Tuesday, 20 December 2016

Bad politics drives out good economics

The idea that politicians will deliberately implement economic policies they know to be bad just to help them politically is highlighted here in a paper about Richard Nixon's wage and price controls.

The Political Economy of Wage and Price Controls: Evidence from the Nixon Tapes by Burton A. Abrams and James Butkiewicz

On August 15, 1971, Richard Nixon imposed the first and only peacetime wage and price controls in U.S. history. The Nixon tapes, personal tape recordings made during the presidency of Richard Nixon, are now available to the public and provide a unique body of evidence to investigate the motivations for Nixon’s macroeconomic policies. We have uncovered and report in this paper evidence that Nixon manipulated both monetary and fiscal policies to create a political business cycle that helped secure his reelection victory in 1972. Nixon was very knowledgeable about economic matters and understood the risks to the economy of his macroeconomic policy actions and the imposition of wage and price controls, but chose to tradeoff longer-term economic costs to the economy for his own short-term political gain.
Interestingly the following comes from an 2000 interview with Milton Friedman:
INTERVIEWER: There is a photograph of you and George Shultz with Nixon in the Oval Office. What did you say to him on that occasion? What did you tell him?

MILTON FRIEDMAN: Well, I don't know what occasion that particular one was, but the one that's relevant to your question is the last time I saw Nixon in the Oval Office with George Shultz. What we usually discussed when Nixon wanted to talk was the state of the economy: what monetary policy was doing.

Nixon was a very, very smart person. In fact, he had one of the highest IQs of any public official I've met. The problem with Nixon was not intelligence and not prejudices. The problem with him was that he was willing to sacrifice principles too easily for political advantage. But at any rate, as I was getting up to leave, President Nixon said to me, "Don't blame George for this silly business of wage and price controls," meaning George Shultz. And I believe I said to him, I think I said to him, "Oh, no, Mr. President. I don't blame George; I blame you! " (laughs) And that, I think, was the last thing I said to him. Now, the interesting point of that story is that the Nixon tapes are now available, and I have been trying to get that part of the Nixon tapes, but I haven't been able to get them yet. I want to make sure I didn't make this up.

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