Monetary Policy Needs a William Proxmire-Style Critic

William Proxmire was a longtime deficit hawk. He first appeared on the federal scene after winning the August 1957 special election for Senator from. Failing to win any statewide race before, losing the race for governor of that state three times, Proxmire won a full term in 1958 and would serve continuously as a Democrat in the Senate until his retirement in 1989.

It might have been difficult for any other man to step outside the shadow cast by his immediate predecessor. The 1957 special election was needed because of Joe McCarthy’s death. Proxmire instead paid him no grace and moved right in on his own. A budget specialist, of sorts, as Senator he would serve in powerful positions for shaping the Congressional approach to expenditures. And he would do it spending only a few hundred dollars on each of his campaigns, all out of pocket, of course.

He might be best remembered now for his one showy gimmick. In 1975, he introduced his controversial Golden Fleece Award. Intended to highlight to the taxpaying public the ridiculous excesses that had sprung up beside the ever-expanding federal bureaucracy, Senator Proxmire’s record in directing his ire wasn’t flawless.

He once singled out the FAA, for example, for one of these monthly awards. The agency supposedly devoted to the efficiency of airline operation and the safe travels of their passengers had funded a $57,800 study of the physical measurements of 432 airline stewardesses. That its purpose specifically mentioned the “length of the buttocks” implied more sensationalism than was perhaps realistic.

But Proxmire also bestowed one Golden Fleece, his second, actually, to psychologist Ronald Hutchinson. Trying to unravel a biological cause of aggression, Dr. Hutchinson had been investigating why rats, monkeys, and humans clench their jaws. Funded by some $500,000 in various government grants over a significant length of time, this was easy prey for Proxmire especially since it followed the first Golden Fleece given in March 1975 to an $84,000 National Science Foundation grant to find out why people fall in love.

But Hutchinson sued for defamation, especially as grant money was pulled in the award’s aftermath.  The $6 million suit was eventually settled in 1979 for a reported $10,000 and a laborious apology from Proxmire given on the Senate floor. Ironically, the Senator’s legal defense ended up costing the taxpayers $124,351, though he paid the settlement award out of his own pocket.

Science is a messy business, especially in the affairs of a free republic. What is and is not a valid method or approach is more often than not unclear and even at times unknowable. On the other hand, there can be no free reign, either. Rigorous scrutiny is required at all times, even if originating from among the unscientific. Some balance must be struck where honest effort inhabits both sides.

A year and a half before that first Golden Fleece, the Senator from Wisconsin had focused his skepticism elsewhere within the government. On September 17, 1973, Proxmire wrote and published a letter written to Arthur Burns.

Burns was the Chairman of the Federal Reserve’s Board of Governors, as such was the central bank’s chief central banker. The Senator wanted the Chairman to answer if the money supply was misaligned; and if it was, why. Proxmire suggested to Burns that he might want to see whether:

“…the money  supply  had increased  much too  much  last  year, in fact  that  the  increase  would have  been too  much  even  if  we had  been in  the  depths  of a recession  instead  of  enjoying  a  fairly vigorous  economic  expansion.”

It would take Chairman Burns more than two months to respond. Official monetary policy views in 1973 were not very monetary in nature, especially when it came to what was then relatively early in the Great Inflation. The worst of that period was yet to come, but there had been enough disruptive influence that had already made the topic of inflation a household, therefore political, affair.

And not just in the US. This was at the time a global development, a fact that few seemed willing to appreciate just how that could be. At most, it was easy especially for Economists to simply blame this on a golden defect.

Nine months before receiving Senator Proxmire’s letter demanding answers, Burns in December 1972 had been in Toronto, Canada. Speaking before the Joint Luncheon of the American Economic Association and the American Finance Association, the topic of the Chairman’s speech was quite simply “The Problem of Inflation.”

His view expressed that day was one that aligned with main orthodox understanding, and certainly with what was being done by the Nixon administration. In August 1971, of course, Bretton Woods was officially ended though the worldwide arrangement had been ailing for more than a decade by then. More than that, however, the President had responded to the heavy ratchet of inflationary pressures with attempts at wage and price controls.

This doctrine of cost-push inflation expressed exasperation over the perceived rigidity of American labor in the post-war period. Burns in his 1972 Toronto speech said, “a major cause of the inflationary bias in modern industrialized nations is their relative success in maintaining prosperity.” In other words, the price of labor rarely ever fell any longer as it had during prior depressions. Even in recession, businesses and labor would, by this view, still expect wages to go up rather than correct for the circumstances surrounding them.

