Prosperity By Decree

Exactly 40 years ago, the president of the United States turned the economic world upside down in a prime-time televised speech.

I vividly remember the events of Aug. 15, 1971. My family had a party that afternoon to celebrate my paternal grandparents’ 50th wedding anniversary. We also marked my younger brother’s 11th birthday. Richard Nixon took over the airwaves at 9 p.m. Eastern time to drop multiple bombshell announcements: He froze all American wages and prices for 90 days; he slapped a 10 percent tariff on all imported goods, and he “temporarily” suspended the right of foreign central banks to exchange their dollar holdings for gold. That suspension proved to be permanent, ending the $35-an-ounce peg to gold that Franklin D. Roosevelt had established.

“As a result of these actions, the product of American labor will be more competitive, and the unfair edge that some of our foreign competition has will be removed,” the president assured us. That slap against allegedly unfair foreign competition was one of many elements of Nixon’s speech that foreshadowed our current financial difficulties, though China, which was then in the midst of Mao’s Cultural Revolution, was not on anyone’s economic radar in 1971.

Like President Obama today, Nixon was desperate to get the economy off the table before voters decided his re-election. Unlike Obama, however, Nixon was armed with congressional authority to do pretty much whatever he wanted to the economy. This authority came from the Economic Stabilization Act of 1970, which authorized the president to “stabilize” wages, prices, rents, dividends, interest rates and almost anything else he saw fit.

It was an ingenious political solution to the problems of uncomfortably high inflation, which briefly touched 6 percent in 1970 and hovered near 5 percent when Nixon spoke, and unemployment, which was also near 5 percent at the time.

Congress did not want the blame for the mess, so it told the president to fix it. The president was confident that he could bring down unemployment with a stiff dose of deficit spending together with a protectionist tariff against imports, but both moves would aggravate inflation. So, in Executive Order 11615, he established a Cabinet-level Cost of Living Council to implement the freeze and a set of follow-up regulations that were to keep a lid on cost pressures once the 90-day period was up. Raw agricultural products were conspicuously exempted. Farmers and farm states were a key constituency for Nixon, one he would not want to alienate before his re-election campaign even got started. His price freeze would apply to food processors and grocers, but no further up the supply chain.

Nixon conceded that a weaker dollar would mean higher costs for buyers of foreign goods or travelers who did their business or vacationing abroad. “But if you are among the overwhelming majority of Americans who buy American-made products in America, your dollar will be worth just as much tomorrow as it is today,” he promised.

It seemed to work – for a little while. Under the threat of government sanctions, producers and retailers kept a lid on prices, while unions could do little to win or enforce improvements in their contracts. The Amalgamated Meat Cutters union challenged the executive order in federal court and lost.

But you can’t decree prosperity, at least not for very long. Inflation came roaring back shortly after the 1972 election. A second try at price controls flopped in 1973, as consumers emptied store shelves to avoid anticipated price rises, while producers and sellers held back new product because they could not recoup their costs. It took a stiff recession in 1974-75 to halt the resurgent inflation, and again the halt was only temporary. By the end of the decade, prices were again rising at double-digit rates despite stubbornly high unemployment. “Stagflation” entered our lexicon.

It seems odd, looking back, that a self-described conservative Republican like Nixon would have experimented so deeply with a command-style economy. Nixon himself said it went against his instincts.

As I see it, Nixon was both a product and a prisoner of his time. His was the generation that experienced the Great Depression and the New Deal credited with ending it, even though the Depression dragged on through all of FDR’s first two terms. His was the generation that accepted price controls, ration cards and confiscatory tax rates as part of the effort to win World War II. Nixon himself, in fact, had worked in the wartime Office of Price Administration as a young attorney. He helped administer the tire-rationing program.

The idea that government could set rules that might bend the economy to its will was widely accepted in both parties 40 years ago. It would be another decade before Ronald Reagan declared that government was the problem, not the solution. While Reagan started the accelerated accumulation of national debt that has just cost Washington part of its AAA rating, he also ushered in a general restructuring of the relationships between business, labor, taxation and regulation – creating an America that was more efficient, more productive, more competitive and faster growing than at any other point in my lifetime.

Though it provided no lasting benefit apart from creating today’s system of floating exchange rates, Nixon’s gambit helped him win re-election. President Obama can only dream of the compliant Congress and broad powers Nixon enjoyed. He is going to have a much harder time bending the economy to his wishes, even long enough to appease next year’s voters.

About Larry M. Elkin 533 Articles

Affiliation: Palisades Hudson Financial Group

Larry M. Elkin, CPA, CFP®, has provided personal financial and tax counseling to a sophisticated client base since 1986. After six years with Arthur Andersen, where he was a senior manager for personal financial planning and family wealth planning, he founded his own firm in Hastings on Hudson, New York in 1992. That firm grew steadily and became the Palisades Hudson organization, which moved to Scarsdale, New York in 2002. The firm expanded to Fort Lauderdale, Florida, in 2005, and to Atlanta, Georgia, in 2008.

Larry received his B.A. in journalism from the University of Montana in 1978, and his M.B.A. in accounting from New York University in 1986. Larry was a reporter and editor for The Associated Press from 1978 to 1986. He covered government, business and legal affairs for the wire service, with assignments in Helena, Montana; Albany, New York; Washington, D.C.; and New York City’s federal courts in Brooklyn and Manhattan.

Larry established the organization’s investment advisory business, which now manages more than $800 million, in 1997. As president of Palisades Hudson, Larry maintains individual professional relationships with many of the firm’s clients, who reside in more than 25 states from Maine to California as well as in several foreign countries. He is the author of Financial Self-Defense for Unmarried Couples (Currency Doubleday, 1995), which was the first comprehensive financial planning guide for unmarried couples. He also is the editor and publisher of Sentinel, a quarterly newsletter on personal financial planning.

Larry has written many Sentinel articles, including several that anticipated future events. In “The Economic Case Against Tobacco Stocks” (February 1995), he forecast that litigation losses would eventually undermine cigarette manufacturers’ financial position. He concluded in “Is This the Beginning Of The End?” (May 1998) that there was a better-than-even chance that estate taxes would be repealed by 2010, three years before Congress enacted legislation to repeal the tax in 2010. In “IRS Takes A Shot At Split-Dollar Life” (June 1996), Larry predicted that the IRS would be able to treat split dollar arrangements as below-market loans, which came to pass with new rules issued by the Service in 2001 and 2002.

More recently, Larry has addressed the causes and consequences of the “Panic of 2008″ in his Sentinel articles. In “Have We Learned Our Lending Lesson At Last” (October 2007) and “Mortgage Lending Lessons Remain Unlearned” (October 2008), Larry questioned whether or not America has learned any lessons from the savings and loan crisis of the 1980s. In addition, he offered some practical changes that should have been made to amend the situation. In “Take Advantage Of The Panic Of 2008” (January 2009), Larry offered ways to capitalize on the wealth of opportunity that the panic presented.

Larry served as president of the Estate Planning Council of New York City, Inc., in 2005-2006. In 2009 the Council presented Larry with its first-ever Lifetime Achievement Award, citing his service to the organization and “his tireless efforts in promoting our industry by word and by personal example as a consummate estate planning professional.” He is regularly interviewed by national and regional publications, and has made nearly 100 radio and television appearances.

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