The Economist has an article suggesting that Fed chair Arthur Burns has an undeservedly bad reputation, and “deserves a second look”:
Richard Nixon picked Burns to run the Fed, viewing him as a friend who would do his bidding. Despite stubborn inflation, Nixon pressed Burns to cut interest rates in 1971, thinking it would help him win re-election. Sure enough, the Fed did just that. Nixon was re-elected and inflation soared, hitting double digits by 1974.
But the story is more complicated than the basic outlines suggest, and its complexity contains lessons for today’s policymakers. With the holiday season upon us—and with the Fed approaching a turning point in monetary policy—it is a fine time to reassess the legacy of the much-maligned central banker.
Start with what happened after inflation took off. The Fed jacked up interest rates from 3% in 1972 to 13% in 1974, one of its sharpest-ever doses of tightening, and enough to help tip the economy into a deep recession. Doing so took some of the heat out of price growth, with inflation settling at around 6% for the remainder of Burns’s tenure.
Burns was Fed chair from January 1970 to March 1978, roughly in the middle of the Great Inflation. From the first quarter of 1965 to the third quarter of 1981, NGDP growth averaged 9.6%, far too high for price stability. During the 8 years that Burns chaired the Fed, NGDP growth averaged 9.7%. And things were not getting better near the end, NGDP growth averaged 10% over his final two years, and 10.8% over the final year of his tenure. Nor did his policies have a delayed payoff after he retired due to “long and variable lags”. Inflation sped up after he left the Fed, as NGDP growth accelerated sharply in late 1978 and 1979. It is unlikely things would have been much different if he had stayed.
I also strongly object to this:
An oil shock that began in 1973 led to a near quadrupling in energy prices as well as a surge in food costs. A second oil shock in 1978, just after Burns left the Fed, kicked off another inflationary surge. Given this backdrop, how much of the inflation can truly be blamed on the Fed? A review written in 2008 by Alan Blinder and Jeremy Rudd, two economists, found that supply-side factors were decisive. They calculated that the energy and food crises accounted for more than 100% of the rise in headline inflation relative to its baseline level. The Fed could have reacted more strongly, given that inflation had already been unanchored. But Burns was not responsible for the massive shocks facing the economy.
Yes, oil shocks explain why inflation is higher one year than the next, but the Great Inflation of 1966-81 was caused by rapid NGDP growth, which was 100% due to the Fed printing too much money during a period when interest rates were not close to zero. I don’t see how this is even debatable. So why do economists continually look for revisionist explanations? Why search for alternative theories such as supply shocks, labor unions, budget deficits, etc. None of those can explain why the Fed printed to much money. If you raise NGDP at 9.6%/year for 16 years, you’ll get a lot of inflation. Over the entire period, we got roughly as much inflation as we would have had with 16 years of balanced budgets, no labor unions and no OPEC during a period of 9.6% NGDP growth. Persistently high inflation is caused by rapid NGDP growth, which is caused by monetary policy. It’s that simple.
