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Published online by Cambridge University Press: 14 October 2011
In late August 1994, Alan Blinder was concluding his second month of service as vice-chairman of the Federal Reserve Board. A former member of the CEA and a distinguished economist, Blinder had achieved a reputation as a“hard-headed liberal economist.”
1. From the cover of the paperback version of Blinder, Alan S., Hard Heads, Soft Hearts: Tough-Minded Economics for a Just Society (Reading, Mass., 1987).Google Scholar
2. Wessel, David,“Central Bankers Say: Look Elsewhere on Jobs,” Wall Street journal, 29 August 1994, 1.Google Scholar
3. Wessel, David, “Blinder Denies There's a Rift with Fed Chair,” Wall Street Journal, 9 September 1994, 1.Google Scholar
4. George Graham, “Rift at the Top of Fed Is Denied,” Financial Times, 9 September 1994, 5.
5. Wall Street Journal, 13 September 1994.
6. Samuelson, Robert J., “Economic Amnesia: Alan Blinder Forgets the Dangers of Inflation,” Newsweek, 12 September 1994, 52Google Scholar
7. The main intellectual challenge came from the monetarists who seemed in some respects to be triumphant at the end of the decade. Their triumph, however, proved to be short-lived, and with that hindsight and in the interests of brevity I have included little here about the monetarists. For a Keynesian retrospective critique of the monetarists, see Blinder, Hard Heads, Soft Hearts, chap. 3; for a treatment of the monetarists as a political movement, see Woolley, John T., “Monetarists and the Politics of Monetary Policy,” Annals of the American Academy of Political and Social Science 459 (January 1982): 148–60.CrossRefGoogle Scholar
8. Judging from public opinion polls, very few worried about the economy even in early 1971, when Gallup polls reported that 11 percent thought inflation was the most important problem and 17 percent thought that unemployment was the most important problem.
9. Stein, Herbert, Presidential Economics: The Making of Economic Policy from Roosevelt to Clinton (Washington, D.C., 1994), 134.Google Scholar
10. Retrospective characterizations of economists' consensus about that time and its subsequent dissolution include: Tobin, James, “Stabilization Policy Ten Years After,” Brookings Papers on Economic Activity 1:1980, 19–71Google Scholar; Herbert Stein, Presidential Economics; Mankiw, N. Gregory, “A Quick Refresher Course in Macroeconomics,” Journal of Economic Literature 28 (December 1990): 1645–60Google Scholar; Perry, George L., “Inflation in Theory and Practice,” Brookings Papers on Economic Activity, 1:1980, 207–41Google Scholar, and especially the interesting comments on pp. 243–60; Cassidy, John, “The Decline of Economics,” The New Yorker, 2 December 1996, 50ff.Google Scholar
11. U.S. Council of Economic Advisory, Economic Report of the President (Washington, D.C., 1969)Google Scholar; The Okun quotes are from Hargrove, Erwin C. and Morley, Samuel A., The President and the Council of Economic Advisors: Interviews with CEA Chairmen (Boulder, 1984), 308.Google Scholar
12. Hargrove and Morley, President and the Council, 372.
13. By this, Nixon meant to signal his endorsement of the idea of a “full employment” budget, in which current deficits would be permitted if the budget would have been in balance at “full employment.” Evans, Rowland Jr. and Novak, Robert D., Nixon in the White House: The Frustration of Power (New York, 1971), 372.Google Scholar
14. Haldeman, H. R., The Haldeman Diaries: Inside the Nixon White House (multimedia edition, Santa Monica, 1994)Google Scholar; on SST, see entries for 17 and 23 September 1969; on Penn Central, see entries for 4 and 19 June 1970. Also on the SST, see Evans and Novak, Nixon in the White House, 52–53, 376, 410. Also on the Penn Central, see Burns, Arthur F., Reflections of an Economic Policy-Maker: Speeches and Congressional Statement: 1969–1978 (Washington, D.C., 1978), 110–11Google Scholar; Daughen, Joseph R. and Binzen, Peter, The Wreck of the Penn Central (Boston, 1971).Google Scholar
15. Wells, Wyatt C., Economist in an Uncertain World: Arthur Burns and the Federal Reserve, 1970–78 (New York, 1994).Google Scholar
16. Ulman, Lloyd and Flanagan, Robert J., Wage Restraint: A Study of Incomes Policies in Western Europe (Berkeley and Los Angeles, 1971)Google Scholar; “A History of Incomes Policy,” The Economist, 29 March 1975, 92–93; Braun, Anne Romanis, “The Role of Incomes Policy in Industrial Countries Since World War II,” International Monetary Fund Staff Papers 22 (March 1975): 1–36Google Scholar; see especially chart 1, p. 11. For contemporary views inside the government, see Memo, Ghiardi to Partee, “Prices and Incomes Policy Experience in Some Other Nations,” 16 April 1970, Box B-59, File, “Incomes Policy, 1970,” Arthur Burns Papers, Gerald R. Ford Library; and Memo Wernick and Zeisel to Partee, “A Case for Wage-Price Intervention,” 17 April 1970, in ibid.
