American Experience from 1920’s through the 1970’s:
(“The Commanding Heights” – Chapter 2)
(“Economics” – Chapter 14)
(“Economics” – Chapter 16)
(“Economics” – Chapter 7, pages 117–122)
Very strong economic performance during the 1920’s (i.e.,
the “Roaring Twenties”):
 Low unemployment; inflation near 0% throughout
decade; tremendous increases in per capita GDP
 Trend toward “modernization” and “urbanization”:
rapid increase in households with electricity, radio
ownership, automobile ownership
 Partly fueled by the Mellon-Coolidge-Harding tax cuts
of the 1920’s: Revenue Acts of 1921, 1924, & 1926
 Andrew Mellon, Secretary of the Treasury of the
U.S. from 3/1921 to 2/1932
 Warren Harding, President from 3/1921 to 8/1923
 Calvin Coolidge, President from 8/1923 to 3/1929
Year :
1917
1918
1919–1921
1922–1923
1924
1925–1931
Highest MTR:
67%
77%
73%
58%
46%
25%
Lowest MTR:
2%
6%
4%
4%
2%
1.5%
 Tax revenues increased from $700 million in 1921
to over $1 billion in 1928 and 1929
 During Pres. Coolidge’s time in office, unemployment
averaged 3.3% and inflation averaged 1% => lowest
Misery Index of any 20th Century President
1
But, one group that did not prosper during the 1920’s was
the American farmer…
 Agricultural productivity and output were rising
during the 1920’s => prices for many commodities
falling; society needed fewer people to be farmers
(each farm could feed more people); profits of farmers
fell => steady increase in farm foreclosure rates
 Many, including President Herbert Hoover (in office
from 3/1929 to 3/1932) were calling for increased
tariffs to protect farmers from foreign competition
Recall that economists are generally opposed to trade
restrictions [94.1% agree that “tariffs and import quotas
usually reduce the general welfare of society”]
Recent (2002) study by the Federal Reserve Bank of
Dallas, focusing on the costs to society of saving a job by
imposing trade restrictions…
Jobs
Annual Cost
Industry
Saved
per Job Saved
Benzenoid Chemicals 216
$1,376,435
Softwood Lumber
605
$1,044,271
Sugar
2,261
$826,104
Dairy Products
2,378
$685,323
Machine Tools
1,556
$479,452
Canned Tuna
390
$257,640
Peanuts
397
$187,223
Women’s Footwear
3,702
$139,800
…clearly, trade restrictions are not the most cost effective way to help
workers in these industries…
2
Smoot-Hawley Tariff Act of 1930:
 Debated throughout 1929 => would ultimately cover
many non-agricultural industries as well
 While being debated, many trading partners imposed
preemptive, retaliatory tariffs against the U.S.
 In May 1930, 1,028 economists sent a letter to President
Hoover asking him to not sign the bill
 Signed into law on June 30, 1930 => the most
protectionist legislation in U.S. history => virtually
closed the borders to foreign goods and ignited a vicious
international trade war [over 25 countries retaliated with
trade restrictions within the next two years]
 Consumption goods imported from abroad now cost
more for U.S. consumers
 Factors of production imported from abroad now cost
more for U.S. producers [more than 800 items used in
automobile production were taxed by Smoot-Hawley]
 Between 1929 and 1933: U.S. exports fell from $5.4
billion to $2.1 billion [61% decrease] and U.S. imports
fell from $4.4 billion to $1.5 billion [66% decrease]
Contractionary Monetary Policy:
 Federal Reserve started raising interest rates (thereby
decreasing the money supply) in the late 1920’s =>
between August 1929 and March 1933, nation’s money
supply was decreased by one-third
Stock Market Crash of 1929 caused in part by the debate of
Smoot-Hawley (strong correlation between changes in
value of stock market and debates in Congress on SmootHawley throughout 1929) and the contractionary monetary
policy which began in 1929…
3
Stock Market Crash of 1929: (9/3/1929 to 11/13/1929)
Stock market trends during 1920’s…
 Dow Jones Industrial Average increased from 63.9 in
mid-1921 to 381.17 on September 3, 1929 (increase of
roughly 500% over eight years)
 But, much of this increase was an “artificial increase
in prices” and did not reflect increases in the “true,
underlying value of the firm.”
