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  Helping a Great Economist: Arthur Burns

  By James Annable | Jul 31, 2020

  It is a tenet of the GEM Project that professional greatness is not limited to making important contributions to economic theory. Economist policymakers whose experience and skill, especially in crisis, have substantially enhanced our collective well-being are included in the Blog’s Helping-Hand series. An earlier post featured my friend Ben Bernanke, who was Chairman of the Board of Governors of the Federal Reserve during the extreme instability that was organizing itself in 2008-09. He was the architect of and principal force behind the central bank’s bold and creative aggregate-demand policies that prevented a second, and much worse, Great Depression. In that post, I argued that Bernanke ranks with the likes of George Marshall in the pantheon of U.S. civil servants.

  Joining Ben is a more surprising selection. I believe that an earlier Chairman of the Federal Reserve also deserves recognition for exceptional skill and experience in a very difficult time. Arthur Burns insightfully managed 1970s stagflation instability, the 20^th-century’s second most debilitating macro crisis,  that seriously risked collapse into a second Great Depression.

  Burns’s Great Contribution

  In the circumstances of the 1970s stagflation, mainstream market-centric general-equilibrium advice to central bankers was then (and remains today) to  aggressively pursue the single goal of low, stable product-price inflation, laser-focused on asserting their anti-inflation credibility. In arguing that little else matters, the macro academy implicitly promises that the whatever-it-takes use of tight credit will quickly break any price-wage-price spiral, short-circuiting the damaging macrodynamics experienced during the stagflation decade. The wrong-headiness of that policy prescription reveals a great deal about the fatal flaws in the macro academy’s consensus thinking about how highly specialized economies actually work.

  How investors assessed the Fed’s credibility with respect to its trend full-employment, not low inflation, objective is what worried Arthur Burns in the stagflation crisis. He understood that an all-out credit-tightening war on the structural 1970s price-wage-price spiral unacceptably risked a loss of its real-side credibility and a consequent nonstationary collapse of total spending –...

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