Mises Daily

George W. Bush’s Nixonomics

It was a familiar time.

It was a time of a Republican administration waging an unpopular war. It was a war some Democrats said they opposed but seemed to do very little to stop. Inflation was starting to become a problem.

America’s allies thought our president’s economic and political polices were flawed and they were often ridiculed. Anti-Americanism was popular. The Republican president infrequently disagreed with Democrats about the welfare state.

Stories from today’s newspapers? Not exactly.

I could be talking about the current administration, its easy spending ways and detested foreign policies. But actually I am speaking of another Republican president, whose unpopularity, reckless fiscal record and bellicose foreign policy parallels today’s occupant of the Oval Office.

(1) Compassionate Republicanism in the 1960s and 1970s

He was one of the enthusiastic fathers of the modern corporate welfare/warfare state: president Richard Nixon was first elected in 1968. But by 1970 the nation was in the midst of a recession and Nixon’s re-election chances didn’t look good. Democrats were lining up to run against him.

Nixon, who believed he had lost the presidency in 1960 because of the money-tightening policies of Federal Reserve Board chairman William McChesney Martin, wanted easier money policies for his re-election in 1972.

Nixon was a “moderate” Republican. Here was another compassionate Republican of the Dewey/Eisenhower/Theodore Roosevelt wing of the GOP. But Nixon — later impeached for his Watergate shenanigans — was worried about re-election. Nixon, like Bush, decided to shake up his cabinet.

So, in 1971, Nixon took a series of steps that were designed to reduce inflation and juice up the economy for the coming elections. But clearly, if Nixon had to choose between unemployment and inflation to achieve his political goals, he would opt for the latter.

“We’ll take inflation if necessary, but we can’t take unemployment,” Nixon said.1 This — along with left-liberal social policies — were steps that, to this day, earn the praise of Ralph Nader, who says some of Nixon’s economic and social policies were good.

Still, the president’s economic policies, his Nixonomics that included wage and price controls, would be devastating. Controls initially seemed to succeed, stabilizing the economy just long enough for President Nixon to be overwhelmingly re-elected in 1972. His supporters would say that was because he had taken bold steps that restored the economy. In fact, his statist packages of inflation and controls produced a Potemkin Village economic effect.

Nixon installed John Connolly as Treasury Secretary. Connolly, the former governor of Texas, was a wheeler-dealer who impressed Nixon with political skills. He slapped on wage and price controls.

Connolly, by the way, had no formal training in economics. And, like a police prefect from the movie Casablanca, all but announced that he had “no convictions” and that he blew with the wind. Indeed on the issue of a free market versus controls — or on any other policy issue — Connolly was known for saying, “I can play it round or play it flat. Just tell me how to play it.”2

Later, after his career in government, Connolly had difficulty managing his own finances, no less a nation’s. Years later, he declared bankruptcy.

(2) The Republican Potemkin Village

These wage and price controls went along with another series of measures that included the expansion of Social Security — in time for the increased payment notices to go out to recipients just before the election — without any projection of what it would cost, taking the dollar off its last link to gold and installing Arthur Burns as Federal Reserve Board Chairman.

Fed Chairman Martin had angered Nixon because he hadn’t created money fast enough to pay for his defense and social spending. The president thought tight monetary policy would lead to a recession in the middle of the election cycle. He wanted someone at the Fed who would agree with him. He wanted faster money creation and low unemployment rates even if he risked inflation.

Unlike Connolly, a career politician, Burns was an economist and academic. (In the latter capacity, he had temporarily blocked the award of a doctorate in economics to Murray Rothbard3 ). Under pressure from Nixon, Burns proceeded to expand the money supply at a much faster pace than the previous Fed chairman. The economy would appear to be booming in 1972.

In the short term, looser monetary policy — along with wage and price controls and the panoply of socialistic measures — seemed to boost the economy. In the long term, however, America’s economy turned sour. Nixon’s policies led to later hardships for the vast majority of Americans.

These included double-digit inflation, high unemployment, a stock market that lost about 40 percent over 18 months, skyrocketing payroll taxes over the next two decades and a slow- or no-growth economy in the rest of the 1970s. The word that described the economic condition of this era was stagflation — high inflation rates along with little or no growth and considerable unemployment.