 A great deal of uninformed investment in “new
technologies”
 Making purchases “on margin” (borrowing money to
buy stock – brokers lending buyers up to two thirds of
purchase price) was a common practice at this time
 Purchasing “on margin” did not cause the crash, but
it made a bad situation even worse…
 …if you own $1,000 worth of stock and it becomes
completely worthless, that’s bad…but it’s even
worse if you borrowed $750 to buy the stock
(you’re left with worthless shares and a $750 debt)
Dow Jones Industrial Average (DJIA) – stock market index
created by Wall Street Journal Editor Charles Dow in 1896,
to gauge the performance of the industrial sector of the U.S.
stock market
 “Weighted average” of stock prices of 30 large and
widely held publicly traded companies in the U.S.
 Currently consists of companies such as: 3M, AT&T,
Boeing, Coca-Cola, ExxonMobil, General Electric,
Travelers Insurance, Home Depot, McDonald’s,
Microsoft, Pfizer, Walmart, and Walt Disney
4
U.S. Stock Market Crash of 1929:
 Black Thursday (10/24/1929): record 12.9 million
shares traded
 Monday, 10/28/1929: DJIA lost 12.8% of value
 Black Tuesday (10/29/1929): DJIA lost 11.7% of value
 9/3/1929 to 11/13/1929, DJIA went from 381.17 to
198.69 (loss of 47.87%)
 Triggered a “worldwide financial crisis” => collapse of
banking and financial systems around the globe
Additional “Crashes” throughout the Great Depression
 Crash of 1930-1932: from 4/17/1930 to 7/8/1932, the
DJIA fell from 294.07 to 41.22 (loss of 85.98%)
 Crash of 1937-1938: from 3/10/1937 to 3/31/1938, the
DJIA fell from 194.40 to 98.95 (loss of 49.10%)
 Crash of 1939-1942: from 9/12/1939 to 4/28/1942, the
DJIA fell from 155.92 to 92.92 (loss of 40.41%)
 From 9/3/1929 to 7/8/1932 the DJIA went from a value
of 381.17 to 41.22 (loss of 89.19%)
Other Significant Declines since Great Depression:
 Late Aughts: 53.78% decline from 10/9/07 to 3/9/09
 Internet “Tech Bubble” and 9/11/2001: 38.22%
decline from 1/15/00 to 10/9/02
 1987 “Black Monday” (10/19/1987): 36.13% decline
from 8/25/1987 to 10/19/1987
 Early 1970’s (Watergate): 45.08% decline from
1/11/1973 to 12/6/1974
 Late 1960’s: peak of 985.21 on 12/3/1968; low of
631.16 on 5/6/1970 (loss of 35.94%)
5
6
7
The two primary causes of the Great Depression were
protectionist trade policies (e.g., Smoot-Hawley Act of
1930) and contractionary monetary policy…
 Stock Market Crash of 1929 was not a cause of – but
was rather a symptom of – the Great Depression. But,
in part because of the practice of purchases made “on
margin,” the crash would worsen the downturn.
 Further, increased rates of taxation and increased
government involvement in the economy throughout
the 1930’s would prolong the downturn
Arthur Laffer, Stephen Moore, and Peter Tanous (in “The
End of Prosperity”):
“The twelve-year economic slide was a result of trade
protectionism, high tax rates, a contractionary monetary
policy, and a New Deal mishmash of government
programs that were well intentioned, but made things
worse, not better.”
