Remembering 1971, Richard Nixon And Tariffs David Glasner? (Also, Don Trump Is A Creampuff)

A Benjamin Cole post

For people of a certain generation, the brilliant, cunning, yet curiously tone-deaf and self-destructive Richard Nixon, U.S. President (1969-1974), is a bottomless well of interesting stories.

Remembered by a dwindling few is that Sunday of August 15, 1971 when Richard Nixon slapped on a 10% tariff, or import surcharge, on nearly all goods entering the United States. Hard as it is to believe today, Nixon also instituted nationwide wage-and-price controls, and took the U.S. dollar off of gold.

And you think Don Trump talks tough? Nixon walked the walk.

Indeed, just a little bit of Camp David weekend work for Nixon, who took to the airwaves that summer evening to tell the American public,  “If you want to buy a foreign car or take a trip abroad, market conditions may cause your dollar to buy slightly less. But if you are among the overwhelming majority of Americans who buy American-made products in America, your dollar will be worth just as much tomorrow as it is today.”

Not only is Trump a piker, but he could take lessons from Nixon how to frame an argument.

BTW, top-blogger Scott Sumner will be especially appalled at this: The Dow Jones Industrial Average rose 33 points the next day on Monday, August 16, its biggest daily gain in history—history!—up to that point, and the New York Times editorialized, “We unhesitatingly applaud the boldness with which the President has moved.”

Balance Of Payments

There were always many reasons fair and foul for every Nixonian policy, and the “Nixon Shock” was no different. Nixon wanted to get re-elected, and was going for short-term gains.  Playing to the crowd was routine. (I will leave it to Scott Sumner to explain why Wall Street loved trade tariffs.)

But there was also a prominent economic theory of the time that chronic trade deficits impoverished a nation, even if free trade was a good idea. A nation running perennial trade red-ink, and consequent mounting debts to foreigners, would eventually face serous and sustained currency devaluation, meaning citizens could afford less on global markets.

Put bluntly, after the debt-reckoning, instead of traveling overseas and living like kings, Americans would stay home and clean hotel rooms for rich international visitors.

Today

Indeed, it remains a curious feature of modern-day U.S. macroeconomics that federal domestic borrowing to run the national budget is roundly jeered, but trade-induced mounting debts to foreign powers are touted as a positive.

To be sure, the U.S. Federal Reserve seems to be able to print money to monetize debts, national and offshore, though that is hardly a popular sentiment in many circles. For now, I heartily recommend this solution, btw.

But the free-traders say worry not, that the offshore holders of trillions of trade-gained U.S. dollars must invest in the U.S., and that is a valid observation too—but if foreigners “invest” in the U.S. by buying bonds, it just means nationals owe foreigners money to maturity, or 30 years on long-term U.S. Treasuries. If foreigners buy dividend stocks, or property, then nationals owe them dividends or rents in perpetuity.

Americans may be cleaning toilets yet for offshore wealthies. The Chinese own the Waldorf, btw.

Analogies

Sometimes you will read that that no one anymore bakes their own bread, fixes their own car, and slaughters pigs. So the software programmer trades his services for those goods and services, and everyone benefits. International free trade is like that, and everyone benefits.

But there is still an uneasy feeling.

Are U.S. citizens trading software programming to afford bread, auto repairs and pig-meat cutlets—but also mortgaging the house?

Only to the tune of $500 billion to $700 billion a year, the amount of recent U.S. trade deficits.

The free traders obscure that part of the analogy.

Conclusion

David Glasner blogged recently that free trade is perhaps the most gloried totem in all of macroeconomics.

Still, the advantages of free trade are theoretical, and the world is full of huge structural impediments and institutional imperfections.

Not only that, if free traders were truthful, they would concede that the U.S. economy is taking on mounting debts held offshore.

If you think pointy-headed academia is becoming hostile to non-PC ideas, then try telling modern-day macroeconomists that free trade as conducted today might not be great for the United States, that there may be immediate and also long-run consequences worth exploring.

Now that is a non-PC topic.

PS. Unfortunately, from an intellectual perspective the Nixon experiment with 10% tariffs was short-lived, only four months. After the tariff experiment, the real U.S. GDP expanded by 5.3% in 1972, followed by 5.8% in 1974, so if tariffs were harmful, it may not show up in the data. In fact, the GDP data looks great, but then perhaps without the tariffs the growth rate would have been higher.

PPS. It does seem free traders cite theory when theory works, and then structural impediments, when that works. For example, the U.S. dollar is a reserve currency, so the US can pay off foreign debts by printing money. That is a structural impediment, or institutional imperfection, that works in U.S. favor, often cited by free traders.

When Reagan Did A Nixon

A Benjamin Cole post

Thanks to the White House tape-recording system installed by then-President Richard Nixon, we have transcripts of Nixon ordering then-Fed Chairman Arthur Burns to gun the presses before the pending 1972 election.

Never underestimate Nixon, who had an uncanny sixth sense for national and global politics, as well as monetary policy.

But lately it came to this writer’s attention that President Ronald Reagan was a crafty fellow as well. From David M. Jones’ 2014 book, Understanding Central Banking: The New Era of Activism:

“A second incident—one that, according to Volcker, [Bob] Woodward got right—involved a hush-hush unpublicized meeting at the White House just prior the Reagan’s reelection in 1984. Volcker was ordered by [Reagan’s Treasury Secretary and Chief of Staff] James Baker to attend this highly confidential meeting, which turned out to have only three participants. Volcker, James Baker, and President Reagan. At this meeting, by Volcker’s account, Baker “ordered” Volcker not to tighten Fed policy “under any conditions” prior to Reagan’s reelection (quoted in Woodward 2000). This unprecedented order by Baker in the presence of Reagan was, of course, totally inappropriate. It fundamentally violated the Fed’s independence within government. If revealed, it would have severely damaged Fed credibility and greatly unsettled the global financial markets.

