delanceyplace.com 11/11/09 - nixonomics

In today's excerpt - U.S. Presidents have had a
pronounced tendency to pressure the Federal
Reserve into keeping interest rates low, and Federal
Reserve presidents are often predisposed to please.
But deferring needed rate increases always eventually
backfires, and imposing price controls always
eventually backfires:

"Maintaining the gold value of the dollar [by increasing
interest rates] conflicted with the Kennedy growth
imperative in 1962, although it was finessed by the
foreign security tax ploy. Starting about 1965, Lyndon
Johnson started running big budget deficits to finance
the war in Vietnam and his domestic program [and]
the floods of new money were already generating
inflationary pressures. ...

"And once again, the prescribed medicine - raise
interest rates and reduce borrowing - was not on the
table, for it conflicted with Richard Nixon's desire to
win a second presidential term.

"The first two years of the Nixon administration were
very difficult economic sailing, to the point where the
administration was seriously worried about the 1972
election. During the five years of Johnson's
presidency, despite the uptick in inflation, the real, or
inflation-adjusted, annual rate of growth exceeded 5
percent. But in 1970, growth plunged to near zero,
while inflation was scraping 6 percent - dreadful
numbers for a campaign launch. There was little room
for maneuver. The 1970 federal deficit was already as
big as any Johnson had run, so fiscal stimulation was
likely to spill over into more inflation. ...

"But few politicians had Nixon's gift for the bold stroke.
In August 1971 he helicoptered his entire economics
team to Camp David for a weekend that Herbert Stein,
a member of the Council of Economic Advisers,
predicted 'could be the most important meeting in the
history of economics' since the New Deal. After the
meeting, ... Nixon announced that he would cut taxes,
impose wage and price controls throughout the
economy, impose a tax surcharge on all imports, and
rescind the commitment to redeem dollars in gold. ...

"After the final decisions had been taken, Volcker was
charged with drafting Nixon's and [Treasury Secretary
John ] Connally's speeches announcing the changes.
His draft, he recalled, was 'a typical devaluation
speech' filled with the 'obligatory mea culpas.' None
of it saw the light of day. The Volcker draft was handed
over to uber speechwriter William Safire and emerged
as a proclamation of 'a triumph and a fresh
start.'

"Politically, it was a masterstroke. With price controls
in place Nixon and his Federal Reserve chief, Arthur
Burns, could gun up the money supply without
worrying about price inflation - both the narrow and
broad measures of money jumped by more than 10
percent in 1971, at the time the biggest increase ever.
Economic growth obediently revived, and was back up
over 5 percent by the 1972 election - just what the
political doctors had ordered.

"Consumers were happy with flat prices, while big
business loved the tax breaks, the import surcharges,
and the price controls. All in a single weekend, Nixon
had delivered them from union wage pressures,
supplier price hikes, and foreign competition. ...

"Although Nixon got his landslide, the cracks in the
economy were too big to hide. The 1971
wage-and-price '90-day freeze,' as it was originally
billed, lasted for three years. Controls are always
easier to put on than to take off. The underlying
inflation builds to a point of explosiveness, and the
inevitable thicket of rules offers profitable little crevices
for the lucky or the well-connected. Organized labor
stopped cooperating in 1974, but by then Nixon was
deeply ensnared in the coils of Watergate. Congress
forced the end of all controls in the spring, except for
price controls on domestic oil. Removal of controls
triggered double-digit inflation, the first since the
1940s, and the country suffered a nasty recession in
1974 and 1975."

Charles R. Morris, The Sages, Public Affairs,
Copyright 2009 by Charles R. Morris, pp. 124-127.