Lawrence Reed
Depression”):
(in
“Great
Myths
of
the
Great
“The genesis of the Great Depression lay in the
irresponsible monetary and fiscal policies of the U.S.
government in the late 1920’s and early 1930’s. These
policies included a litany of political missteps: central
bank mismanagement, trade-crushing tariffs, incentivesapping taxes, mind numbing controls on production and
competition…”
8
Historic Magnitude of Great Depression…
 Previously noted 89.19% decline in value of DJIA
between 9/3/1929 and 7/8/1932 (along with subsequent
crashes in late 1930’s and early 1940’s)
 Unemployment Rates during the Great Depression
 Since 1900, the rate has never been above 10%, except
for the period from 1931 to 1940, during which time it
was above 10% for 10 straight years!
 Recall, in 2011 the unemployment rate was 8.95%,
which was only the sixth year since World War II in
which a rate above 8% was realized (8.48% in 1975,
9.71% in 1982, 9.60% in 1983, 9.26% in 2009, 9.63%
in 2010) => above 8% for 12 straight years from
1930 through 1941
Year
Population
Labor
Force
Unemployed
Unemployment
Rate
1929
88,010,000
49,440,000
1,550,000
3.14%
1930
89,550,000
50,080,000
4,340,000
8.67%
1931
90,710,000
50,680,000
8,020,000
15.82%
1932
91,810,000
51,250,000
12,060,000
23.53%
1933
92,950,000
51,840,000
12,830,000
24.75%
1934
94,190,000
52,490,000
11,340,000
21.60%
1935
95,460,000
53,140,000
10,610,000
19.97%
1936
96,700,000
53,740,000
9,030,000
16.80%
1937
97,870,000
54,320,000
7,700,000
14.18%
1938
99,120,000
54,950,000
10,390,000
18.91%
1939
100,360,000
55,600,000
9,480,000
17.05%
1940
101,560,000
56,180,000
8,120,000
14.45%
1941
102,700,000
57,530,000
5,560,000
9.66%
9
Annual GDP Growth Rates in the United States (over the
82 year period from 1930 to 2011):
 Mean value of 3.36%; median value of 3.45%
 Negative value in only 17 of 82 years
 Since Great Depression, only three instances of
“consecutive years of negative growth”:
o 2008/2009: –0.3% and –3.1% respectively
o 1974/1975: –0.6% and –0.2% respectively
o 1945/1946/1947: –1.1%, –10.9%, and –0.9%
respectively
 Negative growth rates during Great Depression of:
1930 = –8.6%
1931 = –6.5%
1932 = –13.1%
[lowest rate since 1930]
1933 = –1.3%
[4th straight year of negative rate]
…
1938 = –3.4%
 Rate of “–3.0% or lower” in only 6 years since 1930,
and 3 of these 6 were consecutive years from 1930
through 1932
The Great Depression was much more severe and much
longer lasting than any other economic downturn either
before or since…
10
Following the start of this worldwide Great Depression,
totalitarian dictatorships emerged in Germany (Adolf
Hitler), Italy (Benito Mussolini), and Japan
 not clear that “democratic capitalism” would survive
in the U.S. (especially when the role of the Federal
government and powers of the executive branch were
greatly expanded under FDR)
 August 1936: Gallup poll asked “Do you believe the
acts and policies of the Roosevelt Administration may
lead to Dictatorship?”
 Hard to believe that such a question was even asked
 Overall, 45% said “yes”
 There were 10 states in which over 50% said “yes”
At the time, the belief was that the Great Depression was
caused by the inherent instability of markets and that
government intervention was needed to stabilize the
economy
Expansion of Government Begun by Hoover:
 Herbert Hoover (President from 3/1929 to 3/1933)
was in office during the start of the Great Depression
and the Stock Market Crash of 1929
 in an effort to minimize the economic downturn,
President Hoover expanded the role of the Federal
government in the economy
 Trend toward increased government would continue
under Franklin Delano Roosevelt (President from
3/1933 to 4/1945) who implemented the “New Deal”
11
“New Deal” – title given by FDR to programs initiated
between 1933 and 1938 with the goal of providing “relief,
recovery, and reform” during the Great Depression;
consisted of a wide variety of programs, including:
i. the National Recovery Administration;
ii. increased regulation of markets;
iii. the Agricultural Adjustment Acts;
iv. the creation of Social Security; and
v. attempted stimulus via Keynesian Fiscal Policy;
 Rex Tugwell (a member of FDR’s “Brain Trust” and one
of the people who was influential in formulating many of
the ideas for the New Deal) stated, “We didn’t admit it at
the time, but practically the whole New Deal was
extrapolated from programs that Hoover started.”