17. Tobin, “Stabilization Policy”, 65.
18. Evans and Novak, Nixon in the White House, 184; Cochrane, James L., “The Johnson Administration: Moral Suasion Goes to War,” in Goodwin, Craufurd D., ed., Exhortation and Controls: The Search for a Wage-Price Policy, 1945–71 (Washington, D.C., 1975).Google Scholar
19. The Haldeman Diaries, entry for 25 March 1969.
20. Evans and Novak, Nixon in the White House, 185.
21. Safire, William, Before the Fall: An Inside View of the Pre-Watergate White House (New York, 1975), 509.Google Scholar
22. Last utilized in the Korean War. Economist James Tobin later stated that “when the controls were removed [following the Korean War], prices and price expectations were stable, with unemployment at 3 percent.” James Tobin, “Stabilization Policy”, 65.
23. Memo, McCracken to President, 12 June 1971, McCracken Papers, Box 42, University of Michigan.
24. “Statement before the Joint Economic Committee of the U.S. Congress, July 23, 1971,” reproduced in Burns, Reflections, 117–27. The quotation, which received front-page coverage in major newspapers, is on p. 118.
25. New York Times, 10 August 1971, 21.
26. These tensions are described in some detail in Wells, Economist; Kettl, Donald F., Leadership at the Fed (New Haven, 1986)Google Scholar; Safire, Before the Fall; Woolley, John T., Monetary Politics: The Federal Reserve and the Politics of Monetary Policy (New York, 1984).Google Scholar
27. Neil de Marchi, “The First Nixon Administration: Prelude to Controls,” in Exhortation and Controls, 317.
28. Herbert Stein, Presidential Economics, 159–61; the Davis-Bacon Act required the government to pay “prevailing wages” on government construction contracts. See also de Marchi, “The First Nixon Administration,” 322–23.
29. New York Times, 24 February 1971, 1.
30. New York Times, 8 April 1971, 28.
31. The authority had originally been granted in August 1970, partly with an intent to put the president in the embarrassing position of having to explain why he was choosing not to use his power; de Marchi, “First Nixon Administration,” 325; New York Times, 19 May 1971, 17.
32. de Marchi, “First Nixon Administration,” 338–40.
33. Reported in Peretz, Paul, The Political Economy of Inflation in the United States (Chicago, 1983), 117.Google Scholar
34. Ibid., 119, New York Times, 15 July 1971, 13; The Gallup Poll: Public Opinion 1971 (Wilmington, Del., 1972). Public opinion as measured in Gallup polls was amazingly stable throughout the 1970s at about 50 percent support for “having the government bring back wage and price controls.” In nine polls between 1974 and 1981, the mean approval was 50.3 percent with a standard deviation of 3.8 percent.
