Chris Hughes on the Legacy of Arthur Burns and its Implications for Macro Policy Today

Although monetary policy is known as the primary tool for combating inflation, Arthur Burns believed that broader policy measures could be useful for reliving price pressures throughout the economy.

Chris Hughes is a senior fellow at the Institute on Race, Power, and Political Economy at The New School, and he is also the co-founder of the Economic Security Project and a senior advisor at the Roosevelt Institute. Previously, he was also the publisher of The New Republic and is a co-founder of Facebook. Chris joins Macro Musings to talk about his work on Arthur Burns’ tenure as Fed Chair and the lessons we can learn from it as applied to today’s inflation experience. Specifically, David and Chris also discuss Arthur Burns’ view of the economy and inflation, how his perspective on business psychology impacted these views, Burns’ view of fiscal and industrial policy as a tool for combating inflation, and a lot more.

Read the full episode transcript:

Note: While transcripts are lightly edited, they are not rigorously proofed for accuracy. If you notice an error, please reach out to [email protected].

David Beckworth: Chris, welcome to the show.

Chris Hughes: Thanks for having me.

Beckworth: Well, it's great to have you on and you're such a fascinating character because you've done a lot already in your life. You've been on an amazing career journey from Facebook, to publishing, to the think tank world, to becoming a financial monetary policy person in the space that we live in here on the podcast. So, it's great to have you come on board. So, maybe walk the listeners through your journey to where you are now.

Hughes: So, my career started about 20 years ago as a co-founder of Facebook with Mark and Dustin at Harvard. I stayed there for three years running product, and to some extent, communications, as part of the team. I jumped from there in 2007 and worked for then candidate Senator Barack Obama. I directed online organizing. Obviously, Obama won. It was thrilling. I tried my hand briefly in tech investing, then went on to the media world to own and run a political and literary magazine called The New Republic for a few years.

Hughes: I did a lot of stuff in a pretty short period of time, but I also, to be honest, felt a little unfulfilled and that may sound a little crazy given the paper resume, if you will, but I kept having these very unique and unparalleled career experiences, some of which were very successful, some of which weren't, but I always felt like I was doing something that I should be doing rather than what I actually wanted to be doing. So, in 2016, I took a beat. I spent about, initially six months, it turned into nine, just reading the books I wanted to read, just talking to the people that I wanted to talk to, really following my own interests, and what I found was that I was constantly reading and talking about economics and wealth and inequality, and it was for pretty obvious reasons. I had been a scholarship kid from North Carolina going to boarding school and then college.

Hughes: My life was transformed by Facebook, and I had more success and privilege than I had ever dreamed. So, I was wrestling with that on a personal level and then also big picture, theoretically, intellectually. So, the through line from there to today is I began work on the case for a guaranteed income, the negative income tax and other tax policy. That mushroomed into an interest in [the] anti-monopoly and competition space. I got a master's in economics at The New School where I became very intrigued by, excited by, fascinated by the history of central banking and monetary policy and macroeconomic policy in general, and that's really been my niche, been my vein for the past several years. So, Arthur Burns is a particular interest of mine, but my interests are significantly broader; the emergence of private monies, the history of the central bank backstop and financial stability and what I now call the growth of market crafting. I had a big report come out with the Roosevelt Institute explaining what market crafting is as a concept and how I see it working, just a couple weeks ago. So, that's where my head's been.

Beckworth: And you're working with Peter Conti-Brown, a friend of the show. He’s been on here a few times, so that's great. In fact, he connected us. Just for the audience to know, you've written a paper on central bang digital currency. We probably won't talk about that today. For the sake of time, we'll put a link up to it though in the show notes. So, you're definitely in the policy space that I consider we look at on this show quite extensively and you'll continue to be in this space. So, we may have you back on in the future. Now, I have to ask, Chris, since you're at Harvard, was there ever like an undergrad econ course you took and you look back now and you're like, "Ah, yeah, it clicked. I just wasn't aware that's what I wanted to do?”

Hughes: Yeah, well, it's actually a great question. By the way, I should say I do have the privilege to start a PhD program at Wharton this fall with Peter Conti-Brown. So, that's more in the future than it is in the past, but my love of academia, doing the master's continues. So, I'm really excited to work with him and the whole faculty at Wharton.

Beckworth: Great.

Hughes: Yeah, at Harvard, I managed to have an unusual or strange encounter with economics at Harvard. Everybody takes EC 10, the big flagship course that now Jason Furman teaches and it used to be Mankiw. I was even then a bit skeptical of a lot of the assumptions of the neoclassical frame. So, while I was there, a professor named Steven Marlin actually offered an accelerated, more heterodox introduction to economics, which I decided to take with quite a lot of enthusiasm. I rushed in into it headfirst and really struggled initially. I felt like it was difficult to get through some of the basic foundational assumptions of the models, even in the hands of Marlin and not others, and then once I did, I always wanted to be asking questions about institutions, history, and power rather than the econometric modeling or the more mathematical bent of the topic.

Hughes: So, I did fine in it, but it wasn't what I thought I would study. When you fast-forward to the more recent academic work I've done, I've actually grown to appreciate a lot more of the econometric analysis in economics these days and I enjoyed that work that I did at The New School and I expect to do more of it. So, I now understand it, but I think it's important to see economics as a field in its historical and political context and now that I have the opportunity to do that, it really means it connects with me a lot more individually, personally.