(i)
National Recovery Administration (NRA)
 NRA created on June 16, 1933 (by the National
Industrial Recovery Act) sought to “get labor,
business, and government to cooperate in a grand
partnership” => headed by Hugh “Iron Pants” Johnson
 FDR’s call for a “partnership in planning between
government and business…(with) government having
the right to prevent…unfair practices…by authority.”
=> essentially an attempt at “Indicative Planning”
 NRA allowed industry leaders to create “codes of fair
competition” – intended to reduce “destructive
competition between firms” by setting minimum
wages, maximum weekly hours worked, prices that
firms could charge, and other restrictions on the
behavior of business => legally established collusion
12
 Even businesses that were not directly involved in
writing the codes were subject to the codes
 More than 540 NRA codes covered over 2 million
employers who hired over 22 million workers
 More than 50% of all workers in the U.S. were
employed by firms subject to NRA codes
 NRA codes led to an estimated increased cost of
doing business of roughly 40%
 John Maynard Keynes stated that the NRA “probably
impedes recovery”; Yale economist Irving Fisher told
FDR that “the NRA has retarded recovery and
especially [has] retarded re-employment.”
 Declared Unconstitutional by Supreme Court in 1935
(by a unanimous 9 to 0 decision) => industrial
production significantly increased only after the NRA
was abolished
Methods of getting people to comply with NRA codes:
 The “Blue Eagle” (with the motto “We Do Our Part”)
was the patriotic symbol of compliance that
companies were expected to hang on their doors =>
people urged to boycott non-participating businesses
13
 New professional football team named in honor of the
“Blue Eagle” => Philadelphia Eagles (which helps
explain the hideous powder blue retro uniforms)
 Staging of military style parades and mass rallies
 on 9/12/1933 the largest parade in the history of
NYC was staged in support of the NRA: nearly a
quarter million people marched for 10 hours with 49
military planes flying overhead => a member of the
British Labor Party in attendance was horrified,
saying it reminded him of Nazi Germany
 Indoctrination of schoolchildren: 100,000 kids
marched into Boston Common and led to swear an
oath, administered by the mayor: “I promise as a good
American citizen to do my part for the NRA. I will
buy only where the Blue Eagle flies.”
 Withholding of Government Contracts: Henry Ford
refused to sign off on the NRA codes (which had been
drafted and signed by GM, Chrysler, and others)
 Ford would not receive any government contracts
unless they agreed to the code => Ford submitted a
bid to build 500 trucks for the Civilian Conservation
Corps for $169,000 below the next best offer, but
was not given the contract
14
 Threats/Imposition of Fines/Imprisonment: people
were fined or jailed for not complying with NRA
codes (or altered behavior to avoid such punishments)
 R.W. Johnson of Meridian, MS operated a dry
cleaning service on the outskirts of town: to avoid
being fined, he charged the higher NRA prices and
lost customers
 Armand Friedlander of Houston, TX operated a
jewelry store: under NRA codes, he was not
allowed to advertise prices for repairing watches
 Sam and Rose Markowitz of Cleveland, OH and
Jacob Maged of Jersey City, NJ operated dry
cleaning services
- Markowitz’s fined $15 each for charging 5¢ less
than the NRA code price for cleaning suits =>
refused to pay the fines and were thrown in jail
- Maged fined $100 and spent 3 months in jail for
charging 35¢ to press a suit, instead of the 40¢
dictated by NRA code
Final note on NRA: as is often the case when government
regulations are imposed, many NRA codes raised new
issues which had to be addressed…
 In some instances, businesses in small towns were
exempt from complying with the NRA codes…
Should a business be allowed to move to a small town
to avoid the restrictions of the NRA code?
