Friday, December 08, 2006

Wire them all

Some of the op-eds that Milton Friedman published in his last years included a remarkable optimism (for him) about central bankers. He wrote on several occasions that they are now more independent than in the past.

In the Fall 2006 Journal of Economic Perspectives, there is Burton A. Abrams' "How Richard Nixon Pressured Arthur Burns: Evidence from the Nixon Tapes." Here is the abstract:

"Evidence from the Nixon tapes, now available to researchers, shows that President Richard Nixon pressured the chairman of the Federal Reserve, Arthur Burns, to engage in expansionary monetary policies in the run-up to the 1972 election. This paper quotes the relevant conversations from the Nixon tapes. Questions remain as to whether Burns followed an expansionary policy in an already-inflationary environment out of conviction or because of political pressure."

There is also an interesting discussion of the inflationary aftermath of the disastrous Nixon-Burns price-wage-controls-and-money-expansion policy. It did not abate until Paul Volcker, ten years later.

The author concludes:

"The episode of Richard Nixon and Arthur Burns in the run-up to the 1972 election illustrates the danger of permitting too much discretion in the implementation of monetary policy. It is time to consider an explicit rule for monetary policy, whether the rule targets only inflation or some mixture of inflation and output or employment. Monetary policy is too important to be left to the discretion of central bankers, who may be subject to errors in economic judgment or to manipulation by politicians."

It's hard to disagree. Another implication (not considered by the author) is to put a wire on all these guys.