Burns thus viewed wage and price controls as the one big answer to the burgeoning Great Inflation, dimly stating that “market forced no longer can be counted on to check the upward course of wages and prices even when the aggregate demand for goods and services declines in the course of a business recession.”  There had been one such recession in 1969 and 1970, and the CPI had only modestly retreated before roaring back in the second half of 1972.

Burns again in Toronto:

“There are those who believe that the time is at hand to abandon the experiment with controls and to rely entirely on monetary and fiscal restraint to restore a stable price level.   This prescription has great intellectual appeal; un-fortunately, it is impractical.”

Among those urging especially monetary answers was William Proxmire. By December 1972 when Chairman Burns was still talking wage rigidity, the US CPI was back above 3% again. By September 1973 when Proxmire wrote to Burns it was 7.36%. That November, when Burns finally responded, inflation was more than 8% and was double-digits a mere three months further on.

Monetary science, such that it can be called that, was at an important crossroads at that very moment. Central bankers, in particular, were reluctant to embrace the role of scapegoat as they saw it. Despite the public’s pretty solid handle on what causes inflation, colloquially more money chasing fewer goods, as the nation’s chief central banker Arthur Burns was instead dismissive but for indecisive reasons.

Writing back to Proxmire, Burns admitted:

“There are many assets closely related to cash, and the public can switch readily among these assets. However money may be defined, the task of determining the amount of money needed to maintain high employment and reasonable stability of the general price level is complicated by shifting preferences of the public for cash and other financial assets.”

There are many scathing reviews of the Burns tenure at the Federal Reserve, most with good reasons (save for the few that take on the predictable political tones), but there may not be a more damning appraisal than those few lines. Reporting officially to the US Senate that as the nation’s chief central banker you don’t believe money can be the cause of a sustained and devastating inflationary period because as the nation’s chief central banker you can’t even define money isn’t some explanation of why it’s not money sparking such ruin, but rather an admission that in all likelihood that’s precisely the problem.

At the very best, which is an enormous stretch, it says you don’t know what’s really going on. It’s not the best look for a central bank during a prolonged period where monetary issues are and ought to be front and center.

In January 1976, Chairman Burns appeared on ABC’s Issues and Answers program to talk about economic progress after the nation had suffered in 1974 and 1975 the worst economic recession in the post-war era to that point. He was quite optimistic even though wage and price controls didn’t actually work and were abandoned.

“DR. BURNS.  The economy is doing quite well. We have had a rapid recovery of production, a rapid recovery of employment, our retail trade has been strong. The recovery which has been underway since, oh, last April, last May is proceeding quite satisfactorily.”

Though these words were given by a central banker from a completely different era derived from circumstances we can’t today imagine, the Federal Reserve might well just re-issue them at each and every one of its current policy meetings; changing only the references to which months, or years, were the beginnings of whichever supposedly solid recovery. There isn’t a time even during recession that central bankers are not so optimistic.

This is especially true when speaking about the future. No matter what disaster may have just transpired, it is always so easily disposed of in the past tense without regard for why or how it happened in the first place. Yes, we had a nasty, awful recession in 1974 and 1975 that I can’t begin to explain but boy doesn’t ’76 look awesome!

Yet, it didn’t look awesome at all. Even Dr. Burns was forced on ABC to turn his attention to the very real and clearly negative aspects of the “recovery.” The Phillips Curve was being routed by not just the inflationary spiral but one that saw unemployment rise structurally within it.

“DON CORDTZ. ABC NEWS ECONOMICS EDITOR.  Dr. Burns, in spite of those future dangers, inflation has cooled off significantly recently. At the same time, however, the unemployment rate has been virtually the same for half a year. Now isn’t it time to focus on the problem on which there has been very little improvement?”

The Fed Chair responded in the same way all Fed Chairs ever respond, saying “underlying economic conditions have improved.” But to try and attempt an answer to the question, Burns singled out very generous unemployment insurance benefits. Seriously. “Now, one reason, of course, why unemployment has remained high is that we have extended unemployment insurance benefits to a period of 65 weeks.”

The economy would not get better though it was always “recovering.” The great imbalances unleashed by the Great Inflation would crescendo in absolutely stunning proportions by the end of that decade. The CPI was nearing its cycle low when Arthur Burns appeared on ABC, registering a relatively slow 6.72% that particular month. It would only fall below 5% in two months that year and would remain above 6% constantly before spiking again in later 1978.  

