I closed my previous post asking this question: Is there anyway to characterize President Gerald Ford's "Whip Inflation Now" campaign as anything other than a waste of effort wrapped up in a bad idea?
One answer might be: "Yes, if you are willing to extend a little sympathetic goodwill toward those doing a tough job at a tough time." For some time I have been in a sporadic but ongoing informal debate about the record of Arthur Burns, the Chairman of the Federal Reserve Board during the Ford (and most of the Nixon) administration. I have become increasingly drawn to the possibility that many of the mistakes attributed to the Burns-era Fed -- sometimes with the added charge of overtly political manipulation by Burns himself -- were the inevitable consequence of trying to learn how to conduct monetary policy in the aftermath of the collapse of the Bretton Woods global monetary system. A generous interpretation might be that the right thing to do was only obvious with the benefit of hindsight. And if so great an economist as Arthur Burns struggled with how to get inflation under control, can you really blame Gerald Ford for not getting it quite right?
Even so, you might say, the WIN button publicity campaign was a ridiculously naive misfire. But I wonder. Consider this thoroughly modern idea, described by Lawrence Christiano and Christopher Gust:
An expectations trap is a situation in which an increase in private agents. expectations of inflation pressures the central bank into increasing actual inflation.
There are different mechanisms by which this can happen. However, the basic idea is always the same. The scenario is initiated by a rise in the public's inflation expectations. Exactly why their inflation expectations rise doesn't really matter. What does matter is what happens next. On the basis of this rise in expectations, private agents take certain actions which then place the Fed in a dilemma: either respond with an accommodating monetary policy which then produces a rise in actual inflation or refuse to accommodate and risk a recession. A central bank that is responsive to concerns about the health of the economy could very well wind up choosing the path of accommodation, that is, falling into an expectations trap.
Christiano and Gust continue:
In an appearance before the House of Representatives, Committee on Banking and Currency, July 30, 1974, Burns said:
One may therefore argue that relatively high rates of monetary expansion have been a permissive factor in the accelerated pace of inflation. I have no quarrel with this view. But an effort to use harsh policies of monetary restraint to offset the exceptionally powerful inflationary forces of recent years would have caused serious financial disorder and economic dislocation. That would not have been a sensible course for monetary policy.
What is the way out? There are two possibilities. One, a change of heart, policymakers, or circumstances that alters the perceived trade-off between inflation and the real consequences of monetary restraint. Two, change expectations.
In the end, we took the first route, but it would be the end of the decade before the right circumstances, the right public mood, and the right people would arrive to get the job done. Changing expectations would surely have been the less painful route, but how to do that? The idea of institutionalizing a commitment to price stability -- by way of inflation targets, for example -- was essentially unthinkable at the time. (It was, in fact, viewed as barely respectable in 1991 when I took up residence at the Cleveland Fed, one of the few places in the United States where such ideas were taken seriously.) And when it gets right down to it, what do today's inflation targets really amount to beyond public statements that we think inflation is bad, and we really, really mean it?
Maybe President Ford's anti-inflation PR initiative was indeed hopelessly naive, and it certainly didn't work. But the basic idea was arguably on the right track. And in the context of the times, wasn't it worth a shot?
UPDATE: William Polley has items on the situation Ford inherited (also emphasizing the collapse of Bretton Woods) and an extensive discussion of the proposals in the WIN speech. He also has links to others, including a sympathetic post from King at SCSU Scholars (who also notes that policy credibility then ain't what it is now) and pgl at Angry Bear (who also noticed that Ford called for monetary restraint without a restriction in credit).
UPDATE II: pgl has more thoughts, at Angry Bear. I like to think he is right when he says I would have counseled for more monetary restraint had I been asked at the time, but in truth I'm not so sure. As pgl says, "the 1970’s was a very difficult period for policy makers and their economic advisors."