December 29, 2006
WIN buttons and Arthur Burns
I normally find myself agreeing with Dave Altig's high-quality analysis over at Macroblog. But I'm afraid I have to leave Dave all alone in his latest quixotic mission to defend Arthur Burns (Chair of the Federal Reserve during the great inflationary episode from 1970 to 1978) and Gerald Ford's old WIN buttons.
One of the things many of us are remembering this week about President Gerald Ford was his "Whip Inflation Now" campaign, an effort to marshal the energies and commitment of ordinary Americans in what proved to be a futile attempt to hold back the runaway increases in wages and prices of the 1970s. You were supposed to signal your participation in this community effort by adorning yourself with one of these nice buttons:
It's not that Dave doesn't understand that monetary expansion rather than the greed of price-setters was the fundamental cause of the great inflation of the 1970s, and he's ably summarized some of the basic silliness of the WIN idea in his first of two posts on the topic. But Dave nonetheless thinks the idea isn't altogether without merit. He relates some of the larger context for his views in his most recent post:
For some time I have been in a sporadic but ongoing informal debate about the record of Arthur Burns, the Chairman of the Federal Reserve Board during the Ford (and most of the Nixon) administration. I have become increasingly drawn to the possibility that many of the mistakes attributed to the Burns-era Fed -- sometimes with the added charge of overtly political manipulation by Burns himself -- were the inevitable consequence of trying to learn how to conduct monetary policy in the aftermath of the collapse of the Bretton Woods global monetary system. A generous interpretation might be that the right thing to do was only obvious with the benefit of hindsight. And if so great an economist as Arthur Burns struggled with how to get inflation under control, can you really blame Gerald Ford for not getting it quite right?
Burns was indeed a very sharp economist. But let's carry the story back a bit earlier. Richard Nixon had been running for president as the incumbent vice president in the 1960 election. Here is how Nixon, in his book Six Crises published in 1962, described the advice he received from Burns prior to the 1960 election:
Early in March, Dr. Arthur E. Burns... called on me in my [vice president's] office in the Capitol.... [and] expressed great concern about the way the economy was then acting.... Burns' conclusion was that unless some decisive governmental action were taken, and taken soon, we were heading for another economic dip which would hit its low point in October, just before the elections. He urged strongly that everything possible be done to avert this development. He urgently recommended that two steps be taken immediately: by loosening up on credit and, where justifiable, by increasing spending for national security. [pages 309-310]
In other words, if you want to win the election, better hit the gas pedal for monetary and fiscal policy. Nixon continued:
In supporting Burns' point of view, I must admit that I was more sensitive politically than some of the others around the cabinet table. I knew from bitter experience how, in both 1954 and 1958, slumps which hit bottom early in October contributed to substantial Republican losses in the House and Senate. The power of the "pocketbook" issue was shown more clearly perhaps in 1958 than in any off-year election in history....
Unfortunately, Arthur Burns turned out to be a good prophet. The bottom of the 1960 dip did come in October and the economy started to move up again in November-- after it was too late to affect the election returns. In October, usually a month of rising employment, the jobless rolls increased by 452,000. All the speeches, television broadcasts, and precinct work in the world could not counteract that one hard fact. [pages 310-311].
When Nixon himself became president in 1968 and had the opportunity to appoint a new Chair for the Federal Reserve in 1970, the man he turned to was the same Arthur Burns who had advised him to ease up on monetary policy prior to the 1960 election. Milton Friedman offered these impressions in a 2000 interview that is included in the book Inside the Economist's Mind:
From the moment Burns got into the Fed, I think politics played a great role in what happened. So far as Nixon was concerned, there is no doubt, as I know from personal experience. I had a session with Nixon sometime in 1970-- I think it was 1970, might have been 1971-- in which he wanted me to urge Arthur to increase the money supply more rapidly [laughter] and I said to the President, "Do you really want to do that? The only effect of that will be to leave you with a larger inflation if you do get reelected." And he said, "Well, we'll worry about that after we get reelected." [page 116].