Beckworth: Well, that's great. I was just curious if there were any big names at Harvard that you look back now at and had a class from or which you had a class from.

Hughes: That was the only economics class that I took at Harvard.

Beckworth: Okay. Okay. Fair enough.

Hughes: It was plenty. I ended up studying history and literature.

Beckworth: Okay, fair enough, and you founded a major company too, so-

Hughes: Yeah, we were busy.

Beckworth: ... We won't hold it against you. Alright, so, you had a fascinating article in the Democracy Journal and the title was, *Rethinking Arthur Burns, the "Worst" Fed Chair in History,* An Inflation fighting strategy for today might come from the most unlikely source.* Now, Chris, it was a little jarring to me when I first saw this title, I'll have to admit, and I had to go back and read up. I read your article. I also read Bob Hetzel who is someone who's been on this podcast as well, and I thought it would be useful before we get into your article just to help some of our listeners be familiar with him if they're not already because he is way back. There are many of the people who listen who are younger or haven't maybe read a lot of history back then. So, just to paint some the picture, some context, he was Fed chairman from February 1970 through December 1977.

Beckworth: Prior to that, he headed the CEA, the Council of Economic Advisors. He was president of the American Economic Association and also headed the NBER. He was a very prominent public intellectual coming into this position and continued to do so and that was one thing I found really fascinating in reading about him. He was very much like a Larry Summers is today, that kind of gravitas, stature. He was looked upon very favorably and reading some of the quotes, he was very confident about himself as well. So, in more than one way, he was similar to Larry Summers and he studied under Wesley Clair Mitchell. So, he had a great pedigree, a great background coming into this. Milton Friedman looked up to him, right? Milton Friedman was a student of his. So, in many ways, he was like this perfect person to go into the Federal Reserve, take over during the season of high inflation, but things didn't go so well and you start your essay off by a speech he's giving at Pepperdine, or preparing to give at Pepperdine, and just down the road, president Richard Nixon's in a grumpy mood. So, walk us into that story as a way to motivate the discussion.

Setting the Scene for Arthur Burns’ Legacy

Hughes: Well, I think Arthur Burns is one of the most fascinating and overlooked figures in American economic history. I should say that I am under no illusions about the guy's virtue. He made plenty of mistakes as Fed chair and my project here isn't to try to paint him nostalgically as some hero that we can look back on. Instead, it's to hold up a light to what in my experience is considered a kind of heresy. The idea that Burns was a leader of the Fed who operated from a place of ideological consistency, even conviction at times, and who importantly in his time was considered to be quite hawkish on inflation, which is just head spinning to people today.

Hughes: So, a lot of what I think is important to do here is to focus the light on the history proper. So, I think your picture of the guy is really on point. I had never thought of him as the Summers of the day, but I think that holds. He was a consummate professor. He wore tweed suits. He constantly carried a pipe around, even in the 1970s that was very old-fashioned and he knew it. He came from the school of economics that we call institutional economics, very empirical, data-heavy theories of business cycles. He was not a Keynesian as some might think he was and a lot of people studied with him. Greenspan was his student. Friedman wasn't just his student, I mean, he called the guy his surrogate father and said that outside of his parents, he was most indebted to the man. So, he really was a leading light in economic circles.

Hughes: And so when we’re starting to talk at the very beginning of his job, the reason that I started the essay with the anecdote about a speech that he gives in 1971 at Pepperdine is because it's a speech that throws salt in the wound that aggravates Nixon and the Nixon administration, and the conventional wisdom looking back is that Burns and Nixon were super tight, so much so that Burns might have even gone so far to adjust interest rate policy to please the president, and I think a close look at the historical record suggests a much more complicated relationship, one where these guys were really in conflict a lot of the time, publicly and privately, maneuvering to outflank the other, and at other times a somewhat loyal and warm relationship. So, the Pepperdine speech is one where Burns goes to California and effectively makes the case, an early case for, what I call in the piece, for an all of government kind of approach to fighting inflation, incorporating monetary policy, but not overly relying on it and in so doing, he puts an additional pressure on the administration to take all kinds of actions that they don't want to take, including pricing wage controls in that period. So, it is very fraught.

Beckworth: And one thing Bob Hetzel brings out in his account of Arthur Burns is that he was the most important person promoting this kind of broad government approach, income policies, everything, and given his prominence, he was probably the most important person to promote it. I mean, his voice was loud. Again, he came in with this kind of gravitas already. So, he was a very important personality. So, you can see why Richard Nixon would be so uncomfortable with him. Again, you're President Biden today, if Larry Summer says something that's contrary to what you want, it's noticed. People pick it up. So, it's very fascinating and you give a lot of interesting stories, but one that I'd heard before, but I'd forgotten about and was in your paper was the story about Arthur Burns' salary. Maybe share that with the listeners as a way to illustrate the tensions that sometimes arose between these two people.

