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read it all at: https://www.politico.com/news/magazine/2024/09/01/richard-nixon-kamala-harris-economy-00176374

When Richard Nixon Wrecked the Economy
Kamala Harris should be careful not to follow the Republican president’s lead.

President Richard Nixon addresses a Joint Session of Congress.
Former President Richard Nixon addresses a joint session of Congress on
Sept. 9, 1971, to explain his new economic policy following the sudden
freeze on prices, rents and wages. | AP

By Joshua Zeitz

09/01/2024 07:00 AM EDT

Joshua Zeitz, a Politico Magazine contributing writer, is the author of Lincoln's God: How Faith Transformed a President and a Nation (May
2023). Follow him @joshuamzeitz.

When Vice President Kamala Harris announced her first major policy plank
— new crackdowns on alleged price gouging in supermarkets and grocery
stores — the impetus was clear. Still reeling from pandemic-era
inflation, Americans remain frustrated by steadily rising food prices,
which are 20 percent higher today than when Harris and President Joe
Biden took office.

But her proposals have sparked contention. Donald Trump has attacked
“Comrade Kamala” for embracing “socialist price controls.” Harris’ supporters claim that she did not endorse price controls on groceries,
but rather ordinary crackdowns on gouging that exist in other areas of
the economy.

In fairness to both sides, the vice president’s proposal was more
conceptual than specific. But Democrats have good reason to deny, and Republicans to argue, that she plans to impose price caps. While price
controls played an important role in helping the U.S. mobilize during
World War II, they were disruptive to the economy and, eventually,
broadly unpopular.

In fact, the last time a president attempted to quell runaway inflation
was in the early 1970s when Richard Nixon — a Republican — imposed temporary ceilings on food and gas prices. The results were economically ineffective and politically disastrous, with massive unintended
consequences. It’s history that Harris should remember as she continues
her campaign — and as she governs, if she wins.

After nearly two decades of post-war prosperity featuring robust growth
and low inflation, by the late 1960s, wages and prices began to
accelerate more quickly.

Between 1965 and 1968 federal spending increased by 60 percent — in
large part a result of America’s military buildup in Southeast Asia —
and pushed inflation up to an annual rate of 5.5 percent. Liberals in
Lyndon Johnson’s White House generally embraced the writings of the
famed Cambridge University economist John Maynard Keynes and attributed
such “cost-push” inflation to the dramatic hike in government expenditures.

By this logic, government fiscal policy (in this case, increased war
spending) primed the nation’s economic pump, creating low unemployment.
In turn, the tight labor market encouraged workers to exact generous pay increases from their employers, who responded by boosting prices to
cover new labor costs. At the same time, workers equipped with more
expendable cash competed for a limited supply of products, further
edging prices upward. Good Keynesians all, LBJ’s advisors convinced the president to secure congressional approval of a temporary, 10 percent
tax increase, a measure that would theoretically reduce aggregate demand
and slow the steady climb of wages and prices. But the tax surcharge did
not have its desired effect. “When we were able to call the policy
tune,” said Arthur Okun, LBJ’s chief economic advisor, “the economy did not dance to it.”

Kamala previews her economic policy ahead of DNC

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Such was the economy that Richard Nixon inherited. In his first two
years in office, inflation hovered between 5.5 percent and 6.6 percent — modest by comparison to what would follow in the mid-1970s, when
inflation moved into double digits, but still alarmingly high by recent historic standards. By late 1970, Nixon was eager to own the issue and
drive prices down. Which is where John Connally came in.

A conservative Democrat and onetime protégé of Lyndon Johnson, Connally served from 1971 to 1973 as Nixon’s Treasury secretary. Best known for catching one of the bullets intended for President John F. Kennedy in
November 1963, he was entirely self-made — a son of sharecroppers who
rose to become student body president at the University of Texas, then secretary of the Navy under JFK, and finally, a three-term governor of
Texas. Henry Kissinger noted that “Connally’s swaggering self-assurance
was Nixon’s Walter Mitty image of himself. He was the one person whom
Nixon never denigrated behind his back.”

