Was Arthur Burns a bad Fed chair?
David Beckworth recently interviewed Chris Hughes, who wrote a paper entitled: “Rethinking Arthur Burns, the “Worst” Fed Chair in History.”
This is from the podcast:
There is demand-driven inflation headed into the early parts of Burns’ tenure, for instance in 1971, but then the real extreme periods of very high inflation in the 1970s, the first during Burns’ tenure, the second under Volcker, are the result of supply shocks in commodity and energy markets. So, you see, obviously the work of Alan Blinder on this has been formative for many, including myself, but you see core inflation going from about 4% in the late 1960s and early 1970s to around six by the mid to late 1970s, and then by the time we get on the other side of the Volcker shock, it comes back down to around four, but with these two very significant bumps, the first in 1973 and the second in 1979 and 1980, both of which related to geopolitical events, the Yom Kippur War, and then later the Iranian revolution and the Iran-Iraq war.
In my view, Burns’ tenure was even a bit worse than suggested by this quotation. Take a look at 12-month nominal GDP growth rates:
A few comments:
1. Under Fed chair William McChesney Martin, the inflation problem worsened during the 1960s. The problem was entirely demand driven; indeed the supply side of the economy did extremely well during the 1960s. Given those NGDP growth rates, it’s amazing that inflation was not even higher.
2. Arthur Burns was Fed chair from February 1970 to January 1978. At the end of the 1960s, a tight money policy had briefly reduced NGDP growth. So the situation inherited by Burns was not that bad. Unfortunately, he presided over an easy money policy that drove NGDP growth in the 1970s to rates even higher than those experienced in the 1960s. Thus “supply shocks” don’t tell us very much about inflation during Burns’ tenure (except during 1974). The problem was excessive growth in aggregate demand (NGDP).
3. By the time Burns left office in 1978, inflation had reached double digits. I don’t buy Blinder’s claim that core inflation was only about 6%. Closer to 8%.
Hughes has a nuanced view of the Burns’ tenure at the Fed:
Well, I think Arthur Burns is one of the most fascinating and overlooked figures in American economic history. I should say that I am under no illusions about the guy’s virtue. He made plenty of mistakes as Fed chair and my project here isn’t to try to paint him nostalgically as some hero that we can look back on. Instead, it’s to hold up a light to what in my experience is considered a kind of heresy. The idea that Burns was a leader of the Fed who operated from a place of ideological consistency, even conviction at times, and who importantly in his time was considered to be quite hawkish on inflation, which is just head spinning to people today.
It’s clear that the Fed performed very poorly during the Burns period. Any defense of Burns based on things like supply shocks won’t work. On the other hand, Hughes is correct that the political environment at the time was quite different than today. The zeitgeist within the economics profession was extremely dovish, and the Fed rarely deviates far from that consensus. Another Fed chair might well have produced similar results. Indeed, policy got even worse under ill-fated G. William Miller, who followed Burns and was replaced Paul Volcker after just 18 months as Fed chair. Even Volcker did quite poorly during his first 20 months as chair.