Nixon Taught Us How Not to Fight Inflation
By William N. Walker, 8/13/21, Wall St. Journal

President Nixon announced a 90-day freeze on all prices &
wages in the U.S. on Aug. 15, 1971. Suddenly & with no
warning, every shop & factory was forbidden to raise prices
for every product sold anywhere in the country. It was a
watershed moment—a radical program that imposed direct
govt control over the economy aimed at breaking the cycle
of inflationary price & wage hikes.

A half-century later, the policy seems almost otherworldly.
Does anyone think factory owners & shopkeepers would accept
a peremptory presidential directive to freeze prices today?
Resistance to govt action has become deeply ingrained. In
the face of the pandemic, Americans routinely flout govern-
mental decrees to wear face masks & maintain social
distance. Opposition to a freeze directive would almost
certainly be swift & overwhelming.

Yet 50 years ago, retailers & employers, small & large,
accepted Nixon’s order. Consumers, whose purchasing power
had been eroded by years of rising prices, felt as if
they’d caught a break; govt had stepped in & forced greedy
merchants to stop gouging them, at least for a while.
What was not to like?

A Democratic Congress had passed the Economic Stabilization
Act in 1970, with language authorizing the president to
impose price controls to fight inflation. Nixon signed the
law, but Democrats were confident that a GOP president
would never freeze prices. They planned to use his failure
to do so as a political cudgel in the 1972 campaign.
Nixon’s surprise announcement turned the tables.

It worked—for a while. The freeze persuaded organized labor
to temper wage demands & broke what had been an inflationary
spiral of price & wage hikes that sapped consumer buying
power. But Phase II of Nixon’s program imposed increasingly
complex rules that became both unpopular & a political
burden. After the initial burst of popularity—which lasted
long enough to boost Nixon’s landslide re-election in 1972—
the program failed spectacularly & ushered in nearly a
decade of so-called stagflation—high inflation coupled
with slow growth, which reduced living standards for millions.

Safely re-elected, Nixon ended the experiment on Jan. 15,
1973. The stock market promptly plummeted & the rate of
inflation exploded. Govt & private forecasters alike failed
to recognize that during the price-freeze period, demand had
grown exponentially, putting such severe pressure on supplies
that within months, prices of nearly everything—commodities,
foodstuffs, minerals & petroleum—would soar, an inflationary
shock that left the economy in shambles.

The Nixon admin flailed at trying to halt the damage.
Treasury Sec'y George Shultz threatened to “take the club
out of the closet” & reimpose controls, but to no avail.
The admin slapped a freeze on beef prices, but ranchers
retaliated by withholding cattle from slaughter, & meat
disappeared from store shelves. It declared an embargo on
exports of soybeans to avert an impending shortage.
Nothing worked.

Then, on June 13, 1973, in a show of defiance as the
Watergate hearings unfolded, Nixon decreed a 2nd nationwide
price freeze & follow-on control program. This time, the
measures were deeply unpopular. The novelty had worn off
for consumers, & farmers & business owners disliked the
new round of bureaucratic rules. Then the economic funda-
mentals of the program were upended by two dramatic &
unforeseen events. In Oct 1973, the Saudis doubled the
price of crude-oil exports, leading to a rapid escalation
of gasoline price. Then, OPEC declared an embargo on all
shipments of oil to the U.S. & other Western nations.
By the first qtr of 1974, imports dried up. American
motorists endured long lines at the pump in the greatest
supply disruption the nation has ever experienced.

This bitter legacy—shortages of gasoline, red meat,
soybeans & many other products. together with ruinous
price increases—discredited price controls in the eyes of
the American people. Congress allowed the Economic Stabil-
ization Act to expire, &, with it, the president’s authority
to impose controls, but the damage inflicted by the program
continued until Paul Volcker was appointed to run the
Federal Reserve in 1979 & began the interest-rate increases
that would finally break inflation at the cost of a steep
recession. The economy didn’t recover until 1983, halfway
into Reagan’s first term.

Nixon’s price controls put the federal govt in direct
control of the US economy. Despite its good intentions,
the freeze caused lasting damage. It’s a lesson worth
pondering 50 years on, when the Biden admin is proposing
new govt interventions on an unprecedented scale.

Walker is a retired diplomat & lawyer & author, most
recently, of “Target Switzerland: A Paul Muller Novel
of Political Intrigue.” He served as general counsel &
deputy director of the federal Cost of Living Council, 1972-74.

https://www.wsj.com/articles/nixon-fight-inflation-price-controls-stagflation-gas-shortages-biden-democrats-reconciliation-bill-federal-reserve-11628885071

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