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(2016), he landed on what I call the Magic Formula: Low Taxes and
Stable Money. The low taxes took the form of a major tax reform
posthumously passed in 1964. Stable Money was provided by the Bretton
Woods gold standard of the time, which kept the value of the dollar at
$35/oz., and which Kennedy actively defended against the “soft money”
notions of his academic advisors.
It worked: nominal GDP was up 9.6% in 1966, the best year of the
following boom, and “real” GDP was up 6.6%.
In 1970, Richard Nixon faced a recession officially dated from December
1969 to November 1970. He took a very different approach than Kennedy:
after promising in the 1968 campaign that he would eliminate a 10%
income tax surcharge imposed by Lyndon Johnson, he not only kept the
surcharge, but added new taxes including a doubling of capital gains