 In some industries the mandated wage rate was lower
for women than for men… Should a business be
allowed to fire men and replace them with women in
order to reduce labor costs?
15
(ii) Increased Regulation of Markets
 prevailing view at the time was that the Great
Depression was caused largely by the instability of
markets and businesses’ unfettered quest for profit
=> large part of the New Deal focused on the
“Regulation of Markets”
Regulation of Markets – government policies
intended to directly alter market outcomes, often with
the intention of influencing the number and size of
firms in an industry, wages paid to workers, working
conditions, types of products produced, etc.
Regulation of Markets by the Federal Government did
not begin under the New Deal…
 Interstate Commerce Commission (ICC) –
Federal agency created in 1887 to regulate the
behavior of railroads; regulation in the U.S. began
with the creation of the ICC
…but, Federal Government regulation of Markets was
greatly expanded/accelerated as part of the New Deal
Agencies/regulations created under the New Deal included
 Federal Communications Commission (FCC –
1934) – regulates all non-Federal Government use of
the radio spectrum, all interstate communications, and
international communications to/from U.S.
 Civil Aeronautics Authority (CAA – 1938) –
regulated all non-military aviation in U.S., including
fares and service routes of private airlines
16
 National Labor Relations Board (NLRB – 1935) –
agency created to conduct elections for labor union
representation and to investigate unfair labor practices
 Securities and Exchange Commission (SEC – 1934)
– created in response to Stock Market Crash of 1929,
in order to regulate and restore efficiency to financial
markets (in part by creating financial disclosure
requirements for publically traded firms)
 Federal Minimum Wage – attempted implementation
by FDR in 1933 (declared Unconstitutional by
Supreme Court in 1935); established by the passage of
the “Fair Labor Standards Act of 1938” (25¢ per hour
=> $3.77 in 2009 dollars)
(iii) Agricultural Adjustment Acts of 1933 and 1938
 prices of agricultural output declined by more than
50% between 1929 and 1933 (but over this short time
there was not a huge decrease in the number of
farmers) => per capita income of farmers dramatically
decreased
 prompted government to directly intervene in
agricultural markets in an attempt to artificially inflate
prices and wages
 government: bought crops and removed the food from
markets; paid farmers not to grow crops (i.e., took
land out of farming); imposed restrictions on output
levels
 in total, policies introduced many inefficiencies into
agricultural markets and prevented a long run efficient
reallocation of productive resources
17
(iv) Creation of Social Security
 the Social Security Act of 1935 established the Social
Security System
 at the onset, it established a
1. program to provide income for old age and disabled
individuals (and dependents)
2. federal role in funding programs of unemployment
compensation
 for the first time, the federal government in the U.S.
was playing a role in providing a “safety net”
(v) Large scale use of Keynesian Fiscal Policy to “replace
missing private spending with government spending”
 a major component of the New Deal consisted of
attempts to put the unemployed back to work
through government “make-work” programs
 these attempts were begun under Pres. Hoover with
the passage of the “Emergency Relief and
Construction Act of 1932”
 continued and expanded under FDR: Civil Works
Administration (1933 and 1934) and the Works
Progress Administration (1935 to 1943)
 government: hired workers to construct or renovate
buildings, bridges, highways, schools, parks; funded
arts and literacy projects; funded programs to
provide food, clothing, and housing to those in need
 WPA was the largest employer in the U.S. from
1935 to 1943
18
 Criticisms of public works projects:
 even if they provided short term relief, programs
would inefficiently divert valuable resources to
economically counterproductive or politically
motivated purposes in the medium and long term
 funding for WPA projects often based upon
political motives (i.e., given as a return for
legislator political support or in an attempt to
influence voting behavior of workers)
 even with unemployment above 20%, many claim
that the government policies diverted resources
away from or prevented resources from flowing to
private sector uses:
- Walsh-Healey Act of 1936 fixed standards for
hours, wages, and working conditions for
government employment at artificially desirable
levels => indirectly prevented private firms from
being able to hire with “less desirable offers” =>
this kept private sector unemployment artificially
high
- “Crowding out” – on Page 249 of the Economics
textbook it is noted that many of these programs
“…were merely substitutes for normal privatesector activity that now did not occur because, in
part at least, of the reforms themselves.”