A man of few ideological commitments and even fewer fixed notions about political economy, Connally liked to brag, “I can play it round or I can
play it flat, just tell me how to play it.” After surveying the
landscape, in August 1971 he convinced the president to enact what came
to be called the New Economic Policy (NEP), a two-pronged plan which
first took America off the gold standard that year, thus deflating the
dollar and arresting the outflow of gold to foreign nations that held
large reserves of U.S. currency; and second, a move to check inflation
by imposing 90-day wage and price controls — something that no American president had done since the 1940s. NEP also included a temporary 10
percent surcharge on all imports. Together with the devaluation of the
dollar, this step boosted American exports and helped revive the
struggling manufacturing sector.

Initially, it was a political success; 73 percent of Americans applauded Nixon’s imposition of wage and price controls, and for a time, NEP
seemed to work. But as Herb Stein, one of the president’s chief economic advisers, later admitted, “We had no plan for getting out of … the ninety-day freeze.” Improvising, in October 1971 the administration introduced “Phase II” of the NEP, which kept certain controls in place until January 1973. With prices and wages thus locked into a holding
pattern, the administration’s high-spending budget and the Fed’s expansionist monetary policy heated up the economy in time for the 1972 presidential election. Unemployment only dipped modestly from 5.9
percent in 1971 to 5.6 percent in 1972, but inflation dropped to a
manageable 2.9 percent, providing a stable enough environment for
Nixon’s last electoral campaign and his landslide win against George McGovern.

In 1973, just as Watergate began spinning out of control, the economy
came crashing down. The Fed’s easy money policy and the administration’s budget had so overheated the economy (GNP grew at a real rate of 8.7
percent during the first quarter of 1973) that Americans engaged in an
orgy of consumption, creating shortages of raw materials like chemicals,
paper, steel and copper that soon drove wholesale and retail prices
through the roof. The end of Phase II in January and the introduction of
Phase III, which retained mandatory controls on only a handful of
sectors (namely, health care, food and construction), exacerbated the
problem.

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Had cost-push inflation been the only source of economic woe, the
president’s troubles would have been bad enough. But a series of events
— some coincidental, others owing to Nixon’s ineptitude as a manager — conspired to create what economists call “supply shock” inflation, particularly in the all-important food and energy sectors.

First, heavy snows in the Soviet Union destroyed much of the country’s
wheat harvest, while warm water currents in the Pacific Ocean flowed to
the Peruvian coastline, decimating the anchovy harvest. Anchovies were a
key ingredient of high protein feed grain, a necessary staple for U.S. livestock farmers.

Second, in 1972, the Soviets had quietly cornered the U.S. grain market,
using $750 million in American credits and $500 million in hard currency
to buy up one-quarter of the American wheat harvest. Nixon had extended
the credit and eased the way for the purchase in an effort to secure
Soviet acceptance of arms control agreements that he believed
(correctly) would bolster his reelection campaign. He never anticipated
the economic fallout.

Motorists pass posted gas prices.
In February 1974 the Annapolis Evening Capital reported that “long
lines, long waits and the gas shortage teamed up yesterday to produce
hot tempers and the first violence in customer lines at county gas
pumps.” | Eric Gay/AP

Third, in an effort to shore up his support in the farm belt during the campaign, in 1972 Nixon’s Agriculture Department had increased crop
reduction subsidies, thereby driving up agricultural income ahead of the November election, but further contributing to the shortages that
plagued the national economy the following year.

Finally, the devaluation of the dollar had indeed boosted U.S. exports,
but that included agricultural exports. Thus, America entered 1973 with dangerously low reserves of grain.

Together, the twin natural disasters in the Soviet Union and Peru; the
“Great Grain Robbery;” the devaluation of the dollar; and the administration’s crop reduction plan created massive raw material
shortages and pushed meat and grain prices to historic highs. In the
winter of 1973, the cost of food rose an astounding 30 percent, creating
a hike in the consumer price index larger than any since the Korean War.
For ordinary Americans, the effects were devastating. The price of meat
climbed by 75 percent in just three months.

As if the administration had not displayed sufficient ineptitude, in
June 1973 Nixon announced “Freeze II,” a 60-day freeze on wholesale and retail food prices, but not on the price of raw materials. Poultry,
dairy and livestock farmers now faced an impossible situation: The cost
of feed was rising at uncontrolled rates, but the prices they could
charge for their product — eggs, milk, beef, pork and chicken — were locked. On June 23, American television news viewers were stunned by
images of a farmer in Joachim, Texas drowning 43,000 baby chickens in
barrels of water. “It’s cheaper to drown ‘em than to … raise ‘em,” he
explained.

