The Region

Economist In An Uncertain World: Arthur F. Burns and the Federal Reserve, 1970-1978

Book Review

Kevin L. Kliesen | Economist, Federal Reserve Bank of St. Louis

Published September 1, 1996  | September 1996 issue

By Wyatt C. Wells
Columbia University Press
334 pages

A great man, a philosopher once wrote, reminds us of no one else. While perhaps not a great man, former Federal Reserve Chairman Arthur F. Burns was, in many respects, unlike any Fed chairman to come before him —and since. In his book Economist In An Uncertain World, historian Wyatt C. Wells gives full flavor to the complexity of the man former German Chancellor Helmut Schmidt tagged "the Pope of Economics." This is the same man whom former labor leader George Meany dubbed a "national disaster."

To many economists, however, Arthur Burns was a contradiction in terms. A self-avowed believer in free markets who eschewed government meddling, Burns was nevertheless rarely shy about calling for increased government intervention. Moreover, although he defended the integrity and independence of the Federal Reserve to the end, Burns pursued, what could be charitably called, an incontinent monetary policy that caused significant damage to the institution's credibility.

Arthur Burns did not lack for chutzpah. As soon as he entered the halls of the Federal Reserve, Burns began to influence policy and shape events like few Fed chairmen before him. Whereas William McChesney Martin, Burns' immediate predecessor, was the master consensus builder, Burns was out in front leading the charge, laying down policy markers from the getgo. Burns made no apologies, brooked no resistance: "What is the Chairman supposed to be, a purely passive regulator, a policeman who keeps order, or a leader?"

An economist by training, with an apparent visceral disdain for unscientific information, Burns broached policy problems from an analytical perspective. Under Martin, by contrast, governors, Reserve bank presidents and staff economists came to rely on anecdotal information as the basis for making decisions about the direction of policy—euphemistically known as the "tone and feel of the markets." Burns viewed this process with considerable disdain. Buttressing his call for higher standards of analysis, he poured resources into the development of the red book (now called the beige book) and the Board's large, macroeconometric forecasting model—the type he had criticized in an earlier time as bankrupt.

But a Federal Reserve chairman is judged not by the standards he sets for scientific analysis, but by how well he achieves price level stability. Thus, prominent among the self-professed goals of any Federal Reserve chairman is to leave office with inflation in a straitjacket and financial markets convinced it will stay that way. By this standard, Arthur Burns' tenure was not an especially successful one: The inflation rate averaged just over 7 percent during the 1970s —more than triple the average inflation rate that prevailed during the 1950s and 1960s. Although distances in time have a way of masking the circumstances faced by policymakers of an earlier era, few economists would quibble with the notion that the 1970s was a decade of significant economic upheaval and underperformance. The question for historians, though, is to what extent Arthur Burns' policies contributed to this lackluster performance.

Wells gives the reader the impression that Burns was dealt a bad hand from the start. He argues that Arthur Burns—probably more than any other policymaker during that wretched decade—had the difficult task of coming to grips with the emerging failure of Keynesianism and its ill-conceived policy prescriptions. Wells does not claim—nor should he—that the chairman played his cards right. Rather, he believes that Burns was often caught up in a vortex beyond his control: While trying to manage the difficult transition to an economy with low productivity growth rates, high and rising inflation and increased unemployment rates, Burns ended up arguing for policies that just a few short years earlier he went at lengths to dismiss as reckless.

For example, his anti-inflation elixir was, more often than not, predicated on some form of an incomes policy. Believing that the labor and product markets had somehow broken down, he was quick to advocate a wage-price review board to curtail wage increases early in his tenure. Similarly, when the Lockheed Corp. was on the verge of collapse, it was Arthur Burns who argued strenuously for a government bailout. Later on, he proposed that a $2 billion bailout plan be set up to help ailing—but fundamentally sound—companies. Although his enthusiasm for such policies waned in hindsight, the "logic of events," as Burns would note in later years, dictated these and other unpalatable measures since the rules of economics were no longer working the way they used to.

But of course many still did. To Milton Friedman's great disdain, his former teacher failed to comprehend fully the seeds sown by his overly expansionist monetary policies. To Burns' way of thinking, blame for the inflationary fires of the 1970s rested with profligate fiscal policies, devaluations of the dollar or surges in oil prices. More important, a social ethos was to blame, which simply reflected the then commonly held view unemployment was a greater evil than inflation. Burns believed that he was merely delivering what Congress and the administration wanted from a Fed chairman.

The first prerogative of any policymaker, according to Arthur Burns, was to avoid catastrophic change. Wells' book shows that, probably more than any other policymaker during the 1970s, he violated his one lodestar. This drama is portrayed in exquisite detail by Wells, as he shows President Nixon's tortured path to wage and price controls 25 years ago in August 1971. By relentlessly prodding the Nixon administration to adopt some form of restraint on the growth of wages and prices, Burns was a convenient foil for many members of Congress seeking to embarrass the administration. In the end, with much of Congress, the country and, of all people, Arthur Burns, lined up against him, Nixon imposed wage and price controls—the ultimate acknowledgment of defeat in the war against inflation.

Wyatt Wells' book is about much more than Arthur Burns and the Federal Reserve. In a larger sense, it poignantly depicts a fractious period when economic events, largely spurred by well-intentioned government policies, seemed to spin out of control. Thus, it should be required reading for those who do not remember—or did not live through—that era. But more important, it also depicts a time when the commitment to price stability was measured by WIN buttons (Whip Inflation Now), "inflation alerts," and wage and price controls. And for that legacy, Arthur Burns, for all of his other admirable qualities, must bear a considerable share of responsibility.