Hughes: Yeah. So, the second half of 1970 and 1971 are… we're three years into the Nixon administration. Burns is about a year, year and a half into his tenure as Fed chair. Inflation is running much higher than Burns wants, than other people want, but 1970 in many ways is a confusing year and in '71, there's increasing tension between the president and Burns. Probably, obviously, the president is looking for a looser monetary policy and Burns is resistant to that, but also interested in making this broader case. So, in the summer of 1971, Nixon goes out on the Potomac, on the presidential yacht, which I've always had a little asterisk in my historical records to read more about the history of the presidential yacht and where it came from and where it went, but that summer he goes out on the yacht. He has a few drinks, and he cooks up this plan with his staff, Nixon being Nixon, to leak a rumor that Burns wants his salary to be doubled as a way of embarrassing Burns publicly.

Hughes: And it does indeed leak, Nixon makes sure of it. Burns is outraged. There's no historical evidence to suggest anything of the sort, and Burns is also a savvy political operator. He had been in the Eisenhower White House. He knew what Nixon was up to. He knew, or I don't know if he knew that the president was behind it, but he certainly had a sense and Nixon just takes such pleasure in it. You can see in the transcripts of the Oval Office tapes. He just cackles gleefully with his Treasury secretary, Connally, when he hears of how angry Burns is. So, Burns in the diaries responds to this with anger and resolve. So, when I say in the diaries, there are some diaries that Burns kept, particularly in the early sections of his term, which were published about eight years ago, which had become a real kind of political football, and those of us who are interested in Burns’ history, people see a lot of things in them that I think aren't there, and then I think it's pretty clear that their attention is on fresh display.

Hughes: So, they end up patching it up. By the way, Alan Greenspan is the emissary who goes back and forth between the two to get them all back at the table in simpatico, but they don't really patch it up until August at Camp David, when the president decides to close the gold window and create price and wage controls. So, I think it's an illustrative story though of the Burns that so many people want to see as one who is just full of loyalty and undying fealty to the president so much so that he's going to adjust monetary policy to help get the guy reelected and tell his colleagues that this is what he's doing a mere several months later. This is does not typify their relationship.

Beckworth: Yeah, so Bob Hetzel agrees with you and his telling of this story, and I want to come back to that because the reason that he didn't raise rates differently is because of his view of inflation, a very different view of inflation and how to deal with inflation. I want to come back to that, but I want to flesh out this Richard Nixon, Arthur Burns story just a little bit more and play armchair psychologist here. This going to be dangerous. I'm going way outside my lane, but I read how they knew each other in the Eisenhower administration. You mentioned he worked with President Eisenhower, and it was either in your article or somewhere else I read that the relationship was one where Arthur Burns was like the elder and Nixon was junior because [of] age difference, but also Burns had more influence with President Eisenhower than did his vice president. So, I'm just wondering, coming into your presidency, here’s this figure who you in a previous relationship, worked with and he was a little more senior than you. He's a Larry Summers again. He comes in, people love him, respect him. I'm just wondering if there's some insecurity on Richard Nixon's part as well, just like, “I got to prove myself. I'm more than he is. I've got to show I'm the president, not him.”

Hughes: It's interesting to think about it, and I think it's important to think about the psychology of these actors because they really did matter. I don't see insecurity in Nixon, but I do see impatience, frustration, and dismissiveness. There's all kinds of evidence from the historical record that Nixon complained about Burns behind his back to Ehrlichman and to other folks and you do get the sense that Burns was the type of person who would enjoy professing, you know, who would show up in the Oval Office, bring the pipe, put it in, and then sit and provide a lecture to the President of the United States who was by the way younger than he was and who felt... I think Burns might have imagined him to be his most important pupil and you can imagine Nixon wanting none of that, but also Nixon was infamously conflict averse and despite all of his shady dealings. So, it does feel like a relationship that was very, very complicated and certainly not as simple as a lot of folks want to portray it as.

Beckworth: Okay. Yeah, it's so fascinating to read this history, the personal history, but as you said, it's also important to understand what really happened and then in a little bit, we'll get back to the implications for today, but let's go to Arthur Burns' view of the economy, of inflation, and after reading all of this, I mean a key takeaway, his view is that monetary policy can influence inflation, but it's a blunt tool and not the most important one. There were other things that needed to be done, this broad approach. So, Bob Hetzel says he had a non-monetary view of inflation for the most part and initially he was concerned about the power of unions, of corporations. He was a big advocate of this wage price spiral theory, at least in early 1970, '71, and then some of his views changed. As inflation went up in '73, he began to look more at supply shocks like farm prices, oil prices, and then as I understand later on, he eventually began to see the deficits playing a role, but his view, if I had to summarize it, was just it's more of a real view. He took seriously, the supply side shocks, powers of unions, corporations. Is that a fair assessment of his view, you think?

