This week two columns at Bloomberg.com discuss different aspects of the economic initiatives President Nixon launched in August 1971, which produced changes in the American economy which still reverberate today.
One is by Joseph J. Thorndike, a leading tax historian and visiting scholar at the University of Virginia. His focus is on the ten percent tax credit that RN decided to extend to businesses for investment in new equipment. This was similar to a seven percent credit that John F. Kennedy announced nine years earlier. As Thorndike observes, Kennedy’s credit and other tax initiatives, while advertised as ways to lessen joblessness, had little effect on the unemployment rate, which remained steady and occasionally climbed slightly until 1964.
Although unemployment decreased after the Nixon credit was announced, Thorndike views it as mainly an example of “branding” a policy to promote the idea of a causal relation which may not be really present. The policy may have strengthened sales for American manufacturing at a time when the wage-price freeze made increased volume of sales important, but Thorndike’s opinion is essentially that the credit was an inadequate substitute for significant action in updating tax policy to meet a changing economic situation, and cautions against its being regarded as an example for today.
In the other Bloomberg column, Amity Shlaes looks at the larger aspects of the “Nixon Shock” of 1971 and their lessons for today. Ms. Shlaes is a fellow at the Council of Foreign Relations and author of the bestselling history of the Great Depression, The Forgotten Man. She was a friend of the late Herbert Stein, one of the leading economists at the Nixon White House, and mentions that, at the time, he had misgivings about some of the policies under consideration, as did George P. Shultz, White House budget director at the time, while Treasury Secretary John Connally embraced even the most radical ideas such as the wage-price freeze.
Ms. Shlaes quotes Herbert Stein’s son Ben as telling his father at the time: “Ideologically, you should fall on your sword, but existentially it’s great.” (This makes me wonder if Ben, in his innumerable commentaries over the years, has ever expounded at length upon the connections between Kierkegaard and Keynes or Sartre and Samuelson.)
Her column finishes with this summation of the lessons to be drawn from 1971:
There are three takeaway messages from 1971. The first is that economists are arm candy for chief executives: Their appearance beside the president may be reassuring, but it doesn’t guarantee strong policy. Economics itself is often mere window-dressing for campaign programs.
The second is that reforms dictated by crisis-intervention teams make for poor long-term policy. Short-term gimmicks, stimuli for employment and automakers — all are pretty much useless. The best thing the Obama administration can do is to stay clear of the market, avoid election-year panic, and call on Republicans to undertake measures aimed at 2030. If this is unrealistic, then that explains why presidential and congressional approval ratings sank with the market.
Such measures might include commitments to yet smaller budgets and stronger entitlement reforms, or promulgating a new Federal Reserve law that would strip out some of the discretion that Arthur Burns enjoyed, and make the institution more accountable to taxpayers. Something closer to a gold standard would signal to markets that the U.S. is less likely to inflate away its debts in the future. In short, it would show that the debt-ceiling deal earlier this month was only the beginning of a more stable U.S. with a smaller government and a more reliable currency.
Finally: no more shock therapy. The least likely place for real improvements to be written is a self-aggrandizing presidential retreat like Camp David.