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When Richard Nixon Wrecked the Economy
Kamala Harris should be careful not to follow the Republican president’s
lead.

President Richard Nixon addresses a Joint Session of Congress.
Former President Richard Nixon addresses a joint session of Congress on
Sept. 9, 1971, to explain his new economic policy following the sudden
freeze on prices, rents and wages. | AP

By Joshua Zeitz

09/01/2024 07:00 AM EDT

Joshua Zeitz, a Politico Magazine contributing writer, is the author of
Lincoln's God: How Faith Transformed a President and a Nation (May
2023). Follow him @joshuamzeitz.

When Vice President Kamala Harris announced her first major policy plank
— new crackdowns on alleged price gouging in supermarkets and grocery
stores — the impetus was clear. Still reeling from pandemic-era
inflation, Americans remain frustrated by steadily rising food prices,
which are 20 percent higher today than when Harris and President Joe
Biden took office.

But her proposals have sparked contention. Donald Trump has attacked
“Comrade Kamala” for embracing “socialist price controls.” Harris’
supporters claim that she did not endorse price controls on groceries,
but rather ordinary crackdowns on gouging that exist in other areas of
the economy.

In fairness to both sides, the vice president’s proposal was more
conceptual than specific. But Democrats have good reason to deny, and
Republicans to argue, that she plans to impose price caps. While price
controls played an important role in helping the U.S. mobilize during
World War II, they were disruptive to the economy and, eventually,
broadly unpopular.

In fact, the last time a president attempted to quell runaway inflation
was in the early 1970s when Richard Nixon — a Republican — imposed
temporary ceilings on food and gas prices. The results were economically
ineffective and politically disastrous, with massive unintended
consequences. It’s history that Harris should remember as she continues
her campaign — and as she governs, if she wins.

After nearly two decades of post-war prosperity featuring robust growth
and low inflation, by the late 1960s, wages and prices began to
accelerate more quickly.

Between 1965 and 1968 federal spending increased by 60 percent — in
large part a result of America’s military buildup in Southeast Asia —
and pushed inflation up to an annual rate of 5.5 percent. Liberals in
Lyndon Johnson’s White House generally embraced the writings of the
famed Cambridge University economist John Maynard Keynes and attributed
such “cost-push” inflation to the dramatic hike in government expenditures.

By this logic, government fiscal policy (in this case, increased war
spending) primed the nation’s economic pump, creating low unemployment.
In turn, the tight labor market encouraged workers to exact generous pay
increases from their employers, who responded by boosting prices to
cover new labor costs. At the same time, workers equipped with more
expendable cash competed for a limited supply of products, further
edging prices upward. Good Keynesians all, LBJ’s advisors convinced the
president to secure congressional approval of a temporary, 10 percent
tax increase, a measure that would theoretically reduce aggregate demand
and slow the steady climb of wages and prices. But the tax surcharge did
not have its desired effect. “When we were able to call the policy
tune,” said Arthur Okun, LBJ’s chief economic advisor, “the economy did
not dance to it.”

Kamala previews her economic policy ahead of DNC

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Such was the economy that Richard Nixon inherited. In his first two
years in office, inflation hovered between 5.5 percent and 6.6 percent —
modest by comparison to what would follow in the mid-1970s, when
inflation moved into double digits, but still alarmingly high by recent
historic standards. By late 1970, Nixon was eager to own the issue and
drive prices down. Which is where John Connally came in.

A conservative Democrat and onetime protégé of Lyndon Johnson, Connally
served from 1971 to 1973 as Nixon’s Treasury secretary. Best known for
catching one of the bullets intended for President John F. Kennedy in
November 1963, he was entirely self-made — a son of sharecroppers who
rose to become student body president at the University of Texas, then
secretary of the Navy under JFK, and finally, a three-term governor of
Texas. Henry Kissinger noted that “Connally’s swaggering self-assurance
was Nixon’s Walter Mitty image of himself. He was the one person whom
Nixon never denigrated behind his back.”

A man of few ideological commitments and even fewer fixed notions about
political economy, Connally liked to brag, “I can play it round or I can
play it flat, just tell me how to play it.” After surveying the
landscape, in August 1971 he convinced the president to enact what came
to be called the New Economic Policy (NEP), a two-pronged plan which
first took America off the gold standard that year, thus deflating the
dollar and arresting the outflow of gold to foreign nations that held
large reserves of U.S. currency; and second, a move to check inflation
by imposing 90-day wage and price controls — something that no American
president had done since the 1940s. NEP also included a temporary 10
percent surcharge on all imports. Together with the devaluation of the
dollar, this step boosted American exports and helped revive the
struggling manufacturing sector.

Initially, it was a political success; 73 percent of Americans applauded
Nixon’s imposition of wage and price controls, and for a time, NEP
seemed to work. But as Herb Stein, one of the president’s chief economic
advisers, later admitted, “We had no plan for getting out of … the
ninety-day freeze.” Improvising, in October 1971 the administration
introduced “Phase II” of the NEP, which kept certain controls in place
until January 1973. With prices and wages thus locked into a holding
pattern, the administration’s high-spending budget and the Fed’s
expansionist monetary policy heated up the economy in time for the 1972
presidential election. Unemployment only dipped modestly from 5.9
percent in 1971 to 5.6 percent in 1972, but inflation dropped to a
manageable 2.9 percent, providing a stable enough environment for
Nixon’s last electoral campaign and his landslide win against George
McGovern.

In 1973, just as Watergate began spinning out of control, the economy
came crashing down. The Fed’s easy money policy and the administration’s
budget had so overheated the economy (GNP grew at a real rate of 8.7
percent during the first quarter of 1973) that Americans engaged in an
orgy of consumption, creating shortages of raw materials like chemicals,
paper, steel and copper that soon drove wholesale and retail prices
through the roof. The end of Phase II in January and the introduction of
Phase III, which retained mandatory controls on only a handful of
sectors (namely, health care, food and construction), exacerbated the
problem.

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Had cost-push inflation been the only source of economic woe, the
president’s troubles would have been bad enough. But a series of events
— some coincidental, others owing to Nixon’s ineptitude as a manager —
conspired to create what economists call “supply shock” inflation,
particularly in the all-important food and energy sectors.

First, heavy snows in the Soviet Union destroyed much of the country’s
wheat harvest, while warm water currents in the Pacific Ocean flowed to
the Peruvian coastline, decimating the anchovy harvest. Anchovies were a
key ingredient of high protein feed grain, a necessary staple for U.S.
livestock farmers.

Second, in 1972, the Soviets had quietly cornered the U.S. grain market,
using $750 million in American credits and $500 million in hard currency
to buy up one-quarter of the American wheat harvest. Nixon had extended
the credit and eased the way for the purchase in an effort to secure
Soviet acceptance of arms control agreements that he believed
(correctly) would bolster his reelection campaign. He never anticipated
the economic fallout.

Motorists pass posted gas prices.
In February 1974 the Annapolis Evening Capital reported that “long
lines, long waits and the gas shortage teamed up yesterday to produce
hot tempers and the first violence in customer lines at county gas
pumps.” | Eric Gay/AP

Third, in an effort to shore up his support in the farm belt during the
campaign, in 1972 Nixon’s Agriculture Department had increased crop
reduction subsidies, thereby driving up agricultural income ahead of the
November election, but further contributing to the shortages that
plagued the national economy the following year.