Now, I do agree with Dave that it is easy to make mistakes running the Fed in real-time that many of us would have avoided with 20-20 hindsight. The current academic consensus, which has emerged from some very well done research such as Northwestern Professor Giorgio Primiceri's forthcoming study in the Quarterly Journal of Economics or respected Fed researcher Athanasios Orphanides' 2002 paper in American Economic Review, has concluded pretty clearly that at least part of the cause of the 1970s inflation was bad data and a misunderstanding of how the economy works. But I am forced to conclude also that, in the face of such uncertainties, Nixon and Burns appear to have been wanting to err on the side of doing whatever would most help them win the next election.
And, despite the clever arguments that Dave brings up in the WIN button's favor, I think one great disservice of that campaign was to cultivate the misperception that inflation is somehow the responsibility of ordinary U.S. citizens. In my view, maintaining the purchasing power of a dollar is instead exclusively the responsibility of the people who control how many dollars get printed.
If we want to bring those cute little WIN buttons back, the only people who should be wearing them are the folks who sit on the FOMC.
Posted by James Hamilton at December 29, 2006 06:58 AMdigg this | reddit
I think you could make a pretty good case that, for the most part, the Fed did a terrible job until the 1980's. Since then, we've done pretty well. It's been clear for a long time now that Friedman got almost everything right, and before him people like Irving Fisher should have been listened to rather than ignored. There is no way, for example, that anyone since the time of Fisher has any excuse for confusing nominal and real interest rates, but such ignorance was common in public discourse at least until the early 1980's.
Posted by: Jeff Hallman at December 29, 2006 08:22 AM
I was an investment manager back in the days of
Uncle Arthur Burns. Remember sitting with Wall
Street strategist Ed Hyman on a couple of occasions in 1975 and 1976 wondering how in the
world the economy could be so strong with M1, M2
and M3 so weak...Then later came the Burns' benchmark revisions which showed dramatic and
inflationary growth in these aggregates...No
way the books were anything but cooked...In defense of the Fed was the very strong growth
in the labor force as both male AND female
boomers poured into the job market....Politics
dictated inflation over a sharply rising
unemployment rate...Not easy to maintain tight
monetatry discipline when the labor force is
Posted by: peter richardson at December 29, 2006 09:09 AM
In hindsight we can see that the WIN program was a waste of time, but even today the Fed seems quite concerned with keeping inflation expectations down. Couldn't it have been that a WIN-like program was conceived as a means to fight inflation expectations, and had it been coupled with a more credible Fed, it might have actually helped to some degree?
Obviously that's speculative, because we didn't have a credible inflation-fighting Fed, but I think its a fair question.
Posted by: Tom Graff at December 29, 2006 01:42 PM
Neat reference to 'Six Crises,' Professor. Are you a Nixon historian, or did you know the reference from research on inflation/Dr. Burns?
Posted by: jg at December 29, 2006 03:36 PM
I don't remember for sure where I first saw that reference to Six Crises, JG. Might have been Alan Blinder's 1979 book, Economic Policy and the Great Stagflation
Posted by: JDH at December 29, 2006 04:05 PM
Jim -- Nice post, and I don't really dispute much of it. I'm not quite giving up yet, though! I've added another post at macroblog, but the upshot is this: There seems enough evidence that Nixon was really fed up with Burns to suggest that Burns was operating more independently than he is ogten given credit for. One of the things I'm really looking forward to is Alan Meltzer's next volume on the history of the Fed, which will extend through the Burns years. That ought to give us plenty to talk about.
Posted by: Dave Altig at December 30, 2006 07:58 AM
Ed Nelson calls my attention also to his interesting study, which argues that the 1970s inflation arose from policy-makers belief in the unimportance of monetary policy in creating and stopping inflation.
Posted by: JDH at January 1, 2007 07:24 PM
When politics trumps sound economics both end in disaster.
I was relatively young when Arthur Burns gave Nixon his advice and I was virtually an economic illiterate (some might say I haven't changed much) but as I watched the Nixon administrationís economic moves I was aghast. I just defied common sense. I guess that simply solidified my understanding that some become educated beyond reality. I am reminded of Reagan's famous quip "An economist is someone who sees something that works in practice and wonders if it would work in theory."
Posted by: DickF at January 3, 2007 04:39 AM