One of the advantages of getting older, of course, is that you acquire perspective on life and history. Fed chiefs, it seems, enjoy a similar boost of newfound wisdom after leaving the Board of Governors.

Arthur Burns served as Fed chair over a fractious eight-year period, from 1970 to 1978, that ended with inflation spiraling out of control. Once called the “Pope of Economics” by German Chancellor Helmut Schmidt, labor leader George Meany now dubbed him a “national disaster.” 

Inflation averaged just over 7 percent during the 1970s—more than triple the rate that prevailed during the 1950s and 1960s. 

The economist’s soul was shaken. Burns wondered why, despite central bankers’ abhorrence of inflation and the powerful weapons they wielded against it, their mission to maintain price stability so utterly failed. In this paradox, he told an audience in 1979, lies “the anguish of central banking.”

The devaluations of the dollar in 1971 and 1973, the worldwide economic boom of 1972—73, the crop failures and resulting surge in world food prices in 1973—74, the Arab oil embargo in 1974, and the sharp deceleration of productivity growth from the late 1960s onward all contributed to inflationary forces.

But away from the halls of the Federal Reserve, Burns came to another, perhaps more important, realization. Distance not only brings perspective, but objectivity.

Purely economic analysis of inflation, Burns believed, overlooked the fundamental inflationary bias that emerged from the philosophic and political currents that were transforming economic life since the 1930s, and particularly since the mid-1960s.

The breakdown of the economic order during the Great Depression was unprecedented, and it strained the precept of self-reliance beyond the breaking point. Succor finally came through a political idea that was novel to a majority of American people—namely, that the federal government had a far larger responsibility in the economic sphere than it had hitherto assumed.

Under the New Deal, the government undertook extensive projects of public construction; it gave direct relief to the needy; it established unemployment insurance and old-age pensions; it took steps to raise wages and prices with a view to fostering economic recovery; it gave labor unions broad new rights and powers; and it broadened its regulatory reach. 

The proliferation of government programs led to progressively higher tax burdens on both individuals and corporations. Even so, the willingness of government to levy taxes fell distinctly short of its propensity to spend. Budget deficits thus became a chronic condition. 

“Once it was established that the key function of government was to solve problems and relieve hardships,” Burns spoke, “a great and growing body of problems—not only for society at large but also for troubled industries, regions, occupations, or social groups—became candidates for governmental solution.”

Even conservative politicians and businessmen began echoing Keynesian teachings. Every time the government moved to enlarge the flow of benefits to the population at large, or to this or that group, the assumption was implicit that monetary policy would somehow accommodate the action.

When the government runs a budget deficit, the demand for goods and services tends to increase all around. This imparts a strong inflationary bias to the economy. It’s how inflation first got started in the mid-1960s and later kept being nourished. Since 1970 there was a deficit every year. 

Fighting inflation was the responsible course—it was what central bankers were trained to do—but Burns admitted that there was no way to turn back the clock. We can no longer “cope with inflation by letting recessions run their course” or by cutting programs that help the sick, the aged or the poor. 

The Employment Act of 1946 explicitly prescribes that “it is the continuing policy and responsibility of the federal government to ... utilize all its plans, functions, and resources ... to promote maximum employment.” The Fed is subject to this provision of law. 

Maximum employment, or “full employment” as it came to be known in popular usage, became America’s major economic goal. Inflation was widely viewed as a temporary phenomenon—or, provided it remained mild, as an acceptable condition. 

Burns warned in early 1976 that “in the current inflationary environment, the conventional tools of stabilization policy cannot be counted on to restore full employment.” But fear of immediate unemployment, rather than fear of current or eventual inflation, came to dominate economic policymaking.

It therefore seemed only natural for the Fed to respond quickly to any slackening of economic activity—at times, as in the early days of 1977, even to sheer illusions of such a slackening.

Additional forces on the supply side contributed to the inflationary bias, Burns noted solemnly.

Incentives to work diminished as income maintenance programs were liberalized. Some individuals, both young and old, found it agreeable to live off unemployment insurance, food stamps, and welfare checks, perhaps supplemented by intermittent jobs in an expanding underground economy.

Even ambitious citizens who sought permanent jobs became more leisurely or discriminating in their search as the government provided a protective income umbrella during jobless periods. Thus unemployed numbers could rise even when job vacancies, wages, and the consumer price level were rising.

The Fed failed to recognize that much of reported unemployment is voluntary unemployment and that curbing inflation and reducing involuntary unemployment are complementary rather than competitive goals. 

The Fed had the power to combat inflation at its incipient stage or at any later point. It could have restricted the money supply and created sufficient strains in financial and industrial markets to abort the Great Inflation with little delay. 

It did not do so, Burns mused, because the Fed was itself caught up in the philosophical and political currents that were transforming American life and culture.

As he later reflected, “In a rapidly changing world, the opportunities for making mistakes are legion.”  

And here we are, doing it all over again.

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