Arthur Burns’ View of the Economy and Inflation

Hughes: I think that's right. I think his view is very nuanced. So, I think we should set the scene of the world that he's acting in in order to be able to explain how he made sense of it. So, Burns starts the job in 1970 facing stagflation, which was a novel problem at the time. Inflation in 1969 had been at five and a half, and he starts in early 1970 and everybody thinks it's the top problem. Burns comes in saying inflation is the highest and biggest problem, and his appointment is generally perceived as being a positive development for the strength of will he will bring to combat it. The problem is [that] unemployment is climbing and we're about to enter the most significant recession at the time since the Great Depression. So, this is a new paradigm for everyone that they hadn't seen before and there was no clear playbook. However, it was clear to everyone then, and we can judge them for it now or not, but that higher rates were not some kind of magical answer to the problem. So, right off the bat, economists as diverse as Milton Friedman and James Tobin are supportive of some loosening in monetary policy as are Democrats and Republicans on the Hill, and Burns is the one who is wary of it.

Hughes: I mean even as late as 1970, at the end of the year, Milton Friedman is pushing for a loosening of rates. So, there's profound economic confusion about what's going on and a hesitancy to believe that higher rates are going to necessarily solve it, and then the second thing that is important to understand as a backdrop is the political heat that only grows throughout the course of the decade. So, in the summer of 1971, this is the period when Congress authorizes price and wage controls that at first, it's a democratic-led idea thinking that Nixon will never use them. Of course, he then does later in the year, but in that same debate, they consider placing interest rate controls and effectively a major arm of monetary policy outside of the Federal Reserve into the same new organizational unit that will oversee wage and prices, because the idea is if you can control wages and prices, then the cost of money should be administratively decided too.

Hughes: So, at this moment, and then at many other times, as in the rest of his tenure with Wright Patman and other people, he's under significant political pressure as well. So, on that backdrop, I think Burns is pretty sanguine about the role of rates, believes that they need to be higher and raises them at several points. Of course, he keeps them lower than he probably should in 1973. We can talk about 1977, but there are many moments when he is outside of the mainstream, so much so that the Wall Street Journal is, a few years later, calling him in 1974, the nation's anti-inflation hero. He's seen as being more aggressive than many would expect or want.

Beckworth: So, one thing that was fascinating to learn about him is that after he left office, he didn't really promote himself. He didn't write biographies, how he was right, how others were wrong, and I'm sure this must have contributed to the history that we now have, the standard narrative. He wasn't someone to write a bestseller and set the record straight, which was very surprising to me because one thing I got away from this was, he was a very confident man. In fact, one of the things that was fascinating to read is he felt he knew the heartbeat of America. He talked to businessmen. I got that sense he's a little full of himself at times with Eisenhower and stuff. So, why didn't he write this self-congratulatory book after he got out and set the record straight? I would've done that, I mean, if I were in his shoes and it may have avoided some of the confusion about this more nuanced record that he had at the Fed.

Hughes: If anything, he does even more of the exact opposite. He gives this very historic speech called, *The Anguish of Central Banking,* with Paul Volcker and the audience about a year after Carter decides not to renominate him as Fed chair and effectively bemoaning the malaise in the country, which he sees is the result of too much fiscal investment and increasingly a culture of folks who rely on welfare and unrealistic expectations on the part of the American people for economic prosperity or stability and unrealistic expectations for what government is going to do for it, and he believes that central banking, as a result, the anguish of it is that to raise interest rates so high, it would create such a profound recession or depression that it would trigger social unrest, which has never been seen or known before.

Hughes: So, thus, central bankers must only plot along and do their best. So, it is perplexing. I guess I agree with you that he did not find time to write some kind of memoir, autobiography, trying to reclaim his legacy. If anything, he was continuing to give voice to a lot of the things he struggled with. So, I'd say two things. One is I think that struggle was very real. We forget that the political backdrop of the late '60s and '70s was one of significant social unrest in the United States and a complete realignment in some ways of the social contract, particularly as America started to struggle with... to think through the legacy of structural racism, and that's worked, but obviously, we're continuing today, but on that backdrop, I think the idea of like, just jacking up rates and, “who cares if unemployment goes through the roof? It's just the right thing to do,” seemed politically impossible.

Hughes: The second thing I would say is, I think that one of the reasons why he probably didn't write a biography or autobiography or memoir along those lines is because his legacy had not yet been read through the Volcker prism. The thing about Burns today is he's always set up as the foil to Volcker. Volcker is the strong Fed chair who ask Americans to take their medicine. It may not taste good, but it's the right thing to do for them, whereas Burns is seen as some kind of indulgent parent, and so that narrative had not yet solidified by 1980, certainly not ‘81. If anything, the first couple years of Volcker's tenure see inflationary levels higher than at any point in Burns’ [tenure]. So, I think that there might not have been the same sense of urgency to do that as we would expect now looking back.

Beckworth: Well, we'll never know how history could have been viewed differently had that memoir been written. I want to jump ahead to something I was going to ask later, but since you bring up Volcker, one of the things I think about Volcker and his legacy or his ability to even do... What he did was very painful, right? Double dip recession, some argue it could have been done a little bit more gently, didn't need to be as deep, and that's the debate for another time, but the fact is he got away with it. He was able to do it, and even though it was popular at first, it eventually became less popular, but what's striking to me is if you go back and look at Gallup polls or public polling, you see that inflation becomes the number one concern [in the] late '70s, early '80s. So, the way I read that is the body politic wanted something done and Volcker just happened to be the person.

