'Steady As You Go' Still Good Policy for Uncertain Times: Echoes

Forty years ago this month, President Richard Nixon sharply shifted his economic policy in an interventionist direction with deleterious economic results that continued for a decade and provide lessons for today.

On August 15, 1971, Nixon announced a freeze on wages and prices. This action paved the way for a series of monetary and fiscal policy interventions that eventually led to double-digit unemployment, double-digit inflation and double- digit interest rates. Had he stayed the course, rather than shift policy, the 1970s would probably have been a decade of strong employment growth with low inflation and low unemployment, much as we eventually saw in the 1980s and 1990s.

You can learn a lot from this period by reading contemporary accounts, and one of the best is that of economist Milton Friedman, who was writing a regular column in Newsweek at the time.

In a column on July 26, only three weeks before the Nixon shock, Friedman was full of praise for Nixon's economic policy. He referred in detail to a speech that had recently been given by Nixon's Budget Director, George P. Shultz, titled "Prescription for Economic Policy: 'Steady As You Go,'" which made the case for the steadier, longer-term, more predictable policy that Friedman was urging Nixon to follow.

In a nod to Shultz, Friedman titled his column "Steady As You Go." He argued that Nixon had begun to reverse the harmful interventionist policy of Lyndon Johnson's administration, which he called "Fine-tuning with a sledge hammer!" He was looking forward to a more stable and prosperous decade.

But the August 15 policy shock, and the events of the ensuing few years, changed all that. It was a 180-degree turn back to interventionist policies, and Friedman withdrew all his praise.

In his May 14, 1973 column, he said: "In a masterpiece of bad timing, I chose in the Newsweek issue of July 26, 1971 to pen a tribute to President Nixon's 'vision and courage' in following a policy of (1) moderate fiscal restraint, (2) steady and moderate monetary restraint, (3) and avoidance of price and wage controls -- a policy which George Shultz had earlier termed 'steady as you go.' ... Within six months of my column all three elements had been abandoned."

Friedman predicted that economic performance would be very poor following this change in policy. He and Shultz were right. Not until the interventionist approach was finally abandoned in the 1980s and 1990s did economic performance finally improve.

Looking back on those events, and on that speech, George Shultz wrote to me recently, "Unfortunately, I lost this battle." Wage and price controls, he said, "were initially popular but, in the end, they produced all the predictable problems with which we are all too familiar."

Policy has again veered in an interventionist direction in the past few years, and the result has been an epidemic of unintended consequences, including an unpredictable economic policy, a non-existent recovery, an explosion of debt and now a credit downgrade by Standard & Poor's. It's time to restore the predictability of sound fiscal and monetary policy, and then return to the mantra of "Steady As You Go."

(John B. Taylor, a contributor to the Echoes blog, is the Mary and Robert Raymond Professor of Economics at Stanford University and the George P. Shultz Senior Fellow in Economics at the Hoover Institution.)

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