were overused; and wage-price controls, either "voluntary" or mandatory, were seen—despite constant failure—as a reasonable way to reconcile "full employment" with low inflation. Wishful thinking triumphed. People believed what they wanted to believe. By 1966, inflation had risen to 3.5 percent, which—by the standards of the 1950s—was high. But it "wasn't as big a thing as it should have been [in our minds]," economist Charles Schultze, director of the Bureau of the Budget under President Johnson, said later. Government and private forecasters regularly underestimated inflation. "In every single year of the 1970s, the consensus forecast [of inflation] made late in the previous year understated the actual value of inflation," reported economist J. Bradford DeLong of the University of California at Berkeley.16

The learning curve was remarkably flat. Successive presidents, Congresses and their advisers engaged in the same self-defeating behavior, very much like a compulsive eater who knows gorging is bad but can't stop. Why didn't Nixon learn from Johnson, or Carter from Nixon? One explanation is that presidents regarded economics as an obscure and technical subject that required them to lean heavily on their advisers—and mainstream economists revised their thinking slowly. Having claimed in the 1960s that they could improve the economy's performance (and having, thereby, enhanced their status), they were reluctant to admit that they had vastly overstated their case. Striving to redeem the original and unrealistic promise, they followed one round of bad advice with another and then another. Ideas ruled the roost, and the ruling ideas were wrong. Because they had created public and political expectations that couldn't be met, the effort to do so ultimately made matters worse.

But there was another cause of failure. Controlling inflation was an afterthought for most presidents. It was not central to what they or their political parties sought—not central to their ambitions for the country or for themselves—and so it was dealt with on the fly. When it got bad, they could not ignore it, but their responses were careless and casual—mostly "crisis management." Most presidents' first impulse was to prevent inflation from frustrating other goals (including "full employment"), not to sacrifice other goals to suppress inflation. The result was that these presidents did not devote to inflation the time or rigor required to develop an independent judgment as to what could or should be done. Instead, they went along with what seemed most convenient.

Imagining himself the heir to Franklin Roosevelt, Lyndon Johnson had embarked on his Great Society. It included more than Medicare, Medicaid and "the war on poverty."* He wanted to rebuild cities, transportation systems and much more. (Both the Department of Housing and Urban Development and the Department of Transportation were created under Johnson.) Vietnam and inflation threatened Johnson's ambitions. From the end of 1964 to early 1968, the number of US. troops in Vietnam rose from 23,000 to more than 500,000. The war's costs competed directly with funding for the Great Society. Johnson understood the dilemma, writing later: "[I]f I left the woman I really loved—the Great Society—in order to get involved with that bitch of war on the other side of the world, then I would lose everything at home. All my programs. All

* Medicare and Medicaid were, respectively, government health insurance for the elderly and the poor. Congress created both in 1965.

my hopes ... all my dreams." Inflation, in this analogy, was at best a bad date. Combating it by slowing the economy would shrink tax revenues (inflation was a time-honored way of paying for wars) and further erode Johnson's popularity.17

When Nixon and then Carter entered the White House, their political agendas didn't include controlling inflation. Nixon's great ambitions were in foreign policy and politics. He wanted to disengage honorably from Vietnam and later decided to open relations with China. He also hoped, as historian Allen Matusow of Rice University has observed, to engineer the first major political realignment since the Great Depression. Republicans could become the majority party, Nixon thought, by fusing their traditional base of economic conservatives with disenchanted southerners and blue-collar Democrats who'd become estranged from liberalism by the lifestyle, sexual and racial upheavals of the 1960s. Carter was determined to erase the taint of Watergate, restore rapid economic growth and—later—mediate peace between Israel and Egypt. For both men, inflation was an annoying distraction They paid attention only when there was no alternative.18

Nixon's initial economic policy, dubbed "gradualism," promised to reduce inflation almost painlessly. In 1967, Johnson had finally proposed a temporary increase of income taxes, which Congress reluctantly passed in 1968. When Nixon became president in 1969, the budget had moved into surplus for the only time since the early 1960s (and, as it turned out, the only time until 1998). Interest rates had also risen. The idea of "gradualism" was that a slight economic slowdown and the resulting "slack" (unemployed workers, spare industrial capacity) would gradually reduce wage and prices pressures.

Unemployment, which was 3.4 percent when Nixon moved into the White House, would rise to just above 4 percent—slightly more than "full employment." Competition among workers and companies for jobs and sales would curb inflation without a recession. Most Americans would hardly notice. Nixon's economists expected these good results in 1969 and 1970. What happened was different. In 1970, there was a mild recession. Unemployment reached 6 percent by December. Inflation barely diminished. It was 6.2 percent in 1969 and 5.6 percent in 1970.