Beckworth: It could have been another central banker. Maybe you need a certain personality plus the body politic’s support, but Volcker, in a way, was a product of his time. It was season of change. People wanted inflation. It had gotten high enough and lasted long enough that they were sick of it and they're willing to see change and an interesting parallel to maybe last year when people were really getting worked up about inflation, you know, "Was there going to be a red wave in their elections?" It became this thing, this poignant social force, and I wonder if... Compare that. So, Arthur Burns didn't have that body politic support by that time. Of course, inflation wasn’t that high as well, but Arthur Burns is also a product of the generation out of the Great Depression. He had seen the other extreme. So, you see this generational swinging from people who [are] fighting the last war to avoid the Great Depression, then you lead to excesses. Then you have excesses, and then people want to go back to severe austerity. So, I wonder even if Volcker to some extent, I don't want to say got lucky, but just was there at the right time and the right place.

Hughes: Well, I think that whether it's leaders of these economic institutions and political ones, I mean, the Fed is certainly both economic and political as an institution. I think Volcker could see and was very aware of the fact that the political wins had meaningfully shifted and there's a reason why. I mean, inflation was significantly higher in that period. I mean, it clocks in at I think 11 in 1979 and then 14 in '80 and stays above 10 in '81. And with some quarters, I think there's one quarter that hits 20. So, these are very high levels of inflation and the urgency around tackling it, I think grows, and there is much more political space for Volcker to raise rates. I do think he did benefit from other non-monetary developments, the commodity price cycle going from boom to bust. There's domestic sources of oil that are coming online by the early '80s. Several energy reforms that are passed in the '70s are starting to become more operational by the '80s. Of course, there were headwinds for him too, Reagan tax cuts. Anyway, we could talk more about the Volcker scenario, but I do think that you're right to say that the political and economic understanding of what could be done on inflation and the urgency of tackling it had meaningfully changed by 1980, 1981 compared to a decade before.

Beckworth: And I think that has relevance, looking at the past decade, looking at what we just went through, we went through a decade of low inflation. It seemed like the Fed was struggling to get its inflation target hit. That opens the door for more support of aggressive fiscal policy for AOC and others to promote MMT, and now we go through high inflation and we're swinging back the other direction and my fear as someone who believes in makeup policy… and we definitely had made up policy, we overshot. I just hope we don't throw the baby out with the bath water. That's my fear going forward is that we're going to overcorrect and go the other direction. Well, let's go back to Arthur Burns. This is about Arthur Burns and your interesting story on him, and something fascinating that I learned about him is that he did not believe in the Phillips curve and I bring that up because it was similar to some of the conversations we're having today.

Beckworth: You have to give up so much unemployment to get inflation to a certain level and Bob Hetzel brings this up in his paper. I just want to read an exchange that he had in front of the Senate. Well, I'll just read Hetzel for a short excerpt here and then I'll read this exchange he had with the Senator. Hetzel says, "Burns rejected the idea of a trade-off between inflation and unemployment because he believed inflation caused high unemployment. If through presidential leadership the United States were to mitigate the inflationary psychology that propelled inflation, economic activity would advance as inflation fell." Let me stop right there. Something else that was really important, I think, to understanding Arthur Burns is he really thought business psychology was a key input to all of this, right? So, walk us through this part of him. Why did he think business psychology was such a key part of this story?

Business Psychology as a Key Component to Burns’ Inflation Views

Hughes: That's how that's he’d been trained. I mean, that's how… he writes a book before he moves into government in 1969 that articulates that set of ideas. I mean, he was very focused on encouraging business investment and it was one of the reasons why he disliked inflation as intensely as he did. That's clear in his writings. That's clear in his teachings. He believed that inflation was so destabilizing to the business cycle and to the process of financial decision making that it needed to be nipped in the bud in order to combat unemployment. So, it's in this period, though, that I think it's important that there are multiple different sources of inflation.

Hughes: There is demand-driven inflation headed into the early parts of Burns' tenure, for instance in 1971, but then the real extreme periods of very high inflation in the 1970s, the first during Burns' tenure, the second under Volcker, are the result of supply shocks in commodity and energy markets. So, you see, obviously the work of Alan Blinder on this has been formative for many, including myself, but you see core inflation going from about 4% in the late 1960s and early 1970s to around six by the mid to late 1970s, and then by the time we get on the other side of the Volcker shock, it comes back down to around four, but with these two very significant bumps, the first in 1973 and the second in 1979 and 1980, both of which related to geopolitical events, the Yom Kippur War, and then later the Iranian revolution and the Iran-Iraq war.

Hughes: So, I guess what I'm trying to say is that inflation, like it is today, has multiple causes, some of which are non-monetary, and I think as Burns and others were trying to piece through what to do about it, they really prioritize the fight against it, but it wasn't just clear that interest rate policy should be the only thing. It was some of the other things that we have talked about. Certainly wage and price controls, they get a lot of attention because this is the period when we experimented with them, but he also really favored the reinvigoration of competition policy, job training programs, lowering minimum wages. I mean, he had a whole set of policy proposals that he believed that ,if implemented on the fiscal side, would bring down inflation, thus bringing down unemployment in his outlook.