In October 1973, matters went from bad to worse. The Nixon
administration intervened in the latest Middle East conflict — the Yom
Kippur War — by supplying Israel with badly-needed arms that helped it
stave off near-defeat at the hands of Syria and Egypt. As a punitive
response, on Oct. 20, just hours before Nixon’s “Saturday Night Massacre,” Saudi Arabia cut back oil production and imposed a temporary embargo on all exports to the United States. With 18 percent of U.S. oil consumption tied to the Middle East, prices were certain to go sky-high. Reserves might have helped cover the difference, but the NEP’s price
controls on energy had posed a disincentive for refineries to produce
stocks of home heating fuel.

Once again, the administration’s incompetence exacerbated problems whose origins were largely beyond its control. The president took to the
airwaves in November to ask Americans to lower their thermostats by six degrees, ordered a 10 percent reduction in air travel and urged
voluntary austerity. “We are heading into the most acute energy shortage since World War II,” he grimly explained.

At the time, Nixon scarcely knew the half of it.

In December the Persian Gulf oil ministers hiked the price of crude oil
from $5.11 per barrel to $11.65 — an increase of 470 percent since the beginning of the year. Airlines and automakers announced new rounds of
layoffs, schools closed early for want of heating oil, power plants cut
their voltage output and motorists lined up for hours in search of
precious, expensive gasoline to power their cars.

By February 1974 private rage began to boil over. The Annapolis Evening
Capital reported that “long lines, long waits and the gas shortage
teamed up yesterday to produce hot tempers and the first violence in
customer lines at county gas pumps,” while in Miami, a frustrated driver tried to drive over a station attendant. “In the past month,” the New
York Times observed, “people in metropolitan areas have become
increasingly suspicious and angry, insecure, devious, often violent and
seldom resigned, all because of the lack of gasoline.”

A sign is seen on the RNC convention floor.
Donald Trump has attacked “Comrade Kamala” for embracing “socialist
price controls.” | Francis Chung/POLITICO

Both Keynesians and monetarists were accustomed to thinking of inflation
and unemployment as functions of demand. In theory, they enjoyed an
inverse relationship: As one went up, the other went down. How to
achieve stable equilibrium was the defining question of post-war
economics. Consequently, most experts in early 1974 suggested combating
rapid inflation by cooling down the economy. Nixon chose a middle
course, maintaining a small full-employment budget surplus and urging
the Fed to hold the line on money growth. No contraction, but no
expansion, either.

What the administration failed to appreciate was that the Great
Inflation of 1973-1974 was not a function of excess demand; it resulted
from supply shocks in the food and energy sectors — shocks that sopped
up money in much the same way a tax increase or monetary contraction
might have. In effect, supply shocks could create inflation and
unemployment — or, in the common parlance of the day, “stagflation.”

Inflation would persist until oil and food supplies re-stabilized, which
is precisely what happened in 1975. Reversing job losses, on the other
hand, would require tax cuts, spending hikes or a flow of easy money.
One study suggested that a $20 billion tax cut in early 1974 could have produced normal economic growth within a year. But Nixon went the
opposite route, fighting inflation with traditional measures. In so
doing, he made a bad situation worse. By May 1975 unemployment hit 8.7
percent.

If there is a lesson in this story, it’s that price controls are one
lever, and only one lever, to address inflation — and in the absence of
a fully coordinated economic policy, they can be ineffectual and carry unintended consequences.

In the same way that Nixon could not fully control the Fed or remedy
global supply shocks — some owing to weather, others to politics — a potential Harris administration may prove no less able to anticipate the
host of extenuating circumstances that might render price controls a
poor tool to manage the economy. Certainly the recent experience of Covid-related economic disruption at the global level, much like the
freak shortage of anchovies in 1972, is an example of how unexpected
events can cause unexpected fallout.

To be fair, Harris’ plan leaves much to interpretation. But should she
ascend to the Oval Office, the example of Richard Nixon, and his
ill-fated experiment with price caps, is instructive. What’s good
politics today might be bad policy — and bad politics — tomorrow.

Filed under: Richard Nixon, Inflation, Economics, Kamala Harris, Oil Prices, Playbook
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