`Nixonomics' Echoes In Today's Economy
ECONOMICS wasn't late President Nixon's strongest suit.
Nonetheless, he left two major economic legacies:
* In 1971, he took the United States off the gold standard and devalued the dollar. Subsequently, he set the dollar free to float in value on the foreign exchange markets according to demand and supply. These were dramatic changes in the international monetary system that was set up at the Bretton Woods conference in 1944.
The floating exchange rate system remains in place for the major industrial democracies and many other nations. Some European nations attempt to keep their currencies interlocked in value within generous margins.
``It was a good idea to get the dollar free,'' says Geoffrey Moore, an economist who headed the Bureau of Labor Statistics under Nixon.
* Nixon imposed the first compulsory wage and price controls in peacetime, acting against the advice of his top economists.
The experience was unpleasant enough that no president since then has taken such a drastic measure. President Ford had his ``Whip Inflation Now'' campaign, criticizing companies or trade unions that attempted to raise prices or wages by large amounts. President Carter set up a commission to deter wage and price hikes with public reports.
``It will be a very long time before any administration introduces wage and price controls again,'' says Leif Olsen, who was chief economist at Citibank in New York during Nixon's presidency.
Mr. Olsen recalls mailing with his bank's economic letter in late July 1971, a copy of a Washington Post opinion article by Paul McCracken, chairman of Nixon's Council of Economic Advisers. It sharply criticized the advocacy of wage-price controls by Harvard economist John Kenneth Galbraith. In August, Nixon announced the controls.
``Nixon was no ideologue,'' notes Charles Schultze, President Johnson's budget director, now a Brookings Institution fellow.
This reporter recalls going to the press conference held by Nixon in the red-brick headquarters of the Smithsonian Institution on Dec. 18, 1971, when he was to announce the results of a meeting of the Group of Ten industrial powers dealing with dollar devaluation. The president was a long time coming and I stepped outside for a break. At that moment, Nixon arrived and the secret service would not let me return to my seat under the Wright brothers aircraft. With no immediate deadline, my absence didn't matter professionally. But I did miss the historic announcement. With a little hyperbole, Nixon hailed the deal as ``the most significant monetary agreement in the history of the world.''
For years the US had been trying to avoid devaluation of the dollar, largely for reasons of politics and pride.
Mr. Schultze remembers Johnson ``desperately trying to fend off devaluation'' with various measures that often didn't make much economic sense. But runs on the dollar in foreign exchange markets were getting worse. European nations were, in effect, financing the Vietnam War by being forced to buy dollars to prop up the greenback's value.
Over months of negotiations, Nixon and his Secretary of the Treasury, John Connally, shifted some political blame for the weak dollar to the Europeans and the Japanese, at least in American eyes. Mr. Connally was much reviled abroad for his tough negotiating posture.
Contrary to fears at the time, the floating of the dollar has not prevented a huge growth in world trade. And it has facilitated fewer controls on capital movements across borders.
Under a floating exchange rate regime, companies face greater financial hazards in doing business across borders. But governments have more flexibility in carrying out domestic economic policies without the international effects having major domestic political consequences. Devaluation of the dollar against the yen last year did no noticeable political harm to President Clinton.
Other aspects of ``Nixonomics'' have fainter echoes today. Inflation was running at a relatively high but manageable 4.6 percent on the consumer price index when he took office in 1969. It had reached more than 12 percent when he left. It was the start of a period of price instability in the US that has faded away only after the 1981-82 and 1990-91 slumps.