All of this was a byproduct of Nixon’s efforts to win the 1972 election, which he easily won. The price controls included rents, which heartened rent control advocates around the nation. Many of them reasoned that a Republican president backing price controls certified the policy. Still, Nixon was not atypical.

Nixon was a Republican president, who, like President Eisenhower elected 16 years before him, did little or nothing to roll back the welfare state he inherited after the long rule of Democrats. Nixon claimed to be wary of price controls, which he had helped to administer during World War II. Yet, as president, he imposed them as part of a package of policies designed to combat the inflation that he and others had caused. Wage and price controls always seem popular before they are actually used. And price controls — like government takeovers of various sectors of the economy — are often intriguing as an economic cure for millions of people who are upset about high oil or drug prices, but have little understanding of their history.

For example, how many people can remember Nixon’s wage and price failures? Or that Senator Ted Kennedy and Senator Henry Jackson, back in the 1970s, called for the nationalization of the oil companies? Or that Nixon’s transportation officials, just after the government’s creation of Amtrak, in 1970 promised “a self-sustaining enterprise” within three years?4

But, after years of condemnation by economists, there are now calls by some for price controls on drugs, gasoline, and many other items. If the price of oil goes high enough, it is likely some politician will again call for a government takeover of the oil companies as several major leaders did back in the 1970s.

The idea of controls was, of course, popular with socialist economists like J.K. Galbraith in the 1960s and 1970s. Unfortunately, when used by Nixon and his administration, they created a huge bureaucracy that often confused those in the private sector.5 The inflation rate, in the aftermath of controls, was worse than before controls. All major economic indices also were worse.

Curiously enough, controls caused so many problems and made such a mess that, by the end of the wage and price controls in 1974, there was even condemnation of them by many on the Left because they said the controls had not been vigorously enforced.6 Even in the wake of their failure, supporters still thought they should be tried again.

(3) The Whys and Wherefores of Controls

The story of price controls begins, as it usually does, in wartime. A government can’t pay the bills through direct taxation and tries inflation. Soon, its trading partners and some of its citizens realize what’s happening and start dumping its currency.

“Throughout history, rulers have used inflation to steal from the people and pursue unpopular policies, welfarism, and foreign military adventures,” wrote two commentators. “Likewise throughout history the authorities who have inflated have resorted to blaming innocent citizens, who try to protect themselves from the government-caused inflation.”7

Indeed, Ludwig von Mises cautioned that, “It is important … not to confuse the consequences of credit expansion proper and those of government made fiat money inflation.”8 Nixonomics was an illustration of the latter.

For Nixon, economic problems poised a short-term political danger. Nixon, the same as the average pol with his eye on the next election, ignored the long-term economic effects of “fiat money inflation.” Nevertheless, those who see controls as the solution to the problems of inflation have always been disappointed with the results. Those disillusioned include the Roman emperor Diocletian, the leaders of the French Revolution,9 and Richard Nixon.

That’s because controls inevitably have unintended consequences, another prominent economist warned.

“The announced aim of a maximum price control is to benefit the consumer by giving him his supply at a lower price,” wrote Murray Rothbard, “yet the objective effect is to prevent many consumers from having the good at all. The announced aim of a minimum price control is to insure higher prices to the sellers; yet the effect will be to prevent many sellers from selling any of their surplus.”10

Richard Nixon was driven from office in August 1974. He became the most unpopular president of our time (although George W. Bush is today coming close to his levels of unpopularity) because of the Watergate scandal, not because of economic policies, which were strikingly similar to those of liberal Democrats.

Indeed, one commentator has called Nixon and his economic advisors, “conservative men with liberal ideas.”11 The latter is a frequent theme in the expansion of the American welfare state. Republicans from Reagan to Bush have often campaigned to reduce the welfare state, only to end up expanding it.12

For example, along with a left-liberal Congress, Nixon greatly increased Social Security benefits. This was accomplished just in time for Nixon to be re-elected in 1972.13 In fact, some people called the president’s spending habits reckless, but they were usually in the minority. Nixon needed to spend to overcome the political and economic woes of his first term.