In recounting this incident, Volcker said with a wry smile that what Baker and the President did not know was that Volcker was, at that very time,  urging his fellow policymakers to ease rather than tighten. Specifically, Volcker was worried that the Continental Illinois Bank failure at that time had caused an unintended tightening of bank reserve pressures, accompanied by an unwelcome spike in the federal funds rate…

In any case, Volcker remains shocked to this day be being called to this secret 1984 meeting at the White House, and being ordered directly by Baker—in the presence of the President—not to tighten under any conditions prior to Reagan’s reelection. Not since the days prior to the 1951 Treasury-Federal Reserve Accord had there been such an explicit White House threat to Fed independence.”

Actually, I think the Reagan White House was within its rights, and that the Fed should be a part of the Treasury…as was publicly recommended by Reagan’s Treasury Secretary, Don Regan.

The current arrangement, that of an independent Fed, is undecipherable to the public on many levels. Who knows who is on the 12-member FOMC? The public does not understand who is responsible for monetary policy, and even if it does understand, cannot vote accordingly.

Are surreptitious White House policy meetings—ala Nixon and Regan—a better way?

TV’s Larry Kudlow Pulls Two Big Historical Boners In One Column

A Benjamin Cole post

TV pundit Larry Kudlow recently opined that it has never been proved that President Richard Nixon (1969-74) pushed for loose money, and that President Ronald Reagan (1981-89) “backed” then Fed Chairman Paul Volcker in his epic battles against inflation.

The old CCCP historical rehabilitationists and revisionists were pikers next to our hagiographer Kudlow.

Unfortunately for Kudlow, and even more unfortunately for Nixon, that president tape-recorded himself. So we have this conversation between Nixon and Fed Chairman Arthur Burns was caught on tape on March 19, 1971, in the White House Oval Office:

Nixon: Arthur, the main thing is next year [1972, election year]…let’s don’t let it [unemployment] get any higher. I hope we can—

Burns: That’s what I have my eye on.

Nixon: Yeah. But I think we really got to think of goosing it.

Burns: Yes.

Nixon: Shall we say late summer and fall this year in order to affect next year?”

Burns: Exactly.

BTW, inflation during Burns-Nixon duet was just under 5 percent, on the CPI.

Then there is Nixon telling aides, “I’ve told [Treasury Secretary John B] Connally to find the easiest money man he can find in the country and one that will do exactly what Connally wants and one that will speak up to Burns…Connally is searching the goddamned hills of Texas, California, Ohio,” Nixon said. “We’ll get a populist spender on the board one way or another.”

The UPI reported on July 28, 1971 that, “President Nixon is considering a proposal to double the size of the Federal Reserve Board, it was learned today. The suggestion, if put before Congress, could touch off a controversy rivaling President Franklin D. Roosevelt’s attempt to ‘pack’ the Supreme Court.”

Okay, enough on Nixon.

President Reagan

Where to start? Fed Chairman Volcker, it is now usually forgotten, was first appointed by President Jimmy Carter—and was largely viewed by Reaganauts as a tight-money D-Party Trojan Horse, determined to wreck the GOP.

At one point, the Reaganauts, like Nixon before them, were looking at institutional myrmidons to shackle the Fed, while the money-presses were kept wide open. As the AP reported in December of 1984, “’The Reagan Administration is considering a plan that would place the now autonomous US Federal Reserve under some form of administrative control,’ the US Treasury Secretary, Don Regan, said yesterday. ‘The United States is the only country in the world that has a totally independent central bank.’”

And President Reagan? Speaking before the National Association of Realtors in December 1984, Reagan echoed the Regan assault on the Fed. “Let me assure you we are not pleased with the recent increases in interest rates,” said the Gipper. “And frankly there is no satisfactory reason for them.”

Here are the national columnist GOP attack-dogs Rowland Evans and Robert Novak (back then, writing a national column was big stuff, btw) in July 8, 1984 column: “When Paul Volcker and his central bank colleagues decide later this month whether to further tighten the screws on a dangerously deflationary economy, President Reagan’s policymakers will be offstage as impotent….”

Of course, the 1984 elections were up to bat.

Evans and Nowak continue, “The Federal Reserve’s staff…monomaniacal fear of resurgent inflation ignores sliding commodity prices which connote deflation rather than inflation.”

The column-penners darkly continue, “Their (tight-money) position is being pressed by Lyle Gramley, a former Fed staffer named to the board by Jimmy Carter in 1980.”

And Evans and Nowak were the Kudlows of their era!

Things Have Changed

In fact, right-wingers were not always daft-kooky-nuts about the money supply, gold, inflation and interest rates. In 1958 famed economist Milton Friedman testified before the Joint Economic Committee, and told the august body that the Federal Reserve had caused the 1957 recession by…being too tight.

The right-wing today would exile Milton Friedman.

Today’s Misguided Right Wing

It is sad to see Kudlow and other wahoos tub-thumb for tight-money, but they could at least be truthful about their antecedents.

Well, scratch that, today’s righty-tighties have no antecedents. Nixon and Reagan were far too shrewd to let the self-destructive dogma of tight money gain control over policy levers.

Nixon and Reagan wanted prosperity, and I say good for them.

What does the GOP want today? Has some sort of auriferous theology replaced monetary realism?

Maybe so. But maybe not. The GOP, once again in control of White House in 2016, may do what R-Party forefathers have always done: Run big deficits and browbeat the Fed for loose money.

Because, you know, prosperity does trump genuflecting to piles of gold, and we want to get re-elected.