A Benjamin Cole post
Where is Arthur Burns when you need him? Burns was the mousy U.S. Federal Reserve Board Chairman from 1970 to 1978, the last man in America to part his hair in the middle, and the central banker who infamously presided over double-digit inflation. Burns actually posed for official portraits with a pipe thoughtfully in hand. For you youngsters, that is a smoking pipe; he wasn’t a plumber.
At any rate, back in the disco-1970s Burns held that the powerful market players of the day—unions, the Big 3 automakers, Big Steel, Big Retail, etc., would cut output but not prices, if monetary policy was tightened. Other industries were rate-regulated, including transportation, telecommunications and banking. Even stockbroker commissions (very fat!) were regulated by law, and there was little international trade or competition.
Burns was successful in many regards; recovering from the 1973-75 recession, U.S. real output expanded by 20% in just four years. You read that right—20% real growth. That is a grand slam.
But, as measured by the CPI, inflation hit 13.3% in 1979.
Subsequently, Burns’ reputation was all but ruined by Chairman Paul Volcker (1979-1987), who raised interest rates sharply and crushed inflation back to under 5% in a few years, and then declared victory (yes, anything under 5% inflation was fine in those days. BTW, the NeoFisherians need to ponder Volcker).
Burns thereafter was inducted into the Economics Hall of Shame.
Today the economy is far less inflation-prone than in the 1970s, what with unions dead, and the Big 3 and Big Steel desperately fighting for market share, a web-infested retail sector, and globalized economy. How much has the world changed? New motor vehicle prices have not changed in 20 years.
Burns could have a field day!
But there is a fly in the ointment. Today the housing market has emerged as a sector immune to inflation fighting. As blogger Kevin Erdmann has pointed out, the U.S. is a nation with ubiquitous property zoning, and consequent artificial housing scarcity. Politically, this is a dead end. First, zoning is local, so there is nothing the Fed or Congress can do about it. Secondly, powerful homeowner groups crave retail-free single-family detached housing districts, and highest-and-best-use be damned to hell. Thirdly, many urban neighborhoods have character, a feel that has attracted residents, who have slavishly gentrified entire districts. Soviet-style apartment blocs might solve the urban housing problem, but few want such fixes—in their neighborhood.
Burns would have recognized that housing, now 40% of the PCE deflator, is immune to tight money—and thus he would print more money, and tolerated some inflation. Today, would Burns be right?
Probably. After all, PCE core inflation is running at 1.3% and falling. Unit labor costs have hardly budged since 2008. Forget computer prices. Copper is selling for the same as 10 years ago. The rest of the developed world is fighting deflation, not inflation.
It is time for a rehabilitation of Arthur Burns.
Yes, I still prefer nominal NGDPLT. Or even an IT band of 2.5% to 3.5%. But I would take Burns over today’s FOMC in a heartbeat.
PS Forgotten today is that Arthur Burns was one of two professors that Rutgers student Milton Friedman said inspired him to be an economist. Later, Friedman followed Burns to the NBER, and after tutelage by Burns, Friedman wrote his classic work A Monetary History of the United States, 1867–1960. After his stint at the Fed, Burns went on to hang his hat at the right-wing redoubt, the American Enterprise Institute. Surely, Burns can be rehabilitated, and his policies brought to bear in modern-day America.