more in public management and administration programs, but are instead investing heavily in business management programs and economics.

“Universities potentially, have more resources than we have... they put a lot of money into business management. Not putting money in the public management... The amount of money that's been poured into economic research as compared to the amount of money poured into research and public administration is astonishing.”

Volcker's father, as city manager of Teaneck, New Jersey during the Great Depression, professionalized the police and fire departments through meticulous budgeting, disclosure, and a fanatic commitment to not spending more than necessary while ensuring professional operations, resulting in no crime in the town.

“My father, he took over as city manager of this bankrupt town in 1930, and lasted for 20 years... he was a fanatic for disclosure... he professionalized the police department and the fire department... two departments that are essential, obviously, in any town... he was a bug for not spending more than he had to spend, but spend what was necessary for a professional operation.”

Great leaders have an accurate vision of where to go, will fight opposition in pursuit of that vision, and deliver results, while also maintaining deep caring for people and effective management of civil service and bureaucracy.

“Your principles would be a great leader has an accurate vision of where to go. A great leader has, will fight the opposition in pursuit of that, and deliver. A great leader has a deep caring for the people that they're leading. A great leader also seems to be leading with an effective management of civil service in government”

Teaneck, New Jersey was a solidly middle-class town with good education and professional government management, and as a result had no crime, as documented by the Saturday Evening Post in an article entitled 'There is No Crime in Teaneck, New Jersey.'

“The Saturday Evening Post wrote an article that's entitled, There is No Crime in Teaneck, New Jersey. Because it was well managed, because there's a middle-class, because there's good education.”

Volcker headed commissions on civil service reform in 1987 and five years later that produced good reports with recommendations to make hiring/firing easier, get better leadership, and develop a more effective civil service, but these reports had very little impact.

“I headed a commission on the civil service when I left the Federal Reserve, which was in 1987, and there was a big commission... We issued a good report. What impact did it have, very little... Five years later, I headed another commission. Much smaller commission with another good report. But what impact did it have? Not enough.”

Great world leaders include Angela Merkel in Germany, Lee Kuan Yew in Singapore, and Zhu Rongji in China (1990s), each of whom had clear vision, drive, and delivered results.

“When you look around at world leaders in recent years, I think Mrs. Merkel did a pretty good job in Europe and Germany... Lee Kuan Yew was the next name I was going to mention. And the third name I was going to mention is, I don't know how much you ran into Zhu Rongji.”

A major political problem in the U.S. is the need to reach agreement on appropriate immigration policy balancing economic needs with moral considerations for persecuted people.

“To reach some agreement upon what an appropriate influx, under what conditions, immigrants are... We've, in recent years, taken a lot of immigrants, maybe we don't want so many, but what should the rules be? Both in terms of our economic needs, but in terms of our moral needs? When people are being oppressed”

State financial reporting and budgeting practices changed as a result of the Volcker Alliance's report ranking states on fiscal management, demonstrating that visibility and public comparison can drive behavioral change.

“This attracted a lot of attention because it's a competition between the states. So people say, oh my God, here we got a report by the Volcker Alliance that says we don't have good budgeting arrangements. So, some of them have actually changed their budgeting procedures.”

The Volcker Alliance is a young, small organization attempting to create cohesion around government effectiveness needs by bridging universities and government agencies to better connect demand for skilled civil servants with supply from universities.

“We are a young and small organization. We're trying to get some cohesiveness... about the needs of government for effective administration... get better connection between the needs of the government and the universities, with schools of public administration”

The Volcker Alliance surveyed all 50 states on budgeting practices, pension systems, emergency reserves, and other fiscal measures, and published rankings showing which states were doing good, bad, or impossible jobs, attracting attention through competitive pressure.

“We had seven or eight questions, we asked all 50 states... how are you doing in budgeting? How are you doing, [do you have] funds to reserve for emergencies? How's your pension system?... We published a nice, shiny book. All the states were ranked... are you doing a good job, bad job, impossible job?”

The recruitment connection between the federal government and young people, and between universities, has become so lax it has almost disappeared.

“The recruitment between the federal government and young people, and between these universities is so lax it's almost disappeared.”

The Volcker Alliance is examining the role of the Office of Management and Budget (OMB) as a potential central focus for government management improvements, with support from people in OMB who are taking initiative on Volcker's agenda.

“We're examining precisely that issue. There are people in the OMB, Office of Management and Budget. The management part of that has been very weak but it still exists... They now are taking an initiative to do precisely what I'm talking about.”

Infrastructure projects are being neglected despite obvious needs—e.g., leaking tunnels under the Hudson that are over 100 years old and critical to regional transportation, while resources are spent on peripheral projects like Second Avenue Subway extensions.

“Infrastructure projects is new rail tunnels under the Hudson. We're sitting here with leaking tunnels, totally dependent upon these two very fragile existing pieces of infrastructure that we built more than 100 years ago? What are we wasting time on a few blocks at Second Avenue Subway?”

Volcker's mother reassured him during the Vietnam War and civil unrest that the U.S. had been a democracy longer than any other nation, had overcome worse crises before, and would recover from this turmoil.

“My mother... I recall, vaguely, whining to her when I was, probably, a young man in government, Vietnam War or something, rioting in the streets... she said we're 200 years of democracy, we've been a longer democracy than anybody else in the world, we've gotten over worse than this before, go get back to work”

Volcker's legacy goal is to see more effective government in general and a general acceptance of the need for an efficient public service ethic, with people attracted to public service because they find satisfaction in doing something concrete for the country.

“I'd like to see my legacy in more effective government in general... I would like to see a general acceptance of the need for an efficient public service ethic. And see people attracted to our public service because they can take satisfaction that they're doing something concrete for the country”

The absence of a U.S. ambassador in Saudi Arabia for an extended period despite significant problems with Saudi Arabia indicates lack of leadership coordination and priority-setting.

“We haven't had an ambassador in Saudi Arabia. We have all these problems with Saudi Arabia, we haven't even got an ambassador there until now, why not?”

Volcker responds more favorably to the President of China's statements about seeking harmonious relationships and spheres of influence with peaceful outcomes compared to threats and demands from the U.S. President.

“I sometimes, it sounds terrible, but I respond more favorably to what the President of China is saying than the President of the United States. The President of China at least says that he's looking forward to a harmonious relationship... But looking for peaceable outcomes, where we're all threats and demands”

Volcker created the Volcker Alliance and devoted most of his net worth to it in order to foster proper development and professionalization of government workers and managers.

“You've created the Volcker Alliance, in which you've devoted most of your net worth to, in order to foster the proper development of government workers”

Volcker takes comfort from the historical fact that the U.S. has been a democracy longer than any other nation and believes we can straighten ourselves out after current turmoil.

“And I take a little comfort in that thought, that we can straighten ourselves out after this little turmoil, not so little turmoil.”

As an old government man, Volcker's assessment is that current governance doesn't look good, but he expresses hope that it will improve.

“For an old government man like me, it doesn't look very good, hence my comment. Let's hope it gets better.”