American Experiment (385 page)

The President had acted. The country seemed thrilled, as it so often had been by forthright leadership after a period of doubt and disarray. Wall Street appeared to be elated, as the Dow Jones rose 32.9 points on the Monday after the presidential speech—the biggest one-day jump to that point. Three months later the President instituted Phase II, a comprehensive and mandatory system of controls. The Fed, now under the chairmanship of Arthur Burns, helpfully expanded the money supply. Then, in a series of steps and phases, the controls were gradually loosened, until June when, with food prices climbing and the Administration bleeding from Watergate, Nixon reimposed the freeze. But this time the freeze proved “a total disaster,” as livestock was destroyed or kept from market and food was hoarded. Again the controls were slowly lifted and, by April 1974, eliminated.

Though economically the program had mixed results, politically Nixon’s “New Economic Policy,” as he called it, was a splendid success. Just as his trip to China and détente with Russia took the wind out of McGovern’s peace strategy of 1972, so the President’s dexterous juggling of economic policy from crisis to crisis deflated the Democrats’ domestic challenge. True-blue conservatives were dismayed by the President’s opportunistic interventionism. The tide was not running toward freedom, Stein concluded morosely. Thoughtful conservatives were further dismayed when Nixon tapes publicized by the Watergate inquiry shone a spotlight on Nixon as Economist-in-Chief. Late in June 1972, Haldeman had asked his boss whether he had gotten the report that London had decided to float the pound.

NIXON:
That’s devaluation?

HALDEMAN:
Yeah.…

NIXON:
I don’t care about it. Nothing we can do about it.

Haldeman tried to arouse the President’s interest by mentioning a staffer’s report that the British action showed the wisdom of the President’s policy. The President would not be tempted.

NIXON:
Good. I think he’s right. It’s too complicated for me to get into.

Then Haldeman noted that Burns expected a 5 to 8 percent devaluation of the pound against the dollar.

NIXON
(impatiently): Yeah. O.K. Fine.

HALDEMAN:
Burns is concerned about speculation about the lira.

NIXON:
I don’t give a shit about the lira.

Undiscouraged, Haldeman mentioned a good reaction in the House of Representatives.

NIXON:
There ain’t a vote in it.…

Thus ended the morning’s economic policy making.

From the resigned President, Gerald Ford inherited a festering case of what had come to be called stagflation. He faced a perplexing combination of high inflation and rising unemployment, complicated by a slowdown in economic output, a big trade deficit, and a falling stock market. Ford reacted to these conditions like the stalwart Republican he had always been, but with a public relations twist. He adopted a Madison Avenue-style slogan—Whip Inflation Now! or WIN!—and jawboned General Motors
into trimming a planned price increase from almost 10 percent to 8.6. He cut government spending, sought to balance the budget, and with Congress reduced personal and corporate taxes. Harried by the Democratic-controlled Congress, outflanked on the right by Reagan Republicans, bedeviled by the aggressive efforts of the Arab-dominated Organization of Petroleum Exporting Countries to boost oil prices, Ford resorted to ad hoc, step-by-step economic policies.

He had no national constituency of his own. He could not forget that he was the first and only President chosen by one man, elevated to the vice presidency after Agnew quit under fire, elevated to the presidency after Nixon quit under fire. He chose Nelson Rockefeller as his Vice President in the hope that the former New York governor would bring support from the once-mighty presidential Republicans, but that old party was now a ghost party and Rockefeller a hate object to the resurgent Republican Right. Inundated by advice, Ford pressed his fight against the twin horsemen of inflation and unemployment, shifting back and forth without routing either. Hardly a year after entering the White House he had to launch his struggle to hold his office. Democrats attacked his tax program as regressive, his welfare programs as inadequate, his economics as thwarting growth, his military spending as excessive. And millions of Americans thought of him chiefly as the man who had pardoned Richard Nixon.

