U.S. Growth and Inflation Under Different Fed Chairmanships

December 11, 2013

Ben Bernanke’s eight-year stint as chairman of the Federal Reserve ends six weeks from today.  His immediate predecessors were Alan Greenspan for 18 years and 5 months from August 1987 through January 2006 and Paul Volcker for eight years between August 1979 and August 1987.  The infamous inflation buildup had deep roots going back to the 1960s when America chose to embrace more guns (Vietnam War), more butter (Great Society spending), and less taxes but didn’t become chronically symptomatic until the stewardships of Arthur Burns (February 1970 through end-January 1978) and G. William Miller (February 1978 – August 1979), which covered a combined 9-1/2 years.  In those years, a negative real federal funds rate was accepted long after inflation became excessive.

William McChesney Martin (April 1951-January 1970) barely edged out Greenspan for the honor of longest-serving Fed Chairman.  In his nearly two decades, America had the best combination of macroeconomic trends.  Inflation averaged too high under Burns/Millar, Volcker and Greenspan, and jobs and GDP growth has been too low during the Bernanke years. 

The inflation problem came in on little cat feet, not with a big bang.  Plenty of time was allowed to pass before the problem surfaced and when officials got really serious about restoring price stability.  The table below documents on a percent per annum basis the growth rate of U.S. jobs, real GDP and consumer prices under different Fed Chairmanships.  One observes that a full percentage point reduction of inflation in the Bernanke years was accompanied by a painful deceleration of growth in jobs and real GDP.  The Fed again has negative inflation-adjusted interest rates but in contrast to the 1960s and 1970s when bank lending raced upward, that isn’t happening.  Another three basic differences now are that inflation is still less than desired, real GDP growth lies well below its long-term trend, and jobs are not much higher than at the start of Bernanke’s first term.  Since April 2000, the U.S. population has risen 35.3 million people, but jobs are up just 6.2 million, underscoring that Bernanke inherited a labor market that was already diseased.

% per year Real GDP Jobs Growth CPI
Bernanke 1.2% 0.2% 2.1%
Greenspan 3.2% 1.5% 3.1%
Volcker 2.9% 1.6% 5.6%
Burns/Miller 3.3% 2.5% 7.3%
Martin 3.9% 2.1% 2.0%

Copyright 2013, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.



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