Friday, December 29, 2006
But my question back to Hamilton is which Arthur Burns was he discussing? Christina and David Romer have a nice table in a Journal of Economic Perspectives article on policy views of Fed chairs in which Burns holds seemingly three different views during his eight years in office. First he's a Phillips curve believer but with a very low natural rate. So he believes monetary policy can be tightened in to rein in inflation, but he doesn't feel it necessary since unemployment is often above the natural rate and therefore inflation expectations are dropping. He then seemingly gives up on that view because, he says, inflation isn't obeying the relationship at all. The Romers cite Burn's Congressional testimony in July 1971 (just before the wage-price controls are put in place and the gold window shut):
A year or two ago it was generally expected that extensive slack in resource use, such as we have been experiencing, would lead to significant moderation in the inflationary spiral. This has not happened, either here or abroad. The rules of economics are not working in quite the way they used to. Despite extensive unemployment in our country, wage rate increases have not moderated. Despite much idle industrial capacity, commodity prices continue to rise rapidly. And the experience of other industrial countries . . . shouts warnings that even a long stretch of high and rising unemployment may not suffice to check the inflationary process.A guy that believes that -- and it appears he wasn't alone in this view at that time -- is likely to decide monetary policy will not use a measure of general prices or inflation as its ultimate goal. But he then reverts back to the Phillips curve explanations by early 1974, along with upward revisions to the natural rate estimates. By October of that year Burns says:
For many years, our economy and that of most other nations has been subject to an underlying inflationary bias that has merely been magnified by special influences. . . . governments have often lost control of their budgets, and deficit spending has become a habitual practice. In many countries, monetary policy has supplied an inflationary element on its own, besides accommodating fiscal excesses.Now I would agree with Hamilton that it appears the abandonment of the Phillips curve framework -- flawed as it was -- provided a convenient reason to juice the economy before the 1972 elections. That doesn't necessarily mean, though, that the abandonment of the framework was done because of that. It's hard to ascribe motives to behavior.