Compromised by their own failures to find a solution to the stagflation problem, congressional Democrats were vulnerable to many of the same attacks they launched against the President. Their best hope, and Ford’s worst fear, was the emergence of a presidential candidate untainted by past Democratic failures. Such an outsider was Jimmy Carter. The new President pictured himself, however, much more the orderly policy maker than the passionate, “charismatic” leader. He based his “exact procedure” to some degree on his scientific and engineering background, he told Neal Peirce shortly after winding up his remarkable primary victories in 1976. He liked first to study the historical background of a problem, then “to bring together advice or ideas from as wide or divergent points of view as possible, to assimilate them personally or with a small staff,” bringing in others if necessary to discuss the matter in depth. “Then I make a general decision about what should be done involving time schedules, necessity for legislation, executive acts, publicity to be focused on the issue. Then I like to assign task forces to work on different aspects of the problem,” and he would remain personally involved in the whole process.

This was the operational code of a commanding, “take charge” leader, a blueprint for action—but one that Carter appeared to ignore in much of his economic policy making. The White House sent out mixed signals as
to what it wanted. Advance preparation was inadequate, follow-through sporadic, lines of communication and delegation scrambled. The normal friction between the executive and legislative branches was exacerbated by exceptionally poor staff work in the White House’s congressional liaison office. Above all a clear sense of priorities was lacking.

Gradually, almost imperceptibly for a while, the Carter Administration drifted to the right in economic policy. This appeared to be the result of no grand strategic reconsideration but rather, after the first year or so, of mishaps and collisions that drained the White House of a sense of resolution and consistency, even while the old populist rhetoric remained much the same. Thus the President continued to attack the oil industry and other special interests, Betty Glad noted, even while he moved toward their positions on policy. He talked about the nation’s health crises, but made funding of a national health insurance plan contingent on the state of the economy and the federal budget. In his first year in office he emphasized tax reduction and raising the minimum wage; in the next three years he showed much more concern about inflation and pressed for some restriction on wage increases.

Most of this was in response to immediate, specific problems and crises. But once again “practicality” and “pragmatism” failed. By December 1980, the annual rate of inflation was at 13 percent, the prime rate had risen to 21.5 percent, and unemployment stood at 7.4 percent. Stagflation was back with a vengeance.

One by one Carter’s liberal, urban constituencies began to back away from the Administration. Speaker Tip O’Neill, repeatedly bypassed and “blindsided” by the White House, proclaimed that he had not become Speaker “to dismantle programs I’ve fought for all my life.” Hearing of proposed Social Security cuts, House Majority Whip John Brademas, a workhorse for Democratic party programs, warned that the White House would “run into a buzzsaw” if it tried to eliminate major benefits. As Carter began his third year Senator Edward Kennedy complained that the Administration’s budget asked “the poor, the black, the sick, the young, the cities and the unemployed to bear a disproportionate share of the billions of dollars of reductions.” Urban, black, labor, consumer, and other leaders turned more and more against the Administration during 1979 and helped project Kennedy that fall into his failed effort to wrest the 1980 nomination from the President.

White House watchers had been quick to jump on sudden and erratic shifts of policy. Nixon “clings to what is familiar until the last moment,”
Hugh Sidey of
Time
had noted. “Then, when the evidence overwhelms him or something happens in his gut, he decides to act, and nothing stands very long in his way. He abandons his philosophy, his promises, his speeches, his friends, his counselors. He marches out of one life into a new world without any apologies or glancing back.” Scholars as well as journalists maintained a drumbeat of critical comments on Carter’s gaps between principle and policy. Few of these critics paused to ask whether the White House during the 1970s was receiving steady and adequate intellectual nourishment from the pundits and the professors.

The answer would have been no. In the absence of that kind of nourishment, Presidents attempted a series of “practical” experiments in economic policy, many of them vague reflections of half-understood conventional economic theories.

If the Republicans had been willing to live up to their campaign oratory their path would have been well marked after they recaptured the presidency in 1968. They needed only to slash spending, balance the budget, turn key federal functions over to private enterprise, cut back heavily on regulation—in short, “get government off our backs.” Philosophically, this path had been well marked not only by Herbert Spencer and William Graham Sumner in the previous century but by countless laissez-faire enthusiasts in the twentieth. The most notable of these following World War II was Friedrich August von Hayek, born in Vienna in 1899, a professor of economics at the London School of Economics and at the University of Chicago.

