When Arthur Burns was named to head the Federal Reserve Board in 1970, the Great Inflation was already underway. But when he left in 1978 the inflation problem had become even worse. Indeed he presided over some of the most inept Fed policy of the entire 20th century. Here’s Athanasios Orphanides discussing Burn’s views as an academic:
In his 1957 lectures on Prosperity Without Inflation, Arthur Burns eloquently explained that economic policies since the enactment of the Employment Act of 1946 had introduced an inflationary bias in the U.S. economy which had marred our nation’s prosperity in the post-war period” (p. v). By promoting maximum employment,” the Act encouraged stimulative policies which, by prolonging expansions and checking contractions, resulted in an upward drift in prices. Burns called for an amendment to the Act, a declaration by the Congress that it is the continuing policy of the federal government to promote reasonable stability of the consumer price level” (p. 71).
And here’s Lawrence White discussing how Burn’s views evolved after being named to the Fed:
In his Newsweek column of 2 February 1970, Milton Friedman enthusiastically cheered the previous week‘s appointment of his former college professor and mentor Arthur Burns as Chairman of the Board of Governors of the Federal Reserve System. He lauded Burns as the first person ever named Chairman of the Board who has the right qualifications for that post. Under Burns‘s predecessor, the United States inflation rate had reached 5.5 percent in 1969, rising from only 1.2 percent in 1962. Friedman‘s research had convinced him that inflation—persistently rising money prices of goods on average—was due to overly rapid growth in the stock of money, more dollars chasing each bundle of goods. As head of the central bank Burns would be in position to control the quantity of money in the American economy. Friedman encouraged Burns to produce growth in the money stock―low enough to avoid renewed inflation.‖1
In only a few months Friedman had to choose between keeping his convictions and keeping friendship with Burns unimpaired. As Fed chairman Burns began attributing the inflation he had inherited not to previous monetary policy, but to cost-push factors beyond the central bank‘s control. In July 1971 Burns told a congressional hearing: The rules of economics are not working in quite the way they used to. Despite extensive unemployment in our country, wage rate increases have not moderated. Despite much idle industrial capacity, commodity prices continue to rise rapidly. He called for federal wage and price controls to fight this supposedly new type of inflation—a policy response that in Friedman‘s view was akin to fighting a Toyota‘s runaway acceleration by taping down its speedometer needle.
In May 1970 Friedman sent Burns a lengthy handwritten letter criticizing Burns‘s arguments and policy proposals. Edward Nelson relates that Burns was shaken by the letter and personal relations between the two deteriorated.2 The disagreement went public as Friedman in lectures, newspaper interviews, and writings challenged Burns‘ views. At the December 1971 meetings of the American Economic Association, Friedman quoted and rebutted Burns‘ July statement. Examining the data, Friedman found that inflation was in fact responding as usual to money growth. The economy was performing poorly because the Fed under Burns was pursuing erratic and destabilizing monetary policy [that] has largely resulted from the acceptance of erroneous economic theories.‖3 A sharper rebuke by a student of his former teacher, consistent with professional decorum, is hard to imagine.
As with Friedman and Burns, Bernanke was my first choice to head the Fed. As with Friedman and Burns, I was disappointed to see Bernanke adopt the sort of passive policies he criticized the BOJ for pursuing. As with Burns, Bernanke is following a policy close to what the “median economist” would prefer. Some economists would prefer easier money, some tighter, but Bernanke is certainly right in the mainstream. So was Burns.
Over the last few years I’ve occasionally argued that macroeconomists as a class are mostly to blame for the global economic crisis, not bankers or regulators. Seeing what happened under Burns makes me even more convinced that we macroeconomists are to blame.
What does this tell us? It tells us that it may not matter than much who’s in charge of the Fed, rather it depends what the median economist thinks is the appropriate policy. As an analogy, domestic economic policy probably reflects the views of the median Congressman more than the views of the President.
HT. Thanks to the commenter Declan, who pointed out the connection between Burns and Bernanke.