35. Stein, Presidential Economics, 193.
36. In a 1976 survey of a national sample of economists, the rate of agreement on this issue was second highest of all questions put to the economists—72 percent disagreeing with controls. In a 1990 followup survey with virtually an identical question, 74 percent disagreed with wage and price controls. Kearl, J. R., Pope, Clayne L., Whiting, Gordon C., and Wimmer, Larry T., “A Confusion of Economists?” American Economic Review Papers and Proceedings 69 (May 1979): 28–37Google Scholar; and Alston, Richard M., Kearl, J. R., and Vaughan, Michael B., “Is There a Consensus Among Economists in the 1990's?” American Economic Review. Papers and Proceedings 82 (May 1992): 203–9.Google Scholar
37. In June 1973, to cope with emergent inflation in Phase III, President Nixon was forced to declare another price freeze, this time for only sixty days. OMB Director George Shultz observed that “everybody thinks Phase III was a failure.” Congressional Quarterly Almanac, 1973, 202.
38. “As the bulk of the economy entered Phase IV [on] Aug. 18, prices started rising immediately.” Congressional Quarterly Almanac, 1974, 203.
39. Report, “Inflation,” 5/10/79, File BE4–2, 5/1/79–5/31/79, Box BE-19, WHCF–Subject Files, Jimmy Carter Library.
40. Safire, Before the Fall, 102.
41. Craufurd D. Goodwin, “A Report of the Conference,” in Exhortation and Controls, ed. Goodwin, 385–98.
42. Hathaway, Dale E., “Food Prices and Inflation, Brookcings Papers on Economic Activity, 1:1974, pp. 63–174.CrossRefGoogle Scholar
43. Pierce, James. L. and Enzler, Jared J., “The Effects of External Inflationary Shocks,” Brookings Papers on Economic Activity, 1:1974, pp. 13–61.CrossRefGoogle Scholar
44. Goldfeld, Stephen M., “The Demand for Money Revisited,” Brookings Papers on Economic Activity, 3:1973, pp. 577–646.CrossRefGoogle Scholar
45. Stein, Presidential Economics, 210–12.
46. Green, John Robert, The Presidency of Gerald R. Ford (Lawrence, Kan., 1995), 71.Google Scholar
47. The energy price index (as opposed to the change in the index, which is plotted in Figure 2), hit its peak in September 1974 and began to fall after that point. The big increase in energy prices had started in September 1973.
48. Stein, Presidential Economics, 213.
49. Memo, Stein to President, 12 August 1974, File “Memoranda to the President, August 1974(1),” Box 76, CEA Papers, Gerald R. Ford Library (emphasis in original).
50. Memo, Burns to President, 12 August 1974, File “Memoranda to the President, August 1974(1),” Box 76, CEA Papers, Gerald R. Ford Library.
51. Greene, Gerald R. Ford, 73; Memo, Greenspan to Ford, 26 November 1974, Folder BE5, 11/18/74–11/30/24, Box 17, WHCF BE5, Gerald R. Ford Library.
52. Blinder concluded that the shocks in food, energy, and from price decontrol can account for almost all the acceleration and deceleration of inflation in the 1973–75 period. Blinder, Alan S., “The Anatomy of Double-Digit Inflation in the 1970s,” in Hall, Robert E., ed., Inflation: Causes and Effects (Chicago, 1982).Google Scholar
53. Inter alia, Memo, Gramley to Board of Governors, 8 December 1975, File “Gramley, Lyle (12) May-December 1975, Box C8, Arthur Burns Papers, Gerald R. Ford Library; Wells, Economist, chap. 6; Kettl, Leadership at the Fed, 133–37.
54. Useful accounts of these struggles are in Kettl, Leadership at the Fed, chap. 6, and Woolley, Monetary Politics, chap. 7.
55. Carter, Jimmy, Keeping Faith (New York, 1982), 76.Google Scholar
56. These included restraining federal pay raises; adopting further budgetary restraint; require by executive order that federal regulations be cost-effective; and increase sales of lumber from the national forests.
57. Campagna, Anthony S., Economic Policy in the Carter Administration (Westport, Conn., 1995).Google Scholar
58. Hargrove and Morley, The President and the Council, 480.
59. Carter called it a “turning point,” referring to “a major fiscal and political problem brought about by a resurgent economy and the rapidly building pressures of inflation.” Keeping Faith, 77.