In 1944 Hayek had published
The Road to Serfdom,
which for a book on economics won wide attention and sales, especially in the United States. The book seemed to have special appeal in embattled Western nations whose peoples were tiring of wartime rationing, price controls, travel restrictions, endless regulations. Its message was simple: extensive governmental intervention into the economy, whether through welfare programs or nationalization or economic planning, would lead to totalitarianism, which would crush all freedoms. The next three decades proved this analysis dead wrong. All the major Western democracies had indulged intensively in peacetime intervention, with mixed economic results but with few infringements on fundamental individual rights such as freedom of speech, religion, press, assembly. On the contrary, some contended, promoting economic and social security through public programs more often protected and enlarged individual freedom.

Doctrinaire laissez-faire had become so discredited as public policy during the depression years that neither Nixon nor Ford—nor Eisenhower earlier—offered more than oratory and a few crusts of policy to the
free-marketeers. This enabled the laissez-faire theorists to keep their doctrine intact by arguing that it had never really been tried.

During the depressed 1930s Keynesianism had succeeded laissez-faire as the dominant intellectual influence in Western economics. FDR had followed Keynesian policies without understanding the theory behind them, and to the extent he put federal money into public works and other spending projects he lifted the nation out of stagnation. It took World War II, however, to show what “war Keynesianism” could do to bring about a full recovery. Despite predictions of a catastrophic postwar depression, continued federal spending on welfare and war sustained a strong economy through the 1950s and 1960s. Truman and even Eisenhower were “closet Keynesians,” and Kennedy by 1962 was willing to embrace the doctrine publicly. Johnson carried Keynesian spending to its practical political limit and with great success until the disastrous delay in the tax boost and other mishaps disrupted his experiment in financing both guns and butter.

It fell to Richard Nixon not only to admit but to assert proudly, “Now I am a Keynesian.” While this pronouncement hardly struck Western ears with the impact of Kennedy’s “I am a Berliner,” it was testament to Nixon’s occasional willingness to think and act boldly as well as his desire to be seen as a modern man not mired in nineteenth-century economic orthodoxy. It also fell to Nixon to embrace the still controversial doctrine at the very time when it was becoming less relevant to the specific economic problems facing the nation. The longer-run risks of Keynesianism had not escaped its more thoughtful advocates. Alvin Hansen, Keynes’s leading American disciple, in calling for a bold program of public investment in 1938, had warned against overemphasis on such a program, failure to achieve “a balance in the cost-price-income structure,” and choking off private investment. The hard-nosed Keynesians advising Kennedy and Johnson—Paul Samuelson, Walter Heller, Kermit Gordon, James Tobin, Arthur Okun, and others—knew that depression-style Keynesianism was not enough.

They knew, that is, Keynesianism’s great flaw—its inability to deal with the raging inflations that swept Western economies during the 1970s. By the early 1980s, as the Keynesian economist Robert Lekachman granted, it was clear that the doctrine “underestimated both the inflationary potential of full employment and the impact on public expectations of continuous inflation without serious interruption for so long a period. Keynes exaggerated the competitiveness of the private sector and, in some moods, the efficacy of fiscal and monetary remedies.” Non-Keynesians attacked other Keynesian assumptions—that the economy had a built-in tendency
to operate with output below its potential while unemployment remained high, that enough jobs could be provided through fiscal actions of government to expand demand, that governments could estimate accurately how much spending and deficit creation would be enough to achieve employment goals.

As the Keynesians fell into some disrepute during the inflationary seventies, a new doctrine galloped to the rescue from Stage Right. It was in fact an old idea—the dominant economic doctrine of the 1920s—dressed up in mod fashion for the post-Keynesian era. This was monetarism. Associated in the United States mainly with the noted University of Chicago economist Milton Friedman, monetarism preached that regulating the supply and, if possible, the velocity of money was the way to stabilize the economy and especially to control inflation. It was a beguiling doctrine, largely because it depended mainly on a single lever of economic control, and also because the government, through the Federal Reserve Board and the Treasury Department, had far swifter and more decisive influence over the volume of money than over any other component of the economy. During the 1970s the monetarists, said Alan S. Blinder, “swept through the universities, conquered Wall Street, infiltrated the Congress, and eventually gained the upper hand at the Federal Reserve.”