Inflation and unemployment started to become a problem, with both running at about five percent midway through Nixon’s first term in 1970.

There was a run on the dollar as the federal government ran deficits. That was because it was paying for both the Vietnam War and the expanding welfare state by printing money.

The United States under Nixon, and predecessor presidents Lyndon Johnson and John Kennedy, was cheating on the promises of a gold standard, using other nations to disguise its own deficits.14 It was a system that allowed Americans to pay foreigners in depreciated dollars, while foreigners had to settle debts in gold or in another currency other than their own.15

So, under Nixon, the economy slowed down. Nixon thought he could turn the economy around by running deficits, but the means chosen to finance them led to inflation that began to spook markets. Unemployment went up from 3.5 percent in his first year to 4.9 percent in 1970. By the next year it was up to 5.9 percent.

(4) Nixon and Bush

There are already similarities to our own times. No, unemployment isn’t high. But the federal government is running large deficits; inflation is creeping up at the same time that a so-called fiscally conservative Republican president refuses to reign in spending. Bush has never vetoed a bill.16 Are a recession and another bear market just around the corner? Is history about to repeat?

Little did many Americans of the late 1960s and early 1970s know that economic disaster was around the corner. By the early 1970s, they were worried by a poor stock market. Only a few years ago, our nation went through a three-year-bear market and the bear could be again close. Americans of the 1970s were soon amazed by the remarkable performance of some alternative asset classes.

The value of hard assets, such as gold, oil, and gas — the classic inflation hedges — started to climb. The 1970s would be a great decade for these inflation hedges. For example, gold’s price was $46 an ounce at the beginning of 1972. But between 1974 and 1977, gold’s price was between $100 and $130 an ounce.17 Holders of hard assets had little confidence in Nixonomics and they seem to have little confidence today in the ability of the Bush administration to control inflation.

Recently the price of what the economist John Maynard Keynes called “the barbarous relic” had risen 150 percent since its 2001 low. It is also at its highest price since 1980.18 But those investing in these alternative investments were, and are, sometimes called “unpatriotic.” However, with the declining loss of confidence in the dollar, the damaging policies of Nixonomics would be felt for years to come as the United States suffered under close to a decade of high inflation and jobless rates combined with poor growth numbers.

After Nixon left the White House, many Americans became inured to inflation and were taking no chances. For example, singer Bette Midler, about to depart on a European tour in 1978, demanded she be paid her $600,000 in South African gold coins instead of American dollars.19

Nixon — like Bush today — would not cut expenditures or suggest tighter monetary polices to keep spending and inflation under control. Instead a tax surcharge to pay for part of the Vietnam War was continued at the same time that the flagship program for the welfare state was about to be expanded by Nixon.

Nixon’s celebrated Social Security expansion included a cola provision without serious consideration of the long-term effects, just as President Bush likely has underestimated the costs of his drug prescription plan. This is another entitlement whose costs will burden future generations. These generations of taxpayers will likely curse the government’s faulty accounting techniques just as tens of millions of Americans of modest means pay higher payroll taxes than income taxes.20

Still, besides big deficits and Social Security blunders, Nixon did several other things that hurt our economy, some of which continue to plague us to this day. He installed a new head of the Federal Reserve Board, Arthur Burns, who was given a mandate to go ahead with a politically motivated monetary expansion.21 He was committed to a “full-employment” budget, which was shorthand for running more red ink and making the economy look good in the short run.

Nixon also blamed speculators for the problems of the dollar, the time-honored method of rulers throughout history for when prices quickly rise. These spend and inflate measures would ensure that the economy would appear strong for a short period so he could be re-elected in 1972.

These examples of Nixonomics were bad enough, but perhaps the worst single policy of all was the imposition of wage and price controls. The policy was announced on August 15, 1971 at the same time that he broke the last link between the dollar and gold as American gold reserves were running down.22

Said Nixon, in announcing the dollar was no longer, in any way, tied to gold: “I have directed the Secretary of the Treasury to defend the dollar against the speculators…. We are not about to ease up and lose the economic leadership of the world.”23

The first round of price controls was only supposed to last for 90 days. Controls had to be continued because unsatisfied expectations led to more inflation once controls were due to be removed. Controls were not finally taken off until the spring of 1974. Then the economy was obviously in trouble. Indeed the nation was once again in a recession and the stock market was in a serious decline.