60. Ibid., 77; Burton 1. Kaufman, , The Presidency of James Earl Carter (Lawrence, Kan., 1993), 75–76, 99–100.Google Scholar
61. Carter himself observed, “The obvious inconsistency in my policy during this rapid transition from stimulating the economy to an overall battle against inflation was to plague me tor a long time.” Keeping Faith, 78. Schultze recalled that “there were a lot of people who really didn't like [the rebate proposal] but who had taken a political position on it to please Carter. Then the first thing he did was suddenly to reverse course.” In Hargrove and Morley, President and the Council, 481.
62. Hargrove and Morley, President and the Council, 479.
63. Memo, Marshall to Schultze et al., 16 March 1979, File EX BE 4–2, 3/1/79–3/31/79, Box BE-19, WHCF–Subject Files, Jimmy Carter Library.
64. Indeed, the Council on Wage and Price Stability recommended its own dissolution. Congressional Quarterly Almanac, 1980, 272.
65. For a monetarist, the rapid money growth looked disturbingly inflationary; for Keynesians like Schultze, the increasing interest rates, in time of economic slack, looked disturbingly restrictive. The Fed explained that keeping money growth within the target ranges would have required increases in interest rates that “could have proved destructive to the smooth functioning of financial markets and might eventually have brought serious injury to our economy.” Quoted in Richard W. Lang, “The Federal Open Market Committee in 1977,” Federal Reserve Bank of St. Louis Review, March 1978, 13. Despite public wrangling with the Fed, Carter's economists projected in late 1977 that future monetary policy would be “highly expansionary.” Memo, Gramley to EPG, 7 December 1977, File “Economic and Budgetary Outlook 1979–81, Box 191, WHCF, Jimmy Carter Library.
66. Axilrod, Steven H., “U.S. Monetary Policy in Recent Years: An Overview,” Federal Reserve Bulletin 71 (January 1985): 15.Google Scholar
67. In mid-1978, Charles Schultze wrote that Miller was under pressure from board members, but that “he [Miller], himself, is very sensitive to the danger of overdoing monetary restraint.” Memo, Schultze to President, 27 June 1978, File 6/28/78 [1], Box 93, Office of Staff Secretary, Jimmy Carter Library.
68. Schultze's account is available in Hargrove and Morley, The President and the Council, 485–86. Carter's note to Schultze, calling his action “unnecessary and improper,” is written on Memo, Schultze to President, 11 April 1979, WHCF, FI-27, CF-F17 1/20/77–1/20/81, Jimmy Carter Presidential Library. Schultze and Treasury Secretary W. Michael Blumenthal had clearly informed the president of their concerns and had his approval to urge the board to tighten credit.
69. Neikirk, William R., Volcker: Portrait of the Money Man (New York, 1987).Google Scholar
70. Axilrod, “U.S. Monetary Policy,” 17–18.
71. Hargrove and Morley, The President and the Council, 494.
72. Congressional Quarterly Almanac, 1980, 304, 272.
73. Roberts, Paul Craig, The Supply-Side Revolution (Cambridge, Mass., 1984).CrossRefGoogle Scholar
74. Using data starting in 1978, Tims et al. show that the normative content (i.e., positive or negative evaluation) of Associated Press wire stories dealing with the economy became extremely negative in 1979–80 and had a powerful negative impact on consumer sentiment. See Tims, A. R., Fan, D. P., and Freeman, J. R, “The Cultivation of Consumer Confidence: A Longitudinal Analysis of News Media Influence on Consumer Sentiment,” Advances in Consumer Research 16 (1989): 758–70Google Scholar; see also Hibbs, Douglas A. Jr., “Public Concern about Inflation and Unemployment in the United States: Trends, Correlates, and Political Implications,” in Hall, Robert E., ed., Inflation: Causes and Effects (Chicago, 1982).Google Scholar
75. My analysis of the data from Kernell dealing with mentions of unemployment and inflation in the Economic Report of the President from 1962 to 1992 shows a powerful time-trend effect on the relative mentions of inflation and unemployment that swamps all other effects, including the effects of partisanship and objective economic conditions identified by Kernell. (Results available from author upon request.) Kernell, Samuel, Going Public: Neu; Strategies of Presidential Leadership, 2d ed. (Washington, D.C., 1993), 211–13.Google Scholar
76. See Roberts, The Supply-Side Revolution, 60–64.