In his book, "Nixon's Economy," historian Allen Matusow says, "Burns had offered Nixon an implicit bargain. In 1971 Nixon controlled prices, and in 1972 Burns supplied money by the bushel. The policy helped reelect the president but also assured the next cycle of boom and bust."
Once past the election, the price controls began to break down. Inflation jumped to 8.7 percent in 1973 and 12.3 percent in 1974. Another recession began in November 1973 and didn't end until March 1975. These poor economic conditions created fertile soil for Nixon's enemies when the Watergate scandal broke. Had the economy been stronger, Nixon probably would have survived it, just as a strong economy unquestionably helped Bill Clinton weather the Monica Lewinsky scandal.
With Nixon gone, analysts began to focus on Burns. In July 1974, Fortune magazine ran a long article putting most of the responsibility for stagflation at his door. Since then, it has become the conventional wisdom among economists that the Fed erred drastically by not tightening in 1972 and thereby allowing the inflation genie out of the bottle.
Burns took most of the blame because he had been a renowned economist before joining the Fed. This made it impossible to believe that he simply didn't know better. Therefore, one is left with the inescapable conclusion that Burns used the Fed to help Nixon with full knowledge of the disastrous consequences for the economy. The only alternative is to believe he was incompetent, which no economist believes was the case.
The reason this history is relevant today is because the Fed is under increasing pressure to tighten monetary policy. While there is no evidence of White House pressure to keep monetary policy easy, one can assume that it will not be displeased if the Fed avoids tightening before Election Day.
Fed Chairman Alan Greenspan is well respected, and no one believes he would knowingly use monetary policy for political purposes. However, the longer he waits to tighten monetary policy, the more people are going to ask whether politics is playing a role.
Bruce Bartlett is a former senior fellow with the National Center for Policy Analysis of Dallas, Texas. Bartlett is a prolific author, having published over 900 articles in national publications, and prominent magazines and published four books, including Reaganomics: Supply-Side Economics in Action.
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