Beckworth: And not all of his proposals were put into play, just some of them like the wage and price controls. So, if you really wanted to make a strong case for Arthur Burns, would you tell the, “it really wasn't tried” story? I mean, or maybe would he say that? Would he say, "Hey, had we done everything I outlined in that Pepperdine speech and throughout the rest of the decade, I would have an amazing record in the history books?"

Hughes: That's an interesting question. I think he would largely agree that Congress and the Executive Branch did not embrace their power to fight inflation and because of a political crisis, and this is that anguish of central banking speech, and because of political, unrealistic social and political expectations, they left all of the responsibility to the Fed, and the Fed as an institution, under all kinds of political heat itself, could not single-handedly bring inflation back down. I think something along those lines is what he would say, and the short answer to your question is to the Burns program, which it's the list of things in the Pepperdine speech, but it's the same list of things that he's writing in a memo to Carter in 1977, that they're the same set of things that I think he wouldn't agree with that if they had been tried. I don't know if he would say his legacy would've been considered successful, but I think he would've said that inflation would've been significantly lower.

Beckworth: Yeah. Well, let me circle back to the Phillips curve point because it is something that's come up recently and I want to go from Arthur Burns to today because the part of your article is arguing there are lessons for today, and I think the Phillips curve critique is a good one and in the following sense, if you do have big supply shocks… and this is standard to Phillips curve analysis. If you have a big supply shock, you can have a drop in inflation without having a big change in unemployment. The Phillips curve is really looking at demand pressures. So, often Phillips curves have this little supply shock term at the very end, kind of a fudge factor, and I think one way to interpret Arthur Burns charitably is, well, that fudge factor can be very important. It can be very big. We shouldn't just look at the slope of the Phillips curve, but bringing it to today, you are arguing that there are insights for today to taking a much broader, I would call the abundance agenda, the supply side agenda that we see a lot of people talking about today, bringing it to bear. So, walk us through that point.

The Importance of the Phillips Curve Supply Side Factor and Implications for Today

Hughes: Well, I think on the Phillips curve... I mean, we could do a whole episode or set of episodes on Phillips curve history because it's very clear that we're writing a new chapter in that history now. I mean, it feels like everyone is still struggling to understand what the relationship is and how that relationship may change in historical periods. People tend to want to write these rules or laws that are supposed to be transhistorical and apply through all periods, but it may very well be that it changes over time. So, I think that's a really interesting conversation to have. Implications for today, so, I think that the biggest one that I wanted to try to communicate through the history is that monetary policy is a critical, central, and really the primary tool that we have to combat inflation. That is clear to me and I think that's clear to just about everyone, even those on the political left in the country, that monetary policy is that powerful. However, there are also many other tools that we have in fiscal policy and in industrial policy, what I call market crafting, that can help relieve price pressures in the medium term if not the long term.

Hughes: So, when you saw President Biden, for instance, saying publicly in his, "What are we going to do about inflation?" His primary thing is, well, that's the Fed's job. Yes, and it's also your job and the job of the Congress to think about what we can do on the fiscal and industrial policy side of the House. So, what can we do? Tax policy is perhaps the clearest. It's the most traditional. It's the most straightforward. You could roll back some of the Trump tax cuts or raise rates on the wealthiest if you wanted. That could have been a real conversation to have had, certainly, when there was a democratic trifecta. You could think about a reinvigoration of competition policy. Lina Khan and Jonathan Kanter, I think, are doing great work at the FTC and the DOJ, but some scholars have promoted the idea of automatic use of antitrust policy, which is triggered when prices rise in concentrated industries over some level. We've had this conversation about greedflation, whether it's real, whether it's not. It feels like we're in another phase of that conversation now. Isabella Weber's in The New Yorker and on NPR and everywhere, and I think people are starting to wrestle with her work in a way that's much more intellectually honest and not just dismiss it. I think that empirically, even if you think that it is not the primary driver, it is still a contributing factor to the inflationary surge, and it's a place where competition policy, I think, could use a lot more attention.

Hughes: Suspension of tariffs, immigration restrictions being relaxed to help with labor market pressures, there are all kinds of things in the housing market which we could talk about with permitting that could help spur development. The timeline for all of these things is longer. So, that's the tricky thing. People would say, "Well, sure you can change housing, but it takes years for that to show up." Indeed, it does, but inflationary cycles can endure for years. I mean, we've been in this one already for what's approaching two years, and I think most people think it will continue to be in an era of high inflation, at least for a couple more and that is a period where real macroeconomic forces can adjust, firstly. And then secondly, having the apparatus to bring down the skyrocketing cost of housing is good in and of itself over the next five to 10 years because it means that if our baseline rate of inflation is anchored to where it has been or close to it over the past 10 or 15 years, it's much easier to weather a war in Europe or some other kind of energy shock that we can't foresee or some other kind of exogenous event like a pandemic that we can't see. So, these policies, even though they do take years, in some cases, to come to fruition, can have very long term effects in the effort to restore and maintain price stability.

Beckworth: Yeah, that was going to be my question or my only hesitation is the time horizon on the supply side agenda. So, yeah, I think it's important on some of those issues like the electric grid, for example, make it more robust, housing, make it more flexible, but do we have the ability to do it in a timely fashion given changing political winds, and secondly, to be able to commit to it, but point taken.

