The Federal Reserve’s great antihero deserves a second look

S.inflation took off, the former Federal Reserve chairman came to the minds of politicians and pundits. Many argue that incumbent Jerome Powell should not be the next Arthur Burns, who served as chairman of the Fed in the 1970s and epitomizes the failure of central banks. . In other words, he was a weak leader who did not blink in the face of inflation and sent the economy to ruin.

This warning from history is not wrong. Richard Nixon named Burns the Fed’s operator and saw him as a friend doing his bidding. Despite stubborn inflation, Nixon thought he would push Burns to cut interest rates in 1971 to his advantage for re-election. Sure enough, the Fed did just that. Nixon was re-elected, inflation soared, and by 1974 he was in double digits.

But the story is more complex than the basic outline suggests, and that complexity contains lessons for today’s policy makers. With the holiday season approaching and the Fed nearing a tipping point in monetary policy, it’s a perfect time to reassess the legacy of one of the most notorious central bankers.

Let’s start with what happened after inflation started. The Fed raised interest rates from 3% in 1972 to 13% in 1974. Doing so dampened some of the inflationary momentum, and inflation settled at around 6% for the remainder of Mr. Burns’ term. This was uncomfortably high, and Burns never let him deal the fatal blow to inflation that Paul Volcker did in the early 1980s. Nevertheless, his first attack ushered in a new era. In 2016, an economist at his Fed branch in Richmond assessed the setting of monetary policy over the years. Their model suggested that the “Volcker shock” did not appear like a bolt out of the blue. Burns was laying the groundwork for that.

He did this in formidable circumstances. Beginning in 1973, his shock caused energy prices to nearly quadruple his and food costs to skyrocket. In 1978, his second oil shock occurred shortly after Mr. Burns left his Fed, and inflation surged again. Given this background, can we really say how much of the inflation is his Fed’s fault?In a 2008 review written by two economists, Alan Blinder and Jeremy Rudd, he noted that supply It turns out that the side factor is the determining factor. They calculated that the energy and food crises accounted for more than 100% of his rise in headline inflation relative to baseline levels. Given that inflation had already been unchecked, the Fed could have reacted more forcefully. But Burns was not responsible for the massive shock facing the economy.

Burns’ trouble also illustrates the pitfalls of real-time indicators. Today’s Fed is considered “data dependent.” If inflation momentum remains relatively weak, the next rate hike he could be a quarter of a percentage point. A 0.5 point increase could be on the menu if inflation spikes. It’s perfectly reasonable. But consider the 1975 Head of his faux pas. gdp easing price pressures. The Federal Reserve has cut interest rates aggressively. gdp Losses were only about 5% and inflation remained persistent. Had this been known at the time, Burns’ his Fed might have acted differently.

The fact that real-time numbers can be flawed doesn’t help much on one level. It is impossible to know whether future revisions will boost or depress growth. However, this uncertainty advises against overreacting to limited data. The Fed, which has implemented very tight policy over the past year, wants to proceed more cautiously. Just as Fed Chair Powell tried not to read too much into November’s apparent slowdown in inflation, stick to that gradualism, even if there are upside surprises in inflation between now and the next meeting in February. That may still be the right way to go.

The main economic consequence associated with the Burns Fed is, of course, high inflation. But his relatively loose policies also spurred an investment boom. Capital expenditure, or the money companies spend on buildings, equipment, etc., has reached about one-third that of the United States. gdp In 1978, it remained at the highest level since at least 1946. Much of it was spent on producing energy and commodities in response to the supply shocks of the time. The bank Goldman Sachs’ Jeffrey Curry recently said that these investments have helped “unbottleneck” oil and metals capacity for decades, keeping the economy down in the long run. He said it was pushing inflation.

Today, the global economy is at a new inflection point. A collapsing global trading system, declining immigration, and climate change could constrain US productivity, leading to persistently low growth and high inflation. There is also renewed debate among economists about whether the Fed should pursue an inflation target slightly higher than his 2%. Such a switch could help avoid over-squeezing the economy amid serious challenges. Accurate prediction of effects. The serious effects of the investment boom of the 1970s are a reminder that we must pay attention to the current series of economic structural changes.

1st degree burn

The more we examine Burns’ record, the more its complexity becomes apparent. The former Fed chairman carefully managed the dissolution of a large bank in 1974. This was a precursor to the central bank’s current framework of failing bad companies unless they trigger a financial crisis. But the situation was a powerful union movement, anchoring the rising cost of living adjustment, which no longer exists. Even his relationship with Nixon is anything but simple. Byrnes wasn’t flattered, or at least tried to resist the president’s bullying. All of this provides the final and most important lesson from the Fed’s great antihero. ■

Read more about our column on economics, Free Exchange.
An Insidious Threat to Central Bank Independence (December 15th)
Addressing sexual harassment can have substantial financial benefits (December 8)
1980s Strategy Paper for Dealing with Inflation (December 1st)

Sign up for expert analysis of the biggest news in economics, finance and markets. money talka weekly subscriber-only newsletter.