Alan Reynolds on Fed Chair Arthur Burns
and
the lessons of 1972. Quotable: "Burns advised running a "sizable" budget surplus .. That loony idea -- that a budget surplus could substitute for cautious Fed policy -- led to the 10 percent surtax in 1968. The policy mix of high taxes and easy money doubled the inflation rate and collapsed the real economy by the end of 1969. When his fiscal nostrum failed to fix a monetary meltdown, Burns imagined that inflation could be kept down by economic dictatorship -- the government dictating to businessmen what they could charge for their products, and to workers what their time was worth. With government thus declaring inflation illegal, what harm could there be from an easy money policy? So, the Fed minutes promised to "foster financial conditions consistent with the aims of the new government program." By March 1, 1972, the Fed had pushed the funds rate down from 5.6 to 3.2 percent. The funds rate rose only slightly to 5 percent by the time of the election, but it was doubled to 10.4 percent nine months later. A severe 16-month inflationary recession began one year after the election. By the end of 1974, inflation was 12.3 percent -- only slightly below the peak fed funds rate of 13.6 percent in July 1974. I am not sure Burns was primarily motivated by politics when he promoted and pursued terrible policies. He was clearly motivated by terrible economic theories, which were ubiquitous at the time. Like Burns, Alan Greenspan is now trying to shift attention away from the Fed by lecturing about budget deficits. Unlike Burns, however, Greenspan is not known for embracing incompetent theories or policies .. ".
Posted by Greg Ransom
