Burton A. Abrams and James L. Butkiewicz write,
We uncover and report in this paper evidence that Nixon manipulated his New Economic Policy to help secure his reelection victory in 1972. He became convinced that wage and price controls were necessary to grab the headlines away from the defeatist abandonment of the Bretton Woods Agreement and the closing of the U.S. gold window. Nixon understood the impact of his wage and price controls, but chose to trade off longer-term economic costs to the economy for his own short-term political gain.
Pointer from Tyler Cowen. The paper is based on President Nixon’s secret tapes.
I think that Nixon’s New Economic Policy is under-studied by economists. At the time, many people though that the central policy was getting rid of the gold peg and that wage and price controls were a “cover.” The cover worked, both in the short term and the long term, as people focused on the wage and price controls then and now.
The conventional story of the inflation of the 1970s is that Fed Chairman Arthur Burns printed a lot of money. But as you know, I need to fined a different explanation. My alternative is that abandoning fixed exchange rates set off an inflationary wave, starting with traded goods but spreading elsewhere.
It was less than two years later that OPEC was able to quadruple the dollar price of oil. After that, inflationary psychology took over. Even though we retained price controls on refined petroleum products, such as gasoline, this regime probably raised costs (such as gasoline shortages) more than if prices had been allowed to rise.
What alternative did the Nixon Administration have? The U.S. had been losing reserves of gold and foreign currency at an unsustainable pace. Higher domestic interest rates would have stemmed the outflow, but this would have been unpopular. A lower government budget deficit would have raised net domestic saving (T-G + S-I) and reduced the outflow from the trade deficit, but Mr. Nixon did not go for that, either.
I’d never even heard your standard narrative before. I’d read that the combination of Johnson’s War On Poverty with the Vietnam war while the Fed kept rates low was inflationary (but stimulating), and that set us up for an inflation to spiral out of control with the 2 OPEC crises, and a sudden restriction in the availability of oil is unusual in being inflationary and recessionary at the same time.
Anyway that was the narrative in Charles Schultze’s Memos To the President, which was published by the Brookings Institution.
Anyway your militant atheism regarding monetary policy is very weird.
Huh. I just pulled out that book and looked at the index. One brief reference to Nixon and none to Burns. Weird.
Anyways, this page seems useful.
http://economistsview.typepad.com/economistsview/2009/01/oil-shocks-redux.html
If you apply your same analysis to the Reagan, Bush tax cuts you will find the dominant factor in the weakness of manufacturing since 1980 are the republican tax cuts as their widening of the savings-investment gap lead to an inflow of foreign capital and an offsetting widening of the current account deficit.
Something knew I learned today: “Also, there was a measurement error in the consumer price index that had the effect of amplifying rises in the inflation rate at a time when wage and other contracts were widely indexed.”
http://cepr.net/blogs/beat-the-press/the-1970s-in-the-washington-post-and-the-real-world-1970s