Hughes: Just to ahead add one quick addendum there. If we don't, we should think about creating the institutional capacity to do it. It's a bit too easy to just throw up our hands and say, "Oh, Congress. They're never going to do that stuff.” Well, let's think about an institutional kind of arrangement. I mean, we've done it before. Historically, I don't think price and wage controls are the right answer in this moment in time, at least if they're consumer-facing. It may be in some places like they've done in Europe and energy markets, they do make sense, but when we have had price and wage controls or other kinds of market shaping policies like that, we've created new institutional frameworks to try to implement them. So, my point is [that] it's a bit lazy just to say that these things are complicated, Congress doesn't act very much. I mean, Congress just finished one of its most productive sessions with the IRA, with CHIPS, with the infrastructure bill, with the ARP. There's every reason to believe that if we work to think about what we need to do with state capacity to think about how to manage markets, to be sure that we can maintain price stability, that we could head in the direction of getting it done. We're not there yet. We have a lot more work to do, but it's the reason to work at it more, not give up.

Beckworth: Yeah. Well, that's a great segue into this last part of our show, and that is the role that Arthur Burns played in making an institutional setup that we now call the Federal Reserve backstop. I mean, that's too general of a term there, but you noted that we need to have institutional or state capacity built up during normal times, so [that] during crisis, we can respond and I think during the pandemic, during the last crisis, we saw that we really relied heavily on the Federal Reserve to do a lot of things, things that I don't think it was designed to do. We really pushed hard, Main Street lending facilities, municipal facilities. We need different institutions, I think, to do those effectively, but we haven't built up the state capacity.

Beckworth: I mean, there's a lot of things you could touch. You could touch on our unemployment insurance system didn't have the infrastructure to get checks to the right people in a timely fashion. A lot of issues there, but I want to zero in on the Federal Reserve itself, and that is this growing role that it is playing in the global shadow banking, or I would like to call global dollar funding markets. It is global. It's everywhere, and I think in some sense the Fed's hands are tied. If it doesn't step in now, the system would blow up. So, the Fed in some sense has got itself into a corner, into a bind, where it has to step in, but what was fascinating to learn, I wasn't aware of this until I read your article, is that Arthur Burns put this in motion.

Arthur Burns and the Federal Reserve Backstop

Hughes: Yeah. So, I think just to state the idea, or at least how I think about it, whenever the financial markets enter potential panic or a period where systemic crisis is a risk, the central bank, often in coordination with Treasury, the FDIC and the FEC, provides liquidity facilities that backstop these markets to try to stop panics from happening. That has happened in the traditional banking sector, obviously through the discount window originally and through other methods, but increasingly in recent years, it's happening through these facilities that provide liquidity in the repo market, swap lines and international FX markets, et cetera. So, I think that that backstop is very real and it has a significant effect on the financial system for good and with some causes for concern. The origins of that I trace back to 1970 and the Penn Central Crisis where Arthur Burns is the Fed chair. So, my co-author Tim Barker, a historian, and I have a paper coming out later this year, making the case that the commercial paper crisis that happens in June of 1970 as a result of the implosion of the nation's largest railroad, Penn Central, is a formative moment in that it's clear that the Fed is taking on this new responsibility of providing a systemic guarantee across the financial sector to preserve stability, including outside of the traditional banking sector.

Hughes: So, historically, we think of Bagehot and the lender of last resort, and when an institution is at risk, but solvent in a moment of crisis, they can come to the discount window and lend. Here, it's different where the central bank is stepping in to help out as many institutions as it can across the board to stabilize an entire market. So, that turning point moment happens in 1970 and then gets elaborated on in 1974 with Franklin National, and then it continues to waterfall over the decades that follow, but that's a seminal moment in Burns' career and one of the things that I also think is underappreciated, is Burns' attention to financial stability was very high in the commercial paper and eurodollar markets in particular, and you see him wrestling with that, and several other governors, including Andrew Brimmer and others, in that period.

Beckworth: Yeah, I mean, just to summarize your article, you make the case that Arthur Burns wasn't being negligent with his responsibilities as Fed chair in terms of raising interest rates. He, number one, as we spent some time already talking about, thought there was a broader approach to fighting inflation. He also was concerned about Congress, and Congress maybe getting upset with the Fed and paring its independence, but finally, financial stability. That was the last thing you noted, and just to flesh this out, the Penn Central case, 1970, that was tied to commercial paper. Am I right?

Hughes: Yeah. There's a huge run-up in commercial paper markets at the end of 1960. So, everybody is effectively... Non-financial companies are lending and borrowing from one another and banks are doing the same, most of it unsecured, most of it very short term, overnight, often certainly less than 30 days, and it's created this network of integrated mutual reliance where liquidity can dry up in an instant. So, Penn Central, this iconic major company that owns the railroads, it's the precursor to the Northeast corridor and Amtrak. It's one of the largest companies in the country, goes bankrupt, and all of a sudden all of the folks who had been lending to Penn Central have a real problem on their hands.