It was all supposed to be part of a comprehensive policy of fighting inflation. Wage and price controls were supposed to prove to everyone that Nixon was serious about fighting inflation. It was 8.8 percent in 1973 — the year after the election — and would hit 12.2 percent later in the decade.

While there is always debate about the gold standard,24 few economists will disagree about the Nixon administration’s wage and price controls. They were — as thousands of previous episodes with controls — a disaster. The stock market declined some 50 percent in an eighteen-month period of 1973-74.25

Our nation was in a brutal recession through most of 1973-1975. But Nixon, and most of the incumbents in Congress who voted for increased spending, were re-elected.

The results of Nixonomics meant double-digit inflation, hurting the auto and housing businesses, industries dependent on borrowed money.

(5) The Road to Controls

How did a “conservative Republican” administration give the nation wage and price controls? The Nixon administration — like the Bush administration today — was never fiscally conservative. Nixon’s advisers wanted to equalize incomes, a policy pursuit that ultimately ended in controls.

The Nixon administration also created the alternative minimum tax (AMT). That, like the original income tax, was created to ensure the rich pay their share. But it has ended up plaguing many middle-income people who are caught in bracket creep. Interestingly enough, we today hear many calls to make the “rich pay their fair share,” as though that would have any substantial effect on the nation’s trillions of dollars of debt.26

Nixon also railed against “speculators” who were dumping dollars. There were also controls on the price of gas, which were continued for about a decade, causing predictable shortages, long lines and providing no relief for consumers.

Again, foreigners and speculators were scapegoated by many politicians for high prices. There was little understanding of the monetary and fiscal policies that put our nation in this mess or the ire of foreigners holding petrodollars. They had lost money the minute the United States abandoned the gold standard.

By the late 1970s, inflation was running in the low double digits. Wage and price controls, along with bi-partisan inflationary fiscal and monetary policies, were the prime causes of America’s economic woes. Yet it was much easier to blame everything on OPEC’s decision to raise oil prices.

This, in fact, was more than OPEC’s payback for America supporting Israel. Many foreigners were upset about the Americans’ decreasing the value of their petro-dollars once the dollar was no longer backed by gold. Wrote the Wall Street Journal: “OPEC got all the credit for what the U.S. had mainly done to itself.”27

(6) The Nixonomics Debacle

Nevertheless, the results of the federal price controls were predictable. After Nixon had been overwhelmingly re-elected, inflation started raging out of control. That’s because everyone wanted to make up for the lost increases of the control period. Once wage and price controls were lifted, inflation was much worse than before the controls.

Worse than that was the effect on monetary policy. Interest rates began their historic climb, which wouldn’t stop until they topped 20 percent in the early 1980s. Certain kinds of industries — industries that depended on borrowed money for purchases — were hit hard.

Housing was one of them. With the potential of rent controls adding to their ever-spiraling costs of housing, building owners were spooked. In places like New York City, many owners were walking away from their properties because taxes, controls, and inflation (a hidden tax that results from the overprinting of money) made them uneconomic.

We have seen these actions were bad long-term economic policy, but politically they were brilliant in the short term. Nixon was easily re-elected, defeating Senator George McGovern, who only carried the District of Columbia and Massachusetts.

(7) Then and Now

In this essay I have not been concerned with the political charges and counter-charges of the 1970s Watergate scandal, or with Nixon’s controversial foreign policy moves such as the false announcement that peace was at hand in Vietnam a few days before the election of 1972. These issues seem to overshadow Nixonomics and with good reason: Nixon was generally uninterested in economics, even though he took steps that hurt markets and imposed several economic penalties on average Americans, penalties we live with to this day.28 Instead, I have examined the strange similarities between Nixon and welfare-state Democrats.

President George W. Bush’s statist policies should not been viewed as a departure from the Republican traditions. Bush’s economic policies are a continuation of Nixonomics.

We should also understand that Bush, like Nixon, cannot resist the political temptation of public-sector spending and various price controls to achieve short-term political goals. Bush, backed into a political corner, may well re-impose wage and price controls. He certainly has done nothing that will lead anyone — even his allies — to believe that he is a fiscal conservative.