 Finally, how effective were these efforts if the
Unemployment Rate was still above 14% in 1940 (9
years after the start of such programs)?
19
Under Hoover and FDR the federal government also played
a larger role by way of imposing high taxes…
Increased Federal Income Taxes: Federal Income Taxes
dramatically increased by Hoover (reversing the MellonCoolidge-Harding tax cuts) and FDR
Year :
1925–1931
1932–1935
1936–1940
1941
1942–1943
1944–1945
Highest MTR:
25%
63%
79%
81%
88%
94%
Lowest MTR:
1.5%
4%
4%
10%
19%
23%
 Revenue Act of 1932 (signed by Hoover): largest tax
increase in peacetime history, essentially doubled the
income tax => further increases by FDR
 In July 1941 FDR suggested increasing the MTR on
income over $100,000 to 99.5%; FDR justified it to his
budget director by saying, “Why not? None of us is ever
going to make $100,000 a year.”
 On 4/27/1942 FDR signed an Executive Order
(rescinded by Congress) which would have taxed all
income over $25,000 at a MTR of 100%
20
Increased Excise Taxes: when Income Tax Revenue
decreased at the start of the Great Depression, President
Hoover tried to offset this loss of revenue by imposing a
wide array of per unit taxes on a wide array of goods
including: cars, movie tickets, radios, long distance phone
calls, telegrams, cosmetics, cameras, yachts, and gasoline.
 Many of these taxes were regressive (since people
with low incomes tend to spend a larger fraction of
their income)
 if a husband and wife each smoked a pack of
cigarettes a day, they would pay $43.80 per year in
taxes (about 5% of a typical family’s income)
 Also recall, the incidence of the tax is essentially
“hidden” from consumers
 Congressman Francis Maloney commented “if the
family were sent a bill for $10 and were told it was
for cigarette taxes, there would be a tax rebellion.”
 Excise taxes were largely kept in place or increased
under FDR (e.g., in 1933 FDR increased the gas tax
from 1.0¢ to 1.5¢)
21
Long Term Impact of the “New Deal” on U.S. Economy
=> acceptance of larger government and Keynesianism:
 In response to the Great Depression the U.S.
 embraced regulation and government intervention in
the economy…
 accepted the notion of using Keynesian Fiscal Policy
to smooth macroeconomic activity…
 …but did not become a “planned economy” like many
European countries.
 Ideas of Keynes quickly gained supporters in
Washington, in large part because the recommended
fiscal policies provided a way for government control of
the economy that was not as “statist” or “intrusive” as
the policies implemented throughout Europe.
Post WW-II Economic Performance of U.S.:
 the only country to come out of WW-II with greater
productive capacity than at the start of the war
 consumer demand grew vigorously in the immediate
years after the war (partly a result of “4 years of going
without,” due to wartime rationing)
 technical change (invention and innovation) =>
automated production process for many different goods,
driving down costs for: passenger air tourism, television,
dishwashers, laundry machines, and other goods
 Good outcomes for several decades post WW-II
 Low Inflation Rates from 1949 through 1967
 Low Unemployment Rates from 1948 through 1974
 Keynesianism and a greater role for government seemed
to deliver the promise of “growth and full employment”
22
Lyndon Johnson’s “Great Society”:
Role of the federal government in the economy was further
expanded under President Lyndon Johnson (1963-1969)
“Great Society” – series of domestic programs proposed
by and initially enacted under the leadership of President
Johnson, with the two main goals of eliminating poverty
and racial injustice.
