15 September 2009
The Political Pendulum Swings
This article is excerpted from the book Outline of the U.S. Economy, published by the Bureau of International Information Programs. View the entire book (PDF, 3.26 MB).
The 1960s Great Society legislation, comprising 84 different new laws, was the crest of a wave of political action begun by Franklin Roosevelt to use government’s power to set economic and social agendas. Voting rights for minorities, employment opportunity, public education, the safety of consumers and motorists, environmental protection, and health insurance for the elderly and poor all were addressed by the new laws.
The adoption of Lyndon Johnson’s agenda was based on his landslide victory in the 1964 presidential election and the decisive majorities his Democratic Party achieved in Congress that year. But Johnson’s policies energized opposition from conservatives who felt the government had intruded too far in the lives of private citizens and had put too great a burden on employers, threatening the vitality of the economy. The civil rights measures Johnson championed embittered many southern whites, whose allegiance shifted to the Republican Party.
The 1970s was a trying decade for the U.S. economy. In the middle of his first term in office, President Richard M. Nixon was confronted with rapidly rising prices, triggered in part by the costs of the Vietnam War waged during his and Johnson’s administrations. Nixon broke with his Republican Party’s traditional support for balanced budgets to accelerate federal spending to stimulate economic growth, even though that swelled federal budget deficits.
Nixon similarly embraced wage and price controls in an effort to halt an inflationary cycle in which rising wages led corporations to increase prices, and higher prices then led to new demands for higher pay by workers. “Now, I am a Keynesian,” Nixon said in 1971, putting himself in the camp of British economist John Maynard Keynes, who had advocated deficit spending during times of slow economic growth.
Nixon’s wage-and-price control program failed. To cite just one example, the price of cotton was not controlled because of the political influence of cotton farmers. But the price of plain cotton fabric was regulated, and when fabric manufacturers’ profits were squeezed, they cut back on production, causing shortages, according to former Federal Reserve Chairman Alan Greenspan.
The lesson from Nixon’s experiment was a lasting one: The U.S. economy was far too complex, chaotic, and fast-moving to be managed in any detail by government officials. A new consensus formed that controls could not overcome inflationary forces, but instead stifled innovation, risk-taking, and competition.
Two oil price shocks that followed the Arab-Israeli War of 1973 and the Islamic Revolution in Iran in 1979 battered U.S. economic performance. Oil prices tripled. Long lines formed at gasoline stations. At the end of the decade, inflation was higher than at any time since World War I, and unemployment had jumped to more than 9 percent. The impact hit hardest during the administration of President Jimmy Carter, a Democrat elected in 1976. The U.S. economy was gripped in a “malaise,” as Carter’s advisers put it, and nothing government did seemed an answer to high unemployment, high prices, and stagnant stock markets.
During economic travails, American voters have often punished the party in power, and 1980 was a case in point. Polls that year showed two-thirds of the public believed the country was faring badly. Many Americans sought a change in direction, and they found it in the candidacy of California’s former Republican governor, Ronald Reagan. At the campaign’s only televised presidential debate, Reagan asked the viewers simply, “Are you better off than you were four years ago?” Analysts called it Reagan’s knock-out punch.
Reagan’s election to the presidency marked another directional change in government’s role in the economy. Reagan declared in his 1981 inaugural address that “in this present crisis, government is not the solution to our problem; government is the problem.” He added, “It is time to check and reverse the growth of government.”
“Reaganomics” sought to cut U.S. tax rates, even if one result was growing federal budgetary deficits. Critics protested that this was an indirect way of forcing cuts in domestic social spending and to programs of which the new administration disapproved.
Reagan and his advisers argued that lower marginal tax rates would revive the economy. It was better, they believed, to leave more money in the hands of business and consumers, whose savings, spending, and investment choices collectively would generate more economic growth than would government spending. This theory, called supply-side economics, held that the resulting economic growth also would generate more revenue than would be lost through the lower tax rates, and that the federal budget could be balanced in this manner.
The Reagan tax cuts did help lift the U.S. economy, but contrary to the supply-siders’ predictions, federal budget deficits persisted and grew. Nevertheless, the “Reagan revolution” was a political turning point toward smaller government and individualism, and Reagan left office as one of the most popular U.S. presidents.