The unemployment rate which had gotten as high as 9% during the 1974-75 recession would hover around 6% officially for the second half of the decade. In the early eighties, of course, the US would hit a double dip recession that brought unemployment above 10% for the first time since the Great Depression. In the same month unemployment peaked at almost 11%, the CPI was still showing almost double-digit inflation.

That’s the one thing Arthur Burns got right in his television appearance. He told the audience “I am deeply concerned about inflation,” before warning:

“If we do that [embark on stimulative policies], the rate of inflation is likely to accelerate, and that may bring on before very long, another recession, and a recession that may well be deeper than the one we have just gone through. We had better watch our step and watch it carefully.”

Why didn’t he?

There are clear parallels between the sixties and seventies and the last ten or twenty years. Massive monetary evolution in the prior decade unleashed changes the keepers of the status quo couldn’t begin to comprehend, yet they kept to the status quo anyway. In doing so, they were forced time and again to utter the often ridiculous to try and explain why things were so bad; that is, when they weren’t in parallel trying to claim how things were so good or were about to be.

There are incomprehensible consequences to getting the big issues wrong. 

Where we clearly differ is that today there are no Senator Proxmires anymore. Sure, there are those “audit the Fed” politicians, but even they have largely disappeared from sight with each unsupported drop in the unemployment rate. What good is an audit?

After all, the institution itself is performing its own, of sorts. Begun early in Ben Bernanke’s tenure, the Federal Reserve is well into a concerted effort to become more open and transparent. And they mean it having accomplished quite a lot in honest determination toward that goal. We have more material today that the central bank uses and creates than ever before. So what?

At his latest press conference this week, current Chairman Jerome Powell kicked it off by making a big deal out of speaking plain English. As part of the ongoing transparency thrust, policymakers want the common layperson to be able to understand what’s going on – according to their numbers and beliefs. In truth, this isn’t any different than Arthur Burns on ABC in 1976.

What that meant for the current press gathering was repetition of just this sort. “The decision you see today is another sign that the U.S. economy is in great shape,” Powell said before saying again, “I would say that the economy’s in great shape.” He would later add, “Overall, we have a really solid economy on our hands here.” 

There was, however, very little discussion about IOER and none at all about what might really be behind federal funds taking shape in a way that the FOMC felt necessary to address – and what that might mean. No one brought up Urjit Patel, Brazil, China, or anything related to current events apart from that one minor way downstream change.

Nor was Powell really pressed on how he can say “great shape” when federal funds and the current trajectory (dots and all) isn’t even living up to projections from last year and the years before. In late 2015, when the FOMC began its current odyssey, it was forecast that the federal funds rate (effective) in 2018 would reach between 3% on the low side to as high as 3.6% at the upper bound. We know that because Bernanke’s transparency allows us to see just how their projections always overstate matters, and always to a substantial degree.

When asked about that relatively slow pace of “rate hikes”, the most Powell would say was “uncertainty.” Yeah, no kidding. Jerome Burns?

The institution is corrupt. I don’t mean that its members and staff steal from the government, nor do I mean they waste federal resources in a manner that would have put them in the running for a Golden Fleece award. These are not conniving Wall Street puppets who intentionally crashed the system in 2008 for their masters’ benefit, either, another unhelpful critique that was once pretty common in certain circles.

The Fed is corrupt because it is institutionally resistant to change and is therefore deeply unscientific in its operation about the one area people automatically assume it knows best (even though things like IOER conclusively show they don’t). Arthur Burns couldn’t define money in the seventies during the Great Inflation. Jerome Powell can’t do any better, and, pace Greenspan’s nineties era “proliferation of products”, would do a lot worse if he ever tried. 

Forget the word eurodollar, a term that should have become a regular feature of official monetary discourse long before Proxmire’s 1973 letter. 

In 1975, as chairman of the Senate Banking Committee, Senator Proxmire proposed unsuccessful legislation intended to merge the authorities of the federal government’s three major bank supervisors, among them the Federal Reserve’s. He did so because he lamented in particular the Fed’s secrecy with regard to bank information. The Senator warned that unless something was done, “our economy would eventually be controlled by a few giant banking institutions.”

Add a few words to that quote which might have been supplied had Arthur Burns been less rigidly doctrinaire, and Proxmire’s alarm might have been helpfully rewritten instead as, “our global economy would eventually be controlled by a few giant eurodollar banking institutions.” It would have solved much of the Great Inflation, as well as the Great “Recession” and its continued aftermath.