It makes sense that Bush recently launched an investigation into “gas price gouging”29 at the same time that the actions of his administration cause destructive inflation, just as Nixon blamed “speculators” for the economic problems of his time. It makes sense that Bush has vetoed no spending bills and has expanded the social insurance program with a new prescription drug plan.

This expansion of welfare programs that often benefit well-off people — an expansion led by a Republican president — is dangerous, warned one of the architects of Nixon’s flawed policies over 30 years ago.

“We are a nation in a hurry for more and more of what we consider the good things in life,” wrote Arthur Burns in a speech entitled “The Menace of Inflation.”

“I do not question that yearning. Properly directed, it can be a powerful force for human betterment. Difficulties arise, however, when people in general try to reach their goals by means of shortcuts; and that is what has happened. Of late, individuals have come to depend less and less on their own initiative, and more on government, to achieve their economic objectives.”30

Yet Burns’s easy money creation policies were one of the reasons why the nation had severe inflation problems. It is also why, inevitably, there will be a call in some quarters for wage and price controls as Bush’s deficits and monetary expansion further damage our economy.

(8) The Republican Keynesian

Nixon’s economic problems — like George Bush’s — stemmed from his embrace of inflation as an economic cure-all. He increased state spending at the same time that he pressured the chairman of the Federal Reserve Board to expand the money supply. This Republican president, several years into his first term and looking toward re-election, proclaimed himself converted to the policies of full-employment and deliberate deficits.

“Now, I am a Keynesian,” Nixon announced on television.31 Did Nixon, the leader so noted for not caring about economics, understand what he was saying? Keynesianism, then and now, had made persistent inflation respectable. Indeed, small amounts of inflation were thought to be good for an economy.

Keynesians see their embrace of inflation not only as an economic stimulant for managing the business cycle, but as a backdoor method of redistributing income.32 Indeed, Nixon said that inflation was an acceptable price to pay for an expanding economy, despite the dangers of double-digit inflation and stagflation.

(9) The Butcher’s Bill for Nixonomics

A few years later, after Nixon had been forced out of office because of the Watergate scandal, these controls resulted in double-digit inflation and a destructive, unprecedented economic disease called stagflation — something Keynes never contemplated — which was comprised of high inflation rates, accompanied by high unemployment rates, along with a slow-growth economy. This was the worst of all economic worlds, and it was produced by a decided increase in state interference with the economy.

Still, besides the actual economic destruction caused by these flawed policies, the psychological and political damage wrought by Nixonomics was probably greater: the GOP made blatantly socialist policies respectable. Republicans, supposedly the party that would never enact wage and price controls, had imposed controls. And it had gained politically for doing it.

Rothbard’s call for revolution during the  Nixon Era

Democrats and Republicans around the country were impressed. For example, controls, which in the housing area were on the decline by the mid-1960s, became respectable thanks to Nixon.

So when the federal wage and price controls expired in 1974, some local officials lobbied to continue some parts of them in many communities. By the mid-1980s, about 200 municipalities, representing some 20 percent of the nation’s population, were living under rent control laws. The aftermath of the Nixon years in the mid and late 1970s was the high point of the rent control movement.

Nixon, intentionally or not, became a great friend of rent controls. Indeed, he may have saved them in a city like New York. Cato Institute scholar Charles Baird writes, “Rent control advocates owe more to Richard Nixon than Jane Fonda.”

We are still paying for Nixon’s egregious policies. Indeed, a rehash of the flawed Republican policies of the 1960s and 70s certainly seems possible, especially since President Bush seems to embrace many of these ideas.

A few years from now — after another painful round of stagflation — will some scholar write that collectivists owe more to George W. Bush than J.K. Galbraith?

