Freeman

OUR ECONOMIC PAST

Nixon's New Economic Plan

Nixon's Economic Policies Reflected Political Goals, Not Sound Theory

JANUARY 20, 2009 by ROBERT HIGGS

Richard Nixon had a crisis mentality. In 1962, unhappily out of public office, he wrote an autobiographical account entitled Six Crises. Whereas some presidents have faced real crises, however, Nixon’s were more the product of his personal sense of siege. As president he twice declared a state of national emergency, first on March 23, 1970, in response to a strike by postal workers and then on August 15, 1971, when balance-of-payments problems, among other things, led him to adopt an important set of policies called the New Economic Plan. (Whether any of the President’s advisers appreciated that the same name had been given to the policies implemented by Soviet dictator Vladimir Lenin in 1921, I do not know, but someone should have known.)

Like most incumbent politicians, Nixon gladly took advantage of crises to augment his power, but he did not simply sit waiting for an emergency to come along. For him, the risk that he might not be reelected was crisis enough. According to his economic adviser Herbert Stein, he “tended to worry exceedingly about his reelection prospects and so to feel impelled to extreme measures to assure his reelection.” Years before the election of 1972, Nixon and his aides began to scheme how they could maximize the likelihood of his reelection by manipulating the economy and creating as much apparent prosperity as possible before election day.

The New Economic Plan included several important elements, as described in the 1972 Annual Report of the Council of Economic Advisers: “The United States suspended the convertibility of the dollar into gold or other reserve assets, for the first time since 1934. It imposed a temporary surcharge, generally at the rate of 10 percent, on dutiable imports. Prices, wages, and rents were frozen for 90 days, to be followed by a more flexible and durable—but still temporary—system of mandatory controls.” In no way did this set of policies reflect sound economic principles. Political expediency was its sole driving force.

Price Controls

Nothing illustrates Nixon’s political opportunism better than his imposition of mandatory controls over wages, prices, and rents. The President, who had served as a low-level functionary in the Office of Price Administration during World War II, had often expressed an aversion to price controls, which, he declared during the campaign of 1968, “can never be administered equitably and are not compatible with a free economy.” Yet, as James Reichley has observed, Nixon was “not prepared to take extreme political risks for the sake of economic dogmas.”

Having convinced himself that his defeat in the presidential election of 1960 had resulted from the Eisenhower administration’s failure to generate favorable macroeconomic conditions on the eve of the election, Nixon was determined not to suffer again from the same kind of mistake. His latent fears were sharply aroused in 1970 and 1971, when the new administration’s restrictive fiscal and monetary policies had a more immediate effect in raising the rate of unemployment than in reducing the rate of inflation.

Impatient that the government’s macroeconomic policies seemed to be working so slowly, many politically important people began to call for direct price controls: Union leaders, big businessmen, members of Congress, potential presidential candidates in the next election, high-ranking economists in the treasury department, even Federal Reserve Board chairman Arthur Burns—all prodded the president to impose an “incomes policy” because, as Burns put it, “the rules of economics are not working in quite the way they used to.” Congress, as if daring Nixon to do what he insisted he would never do, passed the Economic Stabilization Act, authorizing the President to control all prices, wages, and rents. Nixon signed the bill with apparent reluctance on August 17, 1970.

Late in 1970 the appointment of the flamboyant John Connally as secretary of the treasury and his subsequent designation as the administration’s chief economic spokesman tipped the balance toward more controls. Connally had few economic scruples; he specialized in dramatic political gestures, favoring, in Nixon’s football metaphor, the “big play.” He supported the imposition of controls because he thought it would appeal to the public as a sweeping, take-charge action by the President.

Nixon liked that aspect of the controls. As he later wrote in his memoirs, imposition of the controls “was politically necessary and immediately popular in the short run.” Indeed it was. The stock markets soared. As Stein noted, “The Dow-Jones Average rose 32.9 points on Monday after the President’s announcement—the biggest one-day increase up to that point.” Opinion polls indicated a huge preponderance of approval of the President’s action, a response that showed, in Stein’s view, “how shallow was the general support in principle for the basic characteristics of a free market economy.” A year later, with rigorous controls still in force, Nixon was reelected by a huge margin.

Do Price Controls Work?

Economists, with notable exceptions, can be relied on to testify that price controls “don’t work,” and in the sense that economists have in mind—actually reducing inflation, not simply suppressing its manifestations—their conclusion is correct. From a political perspective, however, this claim misses the point. Price controls do work—to gain short-run political support for the politicians who impose them. The public seems never to learn that it is being sold a faulty political product. As Stein remarked, even after all of the economic disruptions, artificial scarcities, and inequities of Nixon’s price-control program, which finally ended on April 30, 1974, “the experience did not leave the country with a strong commitment to the free market, monetarist way of restraining inflation. The attraction of the direct approach remained.” Only four years later, the Carter administration yielded to political temptation and imposed another incomes policy, albeit a half-hearted one entirely reliant on indirect sanctions rather than legal penalties.

The most important legacy of Nixon’s wage-price-rent control program was the government’s energy price controls and allocations that persisted long after the comprehensive price controls had expired. When the first “energy crisis” struck, the administration was looking forward to disengagement from its no-longer-useful incomes policy. But given the lingering presence of the price controls, the Arab oil embargo and the OPEC price hikes of late 1973 and early 1974 quickly led in many areas to short supplies that were rationed mainly by the customers’ waiting in the infamous gas lines. The inconvenience and uncertainty were more than the American public could bear. There immediately arose, in William Simon’s words, “collective hysteria. . . . The political heat was on both Congress and the executive to solve the problem overnight.”

Congress “solved” the problem, all right, as anyone who endured the manifold foul-ups of the two “energy crises” (1973–74 and 1979–80) will recall. Only with Ronald Reagan’s election and the scrapping of all oil-price controls was the mess permitted to clean itself up through market processes. Even then, however, a complex system of price controls lingered for natural gas, a political dragon too fearful for even Sir Ronald to slay. Not until 1993 were these controls terminated fully.

ASSOCIATED ISSUE

January/February 2009

ABOUT

ROBERT HIGGS

Robert Higgs is a Senior Fellow in Political Economy at The Independent Institute. He is also the Editor at Large for The Independent Review, the Institute's quarterly journal.

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