Chapter Seventeen

THE ECONOMIC CRISIS OF THE 1970s

The Nixon Years

When the administration of President Richard M. Nixon took office in 1969, the policies set in place during the Kennedy-Johnson years were continued. In part this was because Nixon did not consider himself an expert on economics and did not want to upset the economy; in the short-term he had no other choice as these programs had built up a momentum of their own. Besides, the economy was doing quite well, with the unemployment rate at 3.3 percent at the beginning of 1969 and inflation running at 5 percent. To be sure, this level of inflation was high by previous standards, but moderate compared to what the next decade would bring. 1

One of the hallmarks of Keynesian policy was a willingness to incur budget deficits during a recession. To some extent, this happened automatically; when the economy experienced unemployment, government expenditures for welfare and unemployment programs increased while tax collections declined, resulting in an increase in the deficit. Economist James Tobin has estimated that for each percentage increase in the unemployment rate, the government deficit will grow by $25-$30 billion. 2 Pre-Keynesian fiscal prudence would call for a tax increase to reduce this deficit, whereas Keynesian policy encourages a deficit. Nixon admitted his adherence to this latter view when he announced in 1971, "I am now a Keynesian." 3 Whatever his economic leaning, Nixon still had to conduct the war in Viet Nam, and the Government had to find the means to pay for it. The tax surcharge passed in 1968 was extended into 1970 and the

1 Stein, Presidential Economics, 1984, 133-134.

2 James Tobin, A Keynesian View of the Budget Deficit, in Fink and High, A Nation in Debt, 1987, 79.

3 Stein, Presidential Economics, 1984, 134.

deficit thus remained small. But Nixon also inherited many of the welfare programs that had continuing built-in increases. During 1970 the Federal Reserve had tightened up monetary policy. With the economy heading for a recession in 1971, Nixon pushed for tax reductions to take place in 1972.4 Deficits thereafter began rising to levels previously unheard of except during wartime. In 1973 the budget deficit was $14.3 billion. 5

The Nixon years also saw the beginning of inflationary pressures coming to bear on the economy. The expansionary monetary policy of the 1960s had continued until 1970, when restraint began to be enforced. By 1971 Nixon set forth a new economic policy that called for monetary and fiscal expansion combined with wage and price controls-in force from August 1971 to April 1974. As part of a policy of easy money, the Federal Reserve purchased on the open market $7.8 billion in government securities in 1971 and $5.8 billion in 1972. 7

With the sharp rise in price of petroleum products due to the OPEC-engineered shortage of 1973, and with the lifting of price controls, inflation had increased dramatically by 1974. It should be noted, however, that to the extent that individuals experience inflationary income increases, those increases raise their taxes (by boosting them into higher tax brackets), thus helping to keep government deficits lower.

The Nixon administration did oversee the formation of a variety of new agencies, such as the Environmental Protection Agency, the Occupational Safety and Health Administration and the Consumer Product Safety Commission. Expenditures in these areas would also add to the increasing annual budget deficit. Despite the creation of these new agencies, total Federal government employment levelled off during the 1970s, increasing from 2,928,000 persons in 1970 to 2,987,000 persons in 1980-a rise of only 2 percent. 8

The Ford Years

The administration of President Gerald Ford did not cut down on the size of government operations. To fight inflation, however, Ford

4 Stein, Presidential Economics, 1984, 200-204.

5

6

Secretary, Annual Report, 1973, 11.

Douglas A. Hibbs, Jr., The American Political Economy, (Cambridge MA: Harvard University Press, 1987), 271.

7 Secretary, Annual Report, 1972, 18.

U.S. Government, Statistical Abstract of the United States, (Washington, D.C.: 1985), 322.

did follow a policy of cutting back on government spending while the Federal Reserve put a tighter rein on the growth of the money supply and credit. Unemployment increased as the economy suffered a recession through 1974-1975.9 Ford's cutbacks in spending were offset by the impact of the recession on the government's finances, so budget deficits continued to rise. In 1975 the deficit climbed to $59 billion, the largest it had been since the $61.8 billion deficit in 1944, during a period of all-out war. 10 The budget deficit for 1976 surpassed both these figures, hitting $87.2 billion. 11 In order to help the economy grow, in 1976 the Federal Reserve boosted the money supply, purchasing $9.7 billion in government securities as opposed to $4.3 billion in the previous year. 12

The Carter Years

Under Jimmy Carter, governmental policy turned expansionary. Taxes were cut during 1977 in an effort to stimulate spending. At the same time, the Federal Reserve increased the growth of the money supply, acquiring $8.3 billion in government securities in 1977 and $10.6 billion in 1978. 13 The economy responded, and after several years of growth, the size of the deficit declined to $27.3 billion in 1979. However, the rate of inflation, fueled by the energy crisis of 1979, began rising.

To fight inflation, monetary policy was tightened. In October 1979, the Federal Reserve made a dramatic shift in its policy by placing less emphasis on control of interest rates and more on the growth of the money supply. In 1979 the Federal Reserve purchased a mere $0.7 billion in government securities. 14 Interest rates hit new highs, with market yields on Treasury securities reaching the 14-16 percent range, and the ensuing unemployment increase caused the deficit to rise again, reaching $59 billion in 1980. 15 By 1980, total debt of the Federal government stood at $914 billion, an increase of $532 billion since 1970. 16 Even if the debt were adjusted for the high levels of inflation that took place during the decade, there was

9 Hibbs, American Political Economy, 1987, 271–272.

10

Secretary, Annual Report, 1975, 9.

11 Secretary, Annual Report, 1976, 11. 12 Secretary, Annual Report, 1976, 33. 13 Secretary, Annual Report, 1978, 15. 14 Secretary, Annual Report, 1979, 15.

15 Secretary, Annual Report, 1980, 9.

16 Anderson, Financing Modern Government, 1973, 14.