Hughes: So, the music stops and everyone stops lending in the commercial paper markets, which is a big problem because a lot of other very large companies, defense companies, car companies, et cetera, are relying on these markets to meet their short-term obligations. So, they have to rapidly shift back into the formal banking sector. So, the Fed does a couple things. They aggressively tell the banks to come to the discount window. It is not going to be a shameful thing, they don't need to worry about it. Everybody needs to come to the window, and then they also increase the Regulation Q ceilings on certificates of deposit, Regulation Q was the interest rate framework from the 1930s, which capped interest rates, and by relaxing it on CDs of $100,000 or more, it allows more deposits to flow into the banking sector, effectively allowing the banking sector to provide the liquidity that all of these companies that have been relying on the commercial paper market to do. But it's a very touching moment in June of 1970, and the board meets in many emergency settings to figure out what they're going to do because the last thing that they want to handle is a rolling set of bankruptcies, particularly of iconic American companies. That's going to cause real problems for Burns and for everybody else at the Fed and the rest of government. So, they make these changes in order to stabilize the entire system.

Beckworth: Yes, and it's fascinating because it's the commercial paper market, which is a part of shadow banking. Then in 1974, Franklin National is the eurodollar market, another big important part of shadow banking. You point out in your article that it's not until 2008 that the Arthur Burns playbook is invoked with Bernanke, right? Oftentimes, the Fed put onto Greenspan or they say Bernanke invokes Bagehot, but really the point you make is, Bernanke and the Fed in 2008 was really pulling out the playbook that Arthur Burns outlined.

Hughes: Updating it. I mean, it was certainly-

Beckworth: Updated it.

Hughes: ... the financial system of 2008 is radically different than 1970, but a key issue, which endured and endures, is the problem of short-term liabilities and long-term assets and the fact that liquidity mismatch existed then in 1970, and existed in 2008, and continues to be a problem.

The Fed as a Lender of Last Resort to the World

Beckworth: So, Chris, I want to go to this question you alluded to. There's cost and benefits to the Fed being this lender of last resort to the world, backstopping global dollar markets. There's lots of evidence showing every time the Fed does that, it just increases the growth of it. So, in 2008 and 2020, all these facilities, right? The commercial paper, primary dealer, currency swap lines. They now have a FIMA repo facilities. So, even China in theory could deposit Treasuries at the Fed and get reserves. So, it's massively opened up its balance sheet to the global economy when push comes to shove, and in my view, that tells the investor around the world that on the margin, dollar assets, dollar investments are safe. The Fed will be there in an extreme environment. So, that's going to create more incentive for them to hold those dollar investments. Now, there's both positives than negatives, as you alluded to. I want to make the case for the positives, and I would say start with number one. As Americans, that means lower financing costs. It creates flows of seigniorage both to the private and public sector and there's debate over how big that is, but I do think it's important. Secondly, I would also make the case, the dollar’s emerged as this global medium of exchange. It's facilitated globalization, the ending of poverty for a billion people in China.

Beckworth: It's not the only thing, but it's an important piece of the puzzle, and there's some research that has shown that if we were to go to a multipolar world where you had serious competitors or serious rivals… So, Ricardo Reis talks about how if the euro really was a significant currency in this part of the world and the renminbi, say, in Asia and the dollar, there is a case to be made, you could actually have more financial instability. So, those are the cases for. Now, the case against the Fed doing what it does and increasing the footprint of the dollar, is that it leads to an over-financialization of the US economy. It affects trade. It affects manufacturing. It arguably maybe creates more inequality and creates issues that we may not be thinking about as much as we should. So, I'd love to hear where you come out on that debate and that question.

Hughes: I think all of those points make sense to me. I think it may be even simpler, however. I see this institutional configuration as a good thing in that it can stabilize very erratic and panic-prone markets, many of which are at the center of the financial system, but some of which are increasingly a circle out. So, that's very powerful. You call it a backstop, I think another way to think about it is like macroeconomic insurance or a systemic guarantee. You can trace it back to the Greenspan put. It was not something that was just Burns. We don't have to hop over 20 or 30 years to go to Bernanke. There were plenty of events with Continental Illinois and the Mexican debt crisis, long-term capital management, where the Fed is working actively to provide this kind of systemic insurance to the system. Insurance should be paid for. It has to come paired with, in my view, higher capital requirements and a regulatory regime, which doesn't just wait for the crises to happen, but ensures that the financial system is stronger.

Hughes: So, I think there are a lot of different ideas that are floating around, particularly on the other side of this banking crisis this spring, on what that can look like. This has been a long historical journey from Basel and well before to think about the right way to do that, but it's clear to me that if we're going to have this kind of insurance program, then the Fed and the regulators and those at Treasury and the rest in Congress and elsewhere, need to think about financial regulation as a kind of instrument to pair with the privilege of having the stabilizing force. Ultimately, a world with this stabilizing force, I think, is better than one without it. It prevents all kinds of cataclysmic recessions with horrible impacts on everyday people and employment, but it just needs to be something that doesn't create more rents in the financial system and is fair to everyone.

Beckworth: Okay. Well, with that our time is up. Our guest today has been Chris Hughes. Chris, thank you so much for coming on the program.

Hughes: Thank you for having me.

Photo by Alex Wong via Getty Images

About Macro Musings

Hosted by Senior Research Fellow David Beckworth, the Macro Musings podcast pulls back the curtain on the important macroeconomic issues of the past, present, and future.