Larger role of government under “Great Society” included:
 Elementary and Secondary Education Act of 1965 –
significant federal aid to public schools for first time
 Higher Education Act of 1965 – substantially increased
federal funds to universities; created scholarships and
low-interest loans for students
 Social Security Act of 1965 – created Medicare, under
which the federal government would provide medical
care for the elderly (and others, such as the disabled)
 Medicaid – federal program to provide funding for
medical services for low income individuals in the U.S.
 National Foundation for the Arts and Humanities Act
of 1965 – created the “National Endowment for the Arts”
and “National Endowment for the Humanities,” to
provide targeted federal funding for Arts and Humanities
 Environmental Legislation – first time that federal
government enacted environmental policies with aim of
more than just protecting or conserving untouched
resources (e.g., Endangered Species Preservation Act of
1966; Land and Water Conservation Act of 1965; Solid
Waste Disposal Act of 1965; Motor Vehicle Air
Pollution Control Act of 1965; National Environmental
Policy Act of 1969)
23
Economic Policies of Nixon Administration:
Stagflation – simultaneous realization of higher inflation
along with increased unemployment and decreased growth
 Poor economic performance during Nixon’s first term:
 Annual Inflation Rate up to 5.84% in 1970 (had been
below 2% from 1959-1965)
 Unemployment Rate up to 5.95% in 1971 (had been
below 4% from 1966-1969)
 “breakdown of the Phillips Curve” => Misery Index of
10.82 in 1970 (over 10 for first time since June 1958)
 GDP Growth Rate of only 0.2% in 1970
 Before the middle of his first term, Nixon appeared to be
a strong critic of government intervention in the
economy (particularly had a strong opposition to the
“price controls” instituted in U.S. during WW-II).
 “Philosophy” took a back seat to “politics” during
Nixon’s first administration
 Nixon unsuccessfully ran for president in 1960, when
he was the Vice President under President Eisenhower
 recession in 1960 => Nixon narrowly lost to JFK:
- popular vote was 49.7% to 49.6% in favor of JFK;
- Electoral College was 303 to 219 in favor of JFK
- allegations of voter fraud in IL and TX (some
precincts in which more votes were cast than the
number of total registered voters) => if both had
gone to Nixon, he would have won
 looking forward to the 1972 election, Nixon wanted a
“strong economy”
24
 “Big Question” was: “How to bring down inflation
without further slowing the economy and raising
unemployment?”
 January 1971: Nixon declared, “Now I am a
Keynesian,” and he subsequently introduced a
“Keynesian ‘full-employment’ budget” providing for
deficit spending to reduce unemployment
 In an attempt to combat inflation, he imposed “price
controls”
Price Control – a legal restriction on the price at which
trade can take place (i.e., “price ceiling” or “price floor”).
 Price Ceiling – a maximum legal price at which trade
can take place.
 Price Floor – a minimum legal price at which trade
can take place.
 Analysis of price controls: “Economics” – Chapter 7,
pages 117–122
 In general, both “price ceilings” and “price floors” will
lead to “less than the efficient level of trade” taking place
in a market, and therefore will create a positive
Deadweight-Loss.
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Outcome in the presence of a “Price Ceiling”:
price
Supply
a
5.05
b
3.70
“Excess Demand”
at level of “price
ceiling”
e
f
c
d
2.35
Demand
quantity
0
0
4,800
6,750
9,700
 “free market outcome”: 6,750 units traded, each at a
price of $3.70; CS=(a+b+e); PS=(c+d+f); DWL=(0).
 Suppose society decides this price is “too high” and
imposes a “price ceiling” of pc  2.35 .
