• Nixon Taught Us How Not to Fight Inflation

    From (David P.)@21:1/5 to All on Thu Aug 19 11:31:25 2021
    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.


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