  • 1Monetary Policy and the Great Inflation in the United States: The Federal Reserve and the Failure of Macroeconomic Policy, 1965-1979, Thomas Mayer, p. 71 (Edward Elgar, Cheltenhaum, United Kingdom, 1999).
  • 2See Presidential Economics: The Making of Economic Policy from Roosevelt to Clinton, by Herbert Stein, (American Enterprise Institute, Washington, D.C., 1994). Stein, one of Nixon’s economic advisers, says comprehensive controls were “discredited.” He also complains of the “administrative costs, public and private, the interference with investment in basic industries and economic distortions they caused. No one,” he notes, “objected to the end of controls.” p. 187.
  • 3See An Enemy of the State, by Justin Raimondo, pp. 43-44, (Prometheus Books, Amherst New York, 2000).
  • 4For more on this see The End of the Line: The Failure of Amtrak Reform and the Future of America’s Passenger Trains, by Joseph Vranich, p. 9, (The American Enterprise Institute, Washington, D.C., 2004).
  • 5Stein, p. 162.
  • 6Ibid.
  • 7See Ron Paul and Lewis Lehrman, “The Case for Gold. A Minority Report of the U.S. Gold Commission,” p. 174 (Cato Institute, 1982, Washington, D.C.).
  • 8See Human Action: A Treatise on Economics, p. 571, (The Foundation for Economic Education, Irvington-on-Hudson, New York, 1996).
  • 9See “Fiat Money in France” by Andrew Dickson White (The Foundation for Economic Education, Irvington-on-Hudson, New York, 1959).
  • 10See Man, Economy, and State, pp. 784-785, (Nash Publishing, Los Angeles, California, 1962).
  • 11Stein, p. 164.
  • 12A personal aside: I can remember Republican friends telling me in 1980 that Reagan would dismantle the departments of Education and Energy. Neither of those departments was ever in trouble, and Reagan was easily re-elected in 1984.
  • 13For more on this, see my Mises.org article, “The Disastrous Deal of 1972.”
  • 14See The Monetary Sin of the West, by Jacques Rueff, p. 109, (The MacMillan Company, New York, 1972).
  • 15Ibid.
  • 16“I wish he would veto a bill,” said Republican Senator Chuck Hagel. His observation of the Republican’s fiscal sins came at a Security Traders Association conference that I recently attended.
  • 17See “The Power of Gold,” by Peter L. Bernstein (John Wiley & Sons, New York, 2000), p. 355.
  • 18See Steven Forbes’s column in Forbes Magazine, May 22, 2006, p. 27.
  • 19Bernstein, p. 355.
  • 20Two examples are Medicare and Medicaid. President Johnson estimated the two programs would cost $9 billion and $1 billion, respectively. By 1990, the costs were, respectively, $110 billion and $74 billion with bankruptcy for these programs widely conceded. See The Fair Tax Book, by Neal Boortz and Congressman John Linder, p. 132, (Harper Collins, New York, 2005).
  • 21For more on this, see my FAME.org article “Creating More Fiat Money and Winning an Election.”
  • 22See Rueff, p. 211.
  • 23New York Times, August 16, 1971.
  • 24Typical of the anti-gold sentiment is Peter L. Bernstein’s book, The Power of Gold, (John Wiley & Sons, New York, 2000). At the end of his work, which he describes as the history of an obsession, he warns that most supporters of a gold standard ended up “in a ditch.” p. 372.
  • 25See Stocks for the Long Run: A Guide for Selecting Markets for Long-Term Growth, by Jeremy J. Siegel, (Irwin, New York, 1994).
  • 26An example of this economic populism is Ben Stein’s “Everybody’s Business” column in the New York Times of May 7, 2006. It is entitled, “You’re Rich. Terrific. Now Pay Up.”
  • 27Wall Street Journal, January 30, 1986.
  • 28In Nixon’s book of memoirs, there is no mention of the wage and price control episode.
  • 29The irony is remarkable. Every time George Bush gives another speech threatening war with Iran the price of gas, unsurprisingly, spikes. Then Bush says oil companies must be investigated!
  • 30“Reflections of an Economic Policy Maker,” Arthur F. Burns, p. 162, (American Enterprise Institute, Washington, DC, 1978).
  • 31Stein, p. 173.
  • 32William Greider makes no bones about it. Writing about this period he says, “Inflation particularly benefited the broad middle class that owned their own homes, depended on wages for their income, not on interest and dividends from financial assets.” See Secrets of the Temple, How the Federal Reserve Runs the Country, pp. 41-45, (Simon&Shuster, New York, 1981).
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