To the public and Nixon, "gradualism" was a flop. In the 1970 elections, Republicans didn't make the gains Nixon had wanted (they gained three Senate seats and lost nine in the House). "Without the economic drag, [we] would have carried both the House and Senate," he told White House aide H. R. Haldeman after the election. Discouraged, Nixon switched Treasury secretaries at the end of 1970, replacing David Kennedy, a mild-mannered banker, with John Connally, the flamboyant ex-governor of Texas, a conservative Democrat who had been in the same car with John Kennedy when he was assassinated. Nixon saw Connally as a partner in building a new majority and even imagined him as his presidential successor. Connally s first job was to counteract harsh Democratic attacks. To embarrass Nixon, the Democratic Congress had passed legislation in August 1970 empowering the president to impose wage-price controls. No one expected Nixon to use the power, because the president and his advisers publicly opposed controls. Nixon's dislike for controls was visceral. During World War II, he had served with the Office of Price Administration—an agency that oversaw wartime controls—and came to detest the rationing and in efficiencies of wage-price regulation. For Democrats, the law was a public relations sledgehammer. It allowed them to attack Nixon for the slowdown's failure to suppress inflation; therefore, they could also hold him responsible for excessive unemployment.19

Nixon ultimately stunned—and delighted—the nation when he announced a ninety-day wage-price freeze on August 15, 1971, as part of a program to let the dollar depreciate and abandon the commitment to pay foreign government gold for the dollars they held. The decision simply disregarded the administration's previous hostility toward controls. In June, Connally had announced the four "no"s of administration policy: no controls; no wage-price board (that is, no voluntary controls); no tax cut to stimulate the economy; and no increased federal spending (for the same purpose). With hindsight, it's easy to think that Nixon adopted controls for crass political reasons: He wanted to cut inflation so he could stimulate job creation and ensure his reelection in 1972. That's certainly part of what happened. Both the federal budget and Federal Reserve policy turned expansionary in late 1971. By June 1972, unemployment had dropped to 5.5 percent from 6.1 percent in August 1971. Nixon—consumed by political calculation and obsessed with being reelected—understood the implications. He surely intended controls to improve his prospects.

Still, his reversal was not entirely an act of political self-interest. In a broader sense, he merely surrendered to the overwhelming forces of public opinion and conventional wisdom. Nixon "abandoned gradualism only after practically every prominent Democrat, most professional economists, a growing number of Republicans, much of the corporate community, [his own economists] and the public demanded he do so," wrote historian Matusow. One poll found that 75 percent of the public approved; only a short time earlier 73 percent had disapproved of his economic policies. In the end, imposing controls helped him win reelection, but when they were removed— after becoming unpopular and unmanageable—inflation exploded into double digits.20

Considering the history—Nixon's and, earlier, Johnson's failure to control inflation—the wonder is that the Carter administration fared even worse. But it did. By early 1980, inflation was running almost 15 percent annually. The explanation was not mysterious: "Full employment" remained the obsession. Blaming inflation's worst outbursts on the Vietnam War and oil price explosions—onetime events that exonerated normal economic policies—resulted in a ruinous complacency. Just before Carter took office, the nonpartisan Congressional Budget Office (CBO) issued a report titled The Disappointing Recovery. It expressed concern that the unemployment rate might exceed 6.5 percent by late 1978. It suggested policies (tax cuts, spending increases) to improve job prospects. Carter was considering just such a "stimulus" plan. Inflation was then about 6 percent, but the report did not discuss how it might be reduced. At a congressional hearing, CBO director Alice Rivlin said that Carter's "stimulus" program would have only a "fairly small" effect on inflation. The CBO forecast that by the end of 1978, inflation would be between 3.8 percent and 5.8 percent.21

All these forecasts were wildly inaccurate. By the end of 1977— before Carter's "stimulus" program had had much effect—unemployment was down to 5.4 percent and inflation was up to almost 7 percent. But both Rivlin's view and Carter's policies reflected main stream thinking. At the same hearing, Paul McCracken, the first chairman of Nixon's Council of Economic Advisers, supported a "stimulus" program, arguing that the inflation risk would be "acceptable." Later, testifying before another congressional committee, Reginald Jones, then the head of General Electric, was even more emphatic in favoring a "stimulus" program. "[T]here is so much slack in the economy right now that we believe a fairly sizable program of permanent tax cuts and job oriented programs would not cause unmanageable inflation or deficits [but] rather would strengthen the economy against future inflation and deficits," he said.

0 0

Post a comment