University of Virginia Library

Nixon's Mistake

But even if it is agreed that
inflation must be controlled, it still
may be objected that there must be
some way of doing the job without
plunging the economy into a
recession. Perhaps so. The simple
fact, however, is that there is not
one instance throughout our long
history in which an inflation was
brought under control without a
recession. This, of course, does not
mean that it is silly for policy
makers to spend time trying to
figure out a way of ending inflation
without a recession. Nevertheless, it
would be grossly unfair to blame
the Fed and the Nixon game plan
for failing to achieve what nobody
else has ever succeeded in achieving.

Two things are disappointing
about the performance of economic
policy over the last couple of years.
One is that Mr. Nixon led the
public to believe that he would be
able to check inflation painlessly,
whereas, as we have seen, no
painless remedy is yet known.
When the recession came along in
the wake of the Fed's anti-inflation
policies, there was considerable
disillusionment with the Nixon
game plan, even though it could
reasonably be argued that the game
plan was the best we could do. With
the benefit of hindsight it now
appears that Mr. Nixon should have
stated forthrightly in January 1969
that he intended to stop the
inflation and that this would
involve some short-run sacrifices in
order to achieve longer-term gains.

The second more serious
disappointing aspect of the
Nixon-Federal Reserve policies is
that so little progress has been
made in controlling inflation. Prices
continues to move upward right
through the recession (However,
this has often happened in the
past), and even the rate of price
rise has remained unacceptably
high. Some observers take this as
evidence that the economy is
suffering from hardening of the
arteries—that big labor and big
business have introduced so many
market imperfections into the
system that traditional monetary
and fiscal policies no longer work
and must be supplemented by
direct wage-price controls of some
sort. This is the kind of thinking
that lies behind the 90-day freeze
of Mr. Nixon's New Economic
Policy (NEP).

My own view is that this
thinking is wrong. One need not
invoke market imperfections to
account for the intractability of
inflation since 1969. The inflation
has lasted longer and proceeded
faster than any inflationary episode
in recent times. Moreover, it
followed a menacing accelerating
course until 1970. It is reasonable
to suppose that the degree of
difficulty in controlling an inflation
will depend on its duration and
severity. Instead of prolonged and
powerful restraints, however, the
Fed tightened its policies
moderately for a period of only six
or seven months. In retrospect it
seems obvious that this degree of
restraint could not possibly have
achieved dramatic results in slowing
inflation.

But this is water over the dam.
The old game plan has been
scrapped, and the public is now
being reassured that inflation can
be stopped by a variety of
palliatives that are euphemistically
referred to as "incomes policies."
The outlook for price stability is
bleak. What the NEP does
(assuming that Congress ratifies it)
is to throw more fuel on the fires of
inflation, not less— all in the name
of restoring full employment. There
is a real chance that a resurgence of
inflation will be evident by election
time next year; or alternatively,
that the inflationary forces will be
repressed by an increasingly rigid
and irksome set of wage-price
controls. Neither alternative is likely
to provide an attractive setting for
Mr. Nixon's re-election prospects.