 Consumers want to buy 9,700 units, but firms only
wish to sell 4,800.
 4,800 units will be traded (less trade)
 Trade takes place at $2.35 (lower price, for those who
do get to purchase the item)
 PS=(d): decrease in PS of (c+f)
 CS=(a+b+c): change of (c-e) (total change in CS may
be either positive or negative)
 DWL=(e+f): positive DWL, implying an inefficiency
 Result: lower social welfare; all sellers clearly worse
off; some buyers better off, but some buyers worse off
(those who no longer get the item); total Consumers’
Surplus may be either smaller or larger than before
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Nixon’s Price Controls:
 Implemented in the early 1970’s
 Administered by the “Cost of Living Council” (led by
Director Donald Rumsfeld and Assistant Director
Richard Cheney)
 Initially did keep inflation in check => Nixon
reelected in 1972 in a landslide over George
McGovern
 popular vote was 60.7% to 37.5% in favor of Nixon
 Electoral College was 520 to 17 in favor of Nixon
(the only larger margin was Reagan’s defeat of
Mondale in 1984 by a difference of 525 to 13) =>
see “county-by-county maps” for illustration of
magnitude of landslide
 Price controls had negative consequences over time
 By 1973 “shortages” were artificially created in many
markets: ranchers stopped shipping cattle to markets;
farmers drowned chickens; supermarket shelves were
emptied
 System finally abolished in 1974 => double digit
inflation for 15 straight months from February 1974
through April 1975
 George Shultz (head of the “Office of Management
and Budget”) commented to Nixon that, “At least we
have now convinced everyone else of the rightness of
our original position that wage-price controls are not
the answer.”
 73.0% of economists agree that: “Wage-Price Controls
are NOT a useful policy option in the control of
inflation.”
27
2008: Obama (blue) v. McCain (red)
Popular: 52.9% to 45.7%
Electoral College: 365 to 173
2000: George W. Bush (red) v. Gore (blue)
Popular: 47.9% to 48.4%
Electoral College: 271 to 266
28
1988: George H.W. Bush (red) v. Dukakis (blue)
Popular: 53.4% to 45.7%
Electoral College: 426 to 111
1980: Reagan (red) v. Carter (blue)
Popular: 50.7% to 41.0%
Electoral College: 489 to 49
29
1976: Carter (blue) v. Ford (red)
Popular: 50.1% to 48.0%
Electoral College: 297 to 240
1972: Nixon (red) v. McGovern (blue)
Popular: 60.7% to 37.5%
Electoral College: 520 to 17
30
Poor Economic Performance of 1970s and early 1980s:
 1970s & early 1980s: very poor economic performance.
 Annual Inflation Rate: would reach 12.34% in
December 1974 (highest level since WW-I); would
peak at 14.76% in March 1980; “double digit
inflation” as late as October 1981 (10.14%)
 Unemployment Rate: 9.00% by May 1975; would
peak at 10.8% in November 1982
 Another apparent “breakdown of the Phillips Curve”
 Negative growth rate for Real GDP in: 1974 (–.6%),
1975 (–.2%), 1980 (–.3%), and 1982 (–1.9%)
 These experiences led to a change in thought regarding
the “optimal role of government”
 Confidence in government knowledge was now
turning to cynicism
 Keynesian paradigm not what it seemed to be – not all
that easy to “manage the economy” by “wielding the
levers of fiscal policy”
 Herbert Stein (Chairman of “Council of Economic
Advisors” under Nixon; father of Ben Stein):
“…inflation rate was high, real economic growth
was slow, and our ‘normal’ unemployment
rate…was higher than ever. Nothing was more
natural than the conclusion that the problems were
caused by all these government increases (in
spending, taxes, regulation) and would be cured by
reversing, or at least stopping, them.”
 Message of 1970’s was: “…government could fail,
too. Perhaps markets were not so dumb after all.”
31