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Lessons from Living with
Economic Policy

11my writing and speaking these days consists of reminis­
cences. I have a lot to reminisce about: I have practiced
Washington economics—observing and participating in the
making of federal economic policy—for over fifty-six years. That is
longer than any other economist in the history of the republic.
The recent death of Richard Nixon prompts me to recall my
experience as one of his economic advisers. That experience illus­
trates two general points about economic policy: the lack of strategic
thinking about economic policy and the limited consequences of
policy mistakes. These points are supported by the whole history of
the past fifty years; I use the Nixon experience only because I know
it best.

Lack of Strategic Thinking
There is little strategic thinking about economic policy: that is,
having clear and consistent goals, having plans for achieving them,
and having a plan or policy for adapting when the plans are not
working. This latter feature is almost always missing. Presidential
administrations come into office with many goals, and with plans for
achieving them, but often the world turns out different from what
was assumed inthe plans and the administrationfounders inaneffort
to deal with conditions it had not foreseen, even as possibilities.
Although I could say some positive things about what we did or

Lessons from Economic Policy


tried to do in economic policy during the Nixon years, what stands
out is the big gap between what was expected at the beginning and
what turned out at the end. Two examples of this discrepancy come
At the time of Nixon’s first inauguration in 1969, a dominant
feature of his economics appeared to be a phobia about unemploy­
ment. At my first meeting with him, in December 1968, he asked
me what I thought our main economic problem was. I said it was
inflation, and he said, “Yes, but you must worry about unem­
A second dominant feature of Nixon’s economics at the begin­
ning of his term was opposition to price and wage controls. This
was, for Nixon, more than conventional Republican paternoster or
standard classical economics: it was a strong personal conviction.
His brief tenure as a lawyer in the Office of Price Administration at
the beginning of World War II had been a frustrating experience.
But the unemployment rate that had been 3.4 percent when we
came into office was 9 percent in May 1975. That was nine months
after Mr. Nixon’s premature departure fromoffice, but it would have
been no lower if he had stayed. Insofar as the unemployment rate is
ever the president’s, that 9 percent rate was Nixon’s.
And in August 1971, Mr. Nixon, the great enemy of price
controls, inaugurated the only comprehensive, mandatory price and
wage controls in America’s peacetime history. These controls re­
mained more or less in effect for two and a half years.
I could list a great many reasons for this big gap between our
promises and expectations and the outcomes. We inherited what at
the time seemed a high inflation rate. No one knew how much
slowdown of the economy would be required to curb that inflation or
what monetary policy would be necessary to bring about the disinfla­
tion. In any case, the administration did not control monetary policy.
The course of the economy in 1970 was disturbed by a major strike
at General Motors. The Nixon administration had to deal with a
Democratic Congress that was much less averse to price controls
than the administration was and, moreover, wanted to embarrass
the administration for its reluctance to use controls. Later, in
1972 and 1973, there were major disruptions of the world supply
situation—Soviet crop failures, the departure of the anchovies from
the Pacific coast of South America, and, most severe, the oil shock.
These conditions and developments ensured that the course of


General Perspective

economic policy during the Nixon administration would not run
smoothly, no matter what we did. But my point is that in our
decisions and statements we did not take much account of these
possible obstacles anduncertainties. Some of these conditions—such
as the presence,of a Democratic Congress—were obvious from the
outset, but the possible consequences of that fact were not explored
andgiven adequate attention. Some of these developments—such as
the oil embargo—were probably not foreseeable, but the possibility
of some kind of external shock, even if not that particular one, could
have been recognized. The implications of that possibility were not
given attention either.
We had a view of what we called the optimum feasible path of
the economy. It would bring us to 1972 with low inflation, without
price controls, and after having passed through a brief period of only
moderately high unemployment. We also had a view of the combina­
tion of fiscal and monetary measures that would make the economy
move along that path. Every few months, when we recognized that
we were off the path, we would revise the path and the necessary
policy, always to reach the same goals. But we never prepared
ourselves or the public for the very likely possibility that reality
would turn out to be as far from the new path as it had been from
the old one.
As a result, we were constantly revising our policy to catch up
with events, and the public was continuously losing confidence inour
policy and our forecasts. That made it impossible finally to convince
the countrythat gradualismwouldendinflationandthat price controls
were unnecessary, even dangerous. The condition of the economy
at the time we imposed, the controls was not terribly bad by any
standard except one: the standard of our own promises. Both
inflationand unemployment were higher thanwe hadbeen promising
for two years. We could no longer convince people, probably includ­
ing the president, that our policy of avoiding price controls was
working. If we had recognized and insisted on the inevitable uncer­
tainties from the outset, we would have been in a better position to
argue for patience.
Moreover, our own conception of the bad consequences of price
controls was abstract and academic. If we had been more conscious
of the way price controls might work out, we might have been even
more reluctant than we were to impose them and more successful in
explaining to the public why we did not want to use them.

Lessons from Economic Policy


As I look back to that weekend some twenty years ago when
we decided to impose the ninety-day freeze on prices and wages, I
am amazed to recall how unconcerned and ignorant we were about
what would happen next. We had a vague idea that after ninety days
we would get down to a system of essentially voluntary exhortation
to large businesses and unions about their price, and wage behavior.
We did not foresee that the public would love the ninety-day freeze
so much that we could not retreat from it very quickly. We did not
foresee that we would be living with the system for two and a half
years. We did not foresee that the initial apparent success of the
controls would seduce us into excessively expansionary fiscal and
monetary policy. We did not count on the possibility of shocks to the
world food and energy supplies that would end the system in an
explosion of inflation followed by the worst recession of the postwar
period up to that time.
If we had visualized that course of events, not as most probable
but as possible, we might have resisted the imposition of the controls
more and have explained more successfully to the public why we did
that. We suffered from a tendency to regard the most probable
scenario as the only possible scenario and to neglect the implications
of the uncertainties of our condition.
This deficiency, of course, was not peculiar to the administration
in which I served. The Kennedy-Johnson administration failed to
recognize the possible consequences of its policy of fine-tuning fiscal
measures combined with arm-twisting businesses and unions to
prevent inflation. Members of the Reagan teamhad various assump­
tions of what the consequences of the initial big tax cut would be and
found themselves struggling for seven years with the fact that none
of these assumptions turned out to be true. The Bush administration
found itself seriously embarrassed for having failed to recognize and
prepare for the possibility that its pledge of no new taxes might be
inconsistent with its pledge to balance the budget infive years.

Consequences of Policy Mistakes
This history illustrates my first point, which is the common lack of
strategic thinking. My second point is more comforting: like hurri­
canes in Hartford, Hereford, and Hampshire, terrible things hardly
ever happen, at least as a result of mistakes of economic policy. The


General Perspective

story of the follies of economic policy is the story of irony, of the gap
between pretensions and outcomes, not a story of tragedy.
Most people would probably agree that the imposition of price
controls in 1971-was one of the great mistakes of economic policy of
the postwar period. Some generally sensible observers thought that
the American economy would never be the same and that we would
never get back to free markets. But that did not turn out to be the
case. We did go through some foolish experiences, like the drowning
of baby chicks allegedly because of the price controls, and having to
wait in line for gasoline. We did end up with a recession, but
recessions are a common part of our economic history. The 19741975 recession was not much worse than our average. And we did
have an exceptional rise of output and employment in 1972, which
we might not have hadwithout the controls.
Many people would agree that the deficits of the Reagan and
Bush administrations were a major mistake of economic policy. But
it is hard now to point to any substantial damage they did. Econo­
mists will say that the deficits depressed private investment and
slowed down long-term growth, but when we try to estimate the
size of this effect, it seems to be quite small.
How do we explain this apparent fact that we can have so much
folly with so little resulting damage? I will suggest an explanation by
referring to three quotations.
Adam Smith, the fount of all wisdom, said, “There is a great
deal of ruin in a nation.” He meant, I believe, that a nation is a
sturdy, flexible institution, reflecting the private decisions of millions
of individuals, and that the follies of government do not much disturb
the national conditionunless the follies are exceptionally great.
A second quotation is less elegant but more pointed: “Economic
policy is random with respect to the performance of the American
economy, but thank God there isn’t much of it.” That revelation did
not come fromthe fount of all wisdombut fromme; it suddenly came
to me ten years ago as a summary of my experience in forty-six
years of Washington economics. The fact is that most of the things
that we regard as big issues are really small relative to the size of
the American economy.
The third quotation is, to me, the most interesting. Axel
Oxenstiem, chancellor of Sweden 350 years ago, said: “Behold, my
son, with howlittle wisdomthe world is governed.” For a long time,
I thought he was saying that the world is governed badly because it

Lessons from Economic Policy


is governed with so little wisdom. I now believe that he may have
been saying that even a little wisdom is sufficient to govern the
world—that the world can be well governed without much wisdom.
That idea should be familiar to economists. Thanks to Adam
Smith, we believe that good performance of the economy does not
depend on the wisdom of the individual actors in the economy. We
have an institution, the market, that produces good results even
though the individuals may not be very wise. The institutionwinnows
out the follies of the participants. That, we suppose, is what Adam
Smith meant by reference to the Invisible Hand, although since he
put the initials of those words in capital letters he may also have
been speaking of God.
But we generally reject, or at least overlook, the possibility that
an Invisible Hand controls government to prevent the follies of our
governors from resulting in tragedy. I recently read the First
Inaugural Address of George Washington and was surprised to find
himsaying this: “No people can be bound to acknowledge and adore
the Invisible Hand which conducts the affairs of men more thanthose
of the United States.”
I do not know whether George Washington ever read The
Wealth of Nations. Alexander Hamilton, who helped Washington as a
speech writer, may have done so, and that may be the connection
between Smith’s Invisible Hand and Washington’s. Clearly, Washing­
ton was referring to God, as Smith probably was also. But Washing­
ton like Smith was probably also referring to institutional arrange­
ments that yielded good results without great demands on either the
wisdom or the virtue of individuals. In Smith’s case, the institution
was the free market. In Washington’s case, it may have been the
structure of government, starting with the Constitution in which he
and his contemporaries placed so much faith. The Invisible Hand
may have been the guidance and limitation placed on the policies of
government by the division of functions among the federal govern­
ment, the states, and the citizens; the balance of powers among the
branches of the federal government; the room left for the play of
diverse factions and interests; and the assurance of freedom of
discussion and the competition of ideas. This may be the Invisible
Hand that despite the lack of strategic thinking about which I
have complained saves us from extreme and persistent errors of
government. (June 1994)