“Economics isn’t chemistry. You can take any theory you’ve got. If people think it’s going to work, it will work. If they don’t, it won’t.” – Anonymous
While the American people deal with a present-day waltz of government intervention with the wealth they generate, it might be a good time to take a look at when this dance really picked up the beat. The year was 1971 and the president was R.M. Nixon.
The country was suffering from a disturbance of its industrial base, and consumer confidence by August 1971 was at a historically low 55%. Inflation was getting out of control, and unemployment spiraled toward double digits. Labor strikes at ports were causing supply disruptions throughout the country. The dollar was still backed by the gold standard of the internationally agreed Bretton Woods system, and thus pressure was on to devalue the currency. The economic picture was bleak, and Nixon,
- America’s favorite punching bag.
who wasn’t one to act until the warning signs were breathing down his neck, decided to deal a heavy hand in swiping the problem away.
His solution to the suffering was worked out behind closed doors at Camp David with some of his closest advisors and consisted of three major parts:
1. Any foreign-owned US dollars would no longer be backed by the gold standard nor would be the base currency for international monetary dealings.
2. All prices, wages, and rents would freeze for three months.
3. All foreign goods imported would be subject to a 10% surcharge to be passed onto the consumer.
This move was widely lauded by economists throughout the world as a step in the right direction. They believed with these actions, the US dollar would strengthen, inflation could be curbed, and US goods would become more attractive to domestic shoppers because they weren’t subject to the tax. The 90 days of price wages would at least give the country a little bit of time to think over how it had come to this point. By 1971, high inflation had become part of the daily routine, with a lot of the cause coming from powerful labor unions and a slightly looser money supply. As unions demanded cost of living wage increases, the price of goods increased, causing the overall savings rate to skyrocket. Consumers became uncomfortable with the higher prices. Productivity had also decreased due to labor strikes and shortages. Stagflation was beginning to take hold. The disarray was palpable, and Nixon, never being shy in orchestrating himself as a leader and savior of the United States, decided that he must act. So what happened?
For starters: epic confusion. In Nixon’s speech to the nation, he stated that there wouldn’t be an overreaching bureaucracy in charge of enforcing the price and wage controls but that it would be up to the “voluntary cooperation of all Americans.” A few labor unions had it in their contracts, drawn up long before
- The country was going nowhere quite slowly.
Nixon’s plan, that a raise would take place somewhere in the middle of the 90 days of controls. Their “voluntary cooperation” was in question. In addition, many of the influential labor union leaders of that time saw the price controls as a business-oriented instrument at the expense of the working man despite its efforts to whip inflation. Strikes would continue despite Nixon’s protests. Productivity remained low.
So what was the outcome after the baffling 3 months of price controls in the fall of 1971? Very little. While the nation might’ve felt a little more confident in itself that it had sucker punched inflation by creating inefficient markets, supply, demand, and consumer confidence remained historically low.
The blatant heavy handedness of the republican Nixon administration distinctly parallels the current Bush administration with the exception being that Nixon preached that with government at the command, the economic crisis can be solved. Bush, Paulson, and most democrats and republicans alike preach that with government ownership, the economic crisis can be solved.
The theme is this: When people have nothing else to fall back on, suddenly, it’s the government that can provide us with the answers. Two of Nixon’s unrealized programs (partly unrealized due to America’s then-pitiful economic health) were a universal minimum income and universal health insurance, ideas that, while quite noble in theory, sound decidedly socialist and ripe for failure.
Admittedly, the problems and solutions for 1971 are different from today’s, however, it remains that there’s only so much the government can do to alter the will of the marketplace. The government longs for optimism in the markets. Why should an efficient, optimistic market take instructions from the inefficient unmotivated government? In turn, this bailout should immediately help the large companies, while alienating 300 million consumers.
When government has taken their cut off the top, and the people are outraged; careful now.