Nixon's Legacy, a Bad Decade: Echoes

By Amity Shlaes and Ilan Kolet

Four decades ago, Richard Nixon announced his new economic policy, which included wage-and-price controls, disincentives to import, and the end of the gold-exchange standard. In the short term, meaning the period before the election of 1972, the result was strong growth. Strong enough, in fact, that in November 1972, the U.K. Prime Minister Edward Heath imposed his own wage-and-price controls.

The justification for these steps by national leaders was economic theory so contrived that today it is difficult even to re-read it. For example, explaining Heath's move, a commentator wrote in the New York Times on Nov. 8, 1972: "The lesson of recent experience is that the twin goals of simultaneously reducing unemployment and checking inflation requires use of at least two policy lessons, a stimulative overall monetary and fiscal policy to make jobs grow, and direct controls to keep prices and wages down and curb inflationary expectations." Economists advising both Nixon and Heath told them that the simultaneous occurrence of inflation and slow growth, or inflation and unemployment, was unlikely.

In the longer term, as the chart shows, the Nixon plan proved unworthy of emulation. The wage-and-price controls merely postponed inflation, which eventually showed up, even as growth slowed. People weren't stupid; they understood that wage-and-price controls merely hid inflation temporarily. Americans began to throw around a new phrase, "stagflation," to describe this phenomenon. Another phrase also became popular: "Misery Index," the sum of the inflation and the unemployment rates. The overall result of the Nixon policy was to render the 1970s grimmer, raise interest rates for home buyers (the early 1980s, especially) and force a general review of economic philosophy.

(Amity Shlaes, a senior fellow in economic history at the Council on Foreign Relations and a Bloomberg View columnist, oversees the Echoes blog. The opinions expressed are her own. Ilan Kolet, who created this graphic, is a data editor at Bloomberg News.)