Thursday, June 29, 2006

On Arthur Burns

The conventional wisdom is that Arthur Burns was a failure as a central banker. The mysterious knzn, however, questions whether this assessment is right:
for the 12 months ending in February 1970, when Burns began his chairmanship, the CPI inflation rate was 6.3%. For the 12 months ending January 1978, when Burns ended his chairmanship, the rate was 6.7%. On balance, that hardly looks to me like letting inflation get out of looks like Johnson’s influence on Martin deserves as much blame for the subsequent high inflation rates as does Nixon’s influence on Burns.
An intriguing suggestion, but I don't think we can revive Burns's reputation quite so easily.

While Burns was dealt a particularly difficult hand to play (OPEC shocks, productivity slowdown), inflation was not nearly as well contained as these numbers suggest. Recall that the Fed influences the inflation rate with a lag. Let's suppose that lag is one year, which I believe is roughly consistent with econometric studies. The story then looks very different. By this reckoning, Burns inherited an inflation rate of 5.0 percent (during his first year in office) and left his successor an inflation rate of 9.3 percent (during the year after Burns left office). Not a happy legacy for a central banker.