Here it comes again — and Jimmy Carter should sue for residuals.
Many economists have been warning that the policies of the last few years under the Bush administration followed by the coming economic populism of Barack Obama will lead the U.S. back into a 1930s-style Great Depression. That group includes my friend and coauthor Arthur Laffer. I wouldn’t go so far. Our current constellation of policies—bailouts, a weak dollar, rising tax rates, windfall profit taxes, bloated economic stimulus bills, and reregulation of markets— looks to me more like a reprise of the 1970s. That decade wasn’t the Great Depression, but the economic results were plenty rotten, delivering the worst performance for the stock market and family incomes since the 1930s. Are we going to see a repeat?
The story actually begins on January 18, 1966. That was the day America hit a gold-plated economic milestone, celebrated as a symbol of post–World War II industrial might and productivity. On that red-letter day, the Dow Jones industrial average (briefly) climbed over 1,000 for the first time in American history.
The Kennedy tax cuts of the 1960s had helped fuel this stock market rally. The Vietnam War had not yet fully escalated or become unpopular, American manufacturing was at its peak, firing on all eight cylinders. Smokestack industries—autos, trucks, steel, chemicals, apparel—were global leaders. The “Made in Japan” label was a tipoff that you were buying an inferior product. Cities like Cleveland, Detroit, and even Newark and Gary, Indiana, were prosperous places and beehives of economic activity.
The American middle class was buying up Zenith color TVs (this was when TVs were still made in America), dishwashers, washing machines, electric garage door openers, and air conditioning for the first time—because it could finally afford such luxuries. John Kenneth Galbraith’s “Affluent Society” had come into its own. And no society had ever experienced such affluence for the great preponderance of the population.
In the late 1960s growth seemed to be unlimited— even preordained. But here’s how far America would slip. In 1966 the Dow stood at 1,000. In July 1982 the Dow hit its low point of just below 800. This meant that over 16 years the stock market lost 20 percent of its value. Adjusting for inflation, stocks lost more than 60 percent of their value. The era of America’s post–World War II economic and military preeminence seemed to have vanished overnight. All you had to do was go back to Cleveland and Detroit and Newark and Gary to see the devastation— the boarded-up houses, the closed factories, the panhandlers, the public housing war zones, the unemployment lines, the drug use. And, perhaps the low point, the Cuyahoga River, which funnels into Lake Erie, caught fire due to residue of industrial waste—much to the delight of late-night comedians.
THE DECLINE STARTED UNDER Lyndon Johnson, who, for the first time in American history, spent more on both guns and butter simultaneously. While escalating the Vietnam War, LBJ unleashed the Great Society welfare state “to end poverty in America.” These programs would go on not just to spend more than $2 trillion over the next two and a half decades, but to depreciate the value of work and family cohesion and create several generation of a permanent American underclass sucked into a cycle of welfare dependency. Poor families on welfare were pushed into 100 percent-plus effective tax rates, because they could lose more money in government benefits from working than they could earn on the job.
LBJ also began the reversal of the supply-side effects of the Kennedy tax cuts. In 1968 he signed a 10 percent income tax surcharge to finance the growing cost of the war in Vietnam. The top tax rate went back up to 77 percent.
At the end of the LBJ presidency came the infamous Alternative Minimum Tax. The Johnson Treasury Department discovered in 1968 that 155 tax filers with adjusted gross income of $200,000 ($1.2 million in today’s dollars) were exploiting loopholes in the tax code to avoid paying any income tax. The Democrat-dominated Congress passed a new shadow tax system called the AMT—which remains a thorn in the side of millions of families today. After four years of the Great Society, by 1968 America wasn’t feeling so great. Next came the Nixon years. Known mainly for Watergate and his foreign policy, Richard Nixon is less well remembered for his catastrophic economic policies. He launched the modern era of the regulatory state with passage of the Clean Air and Clean Water statutes. However well intentioned, they were heavy-handed blows to the solar plexus of American industry, with costs far exceeding benefits from the cleanup legislation.
The 1970s was to be the era of economic strangulation by regulation. In constant 2000 dollars, spending by federal regulatory agencies rocketed from $5.2 billion to $10.2 billion during Nixon’s tenure. By 1979 the spending had zoomed to $13.5 billion. The federal government’s army of snoopers was now regulating everything from the width of doorway entrances to speed limits to the flush capacity of toilets.
In 1971 Nixon closed the gold window—meaning that the U.S. was now officially off the gold standard. Nixon and his advisers believed that the standard was no longer sustainable and that the $35 fixed price of gold that had prevailed since the end of World War II could not be maintained. When the gold window was closed permanently, the dollar was no longer hinged to a hard commodity.
The dollar’s value relative to gold melted down over the next 10 years. In 1971 gold was at $35 an ounce. By 1980 it was selling at more than $800 an ounce—25 times higher. The end of the gold standard began the era of hyper-inflation.
THEN IN AUGUST OF 1971 Nixon imposed one of the most radical interventions into the American free market system in U.S. peacetime history. Nixon’s economic advisers hatched a plan officially titled “The New Economic Policy,” and at its core was a 90-day freeze on wages and prices— which was eventually extended for 1,000 days. There was also a 10 percent tariff on all U.S. imports, in blatant violation of our trade agreements.
The freeze on salaries and prices of goods and services seemed to be an admission that inflation was uncontrollable and that since the market wouldn’t hold down prices, the iron fist of the government would. These price controls exposed a fundamental lack of understanding of how the pricing system in a free market operates. If prices aren’t allowed to rise when the market dictates they should, then shortfalls and waiting lines occur and producers have an incentive to produce less, not more. If prices are held too high, the economy produces too much of the product.
When the price controls were lifted, nine months of pent-up inflation exploded like the cork released from a shaken bottle of Dom Perignon. Clerks stood at ready to put new sticker prices on nearly everything once the clock struck midnight and the price freeze was officially over. At this time, Mr. Nixon and his economic team didn’t understand that inflation was a result of too much money and a falling dollar, not insufficient government mandates. Nixon was also a big spender, with the federal budget up by 50 percent during his tenure. Nixon saw federal spending as stimulatory for the economy, and declared himself and all of us Keynesians. As economist Paul Craig Roberts has noted about that era: “The standard remedy was for government to increase total spending by incurring a deficit in its budget. GDP, it was believed, would then rise by some multiple of the increase in spending.”
Gerry Ford’s policies were hardly an improvement. After the midterm elections in November 1974, Ford faced a Democratic majority whose numbers were staggeringly large. To his credit, Ford vetoed more than two dozen of the Democrats’ more left-leaning spending and regulatory measures, but many of those vetoes were overridden by Congress. But President Ford had no strategy for dealing with rising oil prices in the mid-1970s and so instead he did all the wrong things. In his 1975 State of the Union address he called for a windfall profits tax on oil companies. In December of that year he signed that tax into law as well as an energy bill with price controls and the first-ever fuel efficiency standards on cars. None of these policies worked; their main effect was to curtail domestic production, which played into the hands of the Middle East oil cartel, OPEC.
A man of faith in a godless age is hitting Americans where it hurts.
Mr. and Mrs. American Spectator Reader, let P.J. O’Rourke talk sense to your kids.
In Britain, defending your property can get you life.
The debacle of this president’s administration is both a cause and a symptom of the decline of American values. Unless Congress impeaches him, that decline will go on unchecked. An eminent jurist surveys the damage and assesses the chances for the recovery of our culture.
It won’t take long for conservatives to scratch this presidential wannabe off their 2008 scorecard.
The American Christmas, like the songs that celebrate it, makes room for everybody under the rainbow. Is that why so many people seem to be hostile to it?
Was the President done in by the economy, or by the politics of the economy?