America’s inflation villain gets a makeover

The years have not been kind to Arthur Burns, who led the Federal Reserve from 1970 to 1978 and is often remembered as perhaps the worst chair ever to head America’s central bank. His poor policy decisions, critics say, allowed inflation in the 1970s to jump out of control.

Chris Hughes thinks he deserves another look. Hughes, 39, is a newly accepted doctoral student focused on central bank history at the Wharton School of the University of Pennsylvania. This is a third career for Hughes, who was Mark Zuckerberg’s college roommate and a founder of Facebook, a first act that left him with a personal fortune estimated to total hundreds of millions of dollars.

Hughes then bought and for four years served as publisher of The New Republic, the liberal magazine. Starting this fall, he will spend his days studying the law and politics of central bank development and writing a book on the history of financial markets and politics.

As a person who knows something about reinvention, Hughes thinks Burns should get one, too.

He wrote a 6,000-word article for the journal Democracy on how America has misunderstood the former Fed chair, made the argument on NPR’s Planet Money and is now taking his spiel to academic gatherings.

His point? He thinks Burns is portrayed in ways that are unfair to him — and which may offer the wrong lessons as America approaches the inflation burdening the rest of us at the grocery store, used car lot and day care centre today.

Burns is frequently remembered in central banking and economic circles as a weak leader who failed to lift interest rates enough to control inflation because he feared harming the economy too much; Hughes and other Burns revisionists — a small but growing group of historians and economists who don’t necessarily love him, but do think he got an unfair rap — see him as someone who tried to balance concerns about hurting workers with a dedication to slowing down price increases. History often paints him as a political shill; the contrarians argue that he saw controlling inflation as a project that the Fed and elected officials in the White House and Congress could and should share.

Burns, a conservative economist, presided over rate increases during the 1970s, but he never pushed them far enough to bring inflation under control. And he may have pursued that start-and-stop approach partly because he was bending to political pressure.

President Richard Nixon, who appointed Burns as Fed chair, wanted him to cut rates in the run-up to the 1972 election. In taped conversations, Nixon urged Burns to push the Fed’s policy committee to lower borrowing costs.

“Just kick ’em in the rump a little,” Nixon was recorded saying. Fed officials did cut rates in the latter part of 1971.

Inflation deepened as the Fed’s rate moves remained more dawdling than decisive, and Burns’ name eventually became synonymous with bad central banking: irresolute and politicized. He remains the key historical foil to Paul Volcker, Fed chair from 1979 to 1987, who pushed interest rates up to nearly 20 per cent in 1981, crashed the economy into a deep recession and ultimately saw price increases cool. Volcker, hated by many in his time, is now recalled as an almost heroic figure.

The parable of Burns and Volcker retains a powerful hold today, as the Fed contends with the first major burst of inflation since the 1970s and ’80s. Fed officials regularly emphasize that they view a noncommittal approach to raising interest rates to slow the economy and choke off inflation — Burns’ style — as a mistake.

Meanwhile, Volcker described his own approach as one of “keeping at it.” Jerome Powell, the current Fed chair, has echoed that phrase aspirationally.

It is not clear whether the Fed would pursue a strategy just like Volcker’s. Powell has publicly noted that today’s circumstances differ from those of the 1970s. Nor do officials plan to push rates to the double-digit heights they reached in 1981 and 1982. But Volcker’s policies came at such a cost to workers, pushing unemployment up to a staggering 10.8 per cent, that mere admiration of his approach has been enough to stir concern among some liberal economists and historians.

Hughes agrees that rate increases have been necessary, but he is also pushing for a more detailed reading of Burns’ legacy. He has spent the past four years researching central bank history, including as a graduate student of economics at the New School in New York City. He remains a senior fellow at the Institute on Race, Power and Political Economy at the New School.

His own rapid jump from an adolescence in North Carolina’s middle class to a young adulthood at the upper end of the Bay Area elite, one that pushed his net worth to just shy of $500 million before his 30th birthday, piqued his interest in the design of the nation’s economic system — in particular, how it intersects with government policy and how it allows immense inequality.

Perhaps no part of that design is more complicated, or less well understood, than the Fed.

“Some are looking at Burns as an example of what not to do,” said Hughes, who quickly became intrigued by the 1970s. “But I think that’s not necessarily right.”

Burns avoided punishingly high rates for reasons beyond his politics, Hughes and those who agree with him argue. While he deeply hated inflation, he blamed supply-related forces, including union bargaining power, for the jump in prices. The Fed’s tools affect mostly demand, so he thought other parts of the government could do a better job of tackling those forces. Relying on rates alone to fully control inflation would come at an untenable economic cost.

He was working from “a place of ideological conviction,” Hughes said.

Still, many economists think Burns deserves his bad reputation, whatever his motivations.

Because his Fed took so long to control inflation, households and businesses came to expect fast price increases in the future, said Donald Kohn, a former Fed vice chair who worked at a regional Fed during the Burns era. That changed consumer and corporate behavior — people asked for bigger raises and companies instituted regular price jumps.

When Burns’ reputation went down in flames, so did the idea that controlling inflation should be a joint effort of the Fed, Congress and the White House. Since Volcker’s stand, inflation has been seen, first and foremost, as the central bank’s problem.

Hughes argued in his essay published last fall that modern policymakers could learn from Burns’ cross-government collaboration. Raising taxes, revising zoning rules, and other frequent Democratic priorities could help temper price increases, he thinks.

Other suggestions for government intervention to tame price increases have gone even further: Isabella Weber, an economist at the University of Massachusetts Amherst, has suggested that price and wage controls should be reconsidered. Their design and implementation in the 1970s did not work, but that does not mean they never could.

But such interventions — even if successful, which is far from assured — would take time. The way today’s central bankers understand Burns as disaster and Volcker as savior could matter more immediately.

And while Peter Conti-Brown, a Fed historian at Wharton and Hughes’ thesis adviser, said he thought Burns deserved most of the blame he received for failing to control inflation, he also thought it was possible that Volcker had been improperly lionised.

To foster both maximum employment and stable inflation — the Fed’s twin jobs — is a balancing act, and to do it requires acting like neither Volcker, with his firm concentration on inflation, nor Burns, with his yielding one, he said.

“I think in the history of central banking, there are few if any heroes,” Conti-Brown said. “There are also few if any villains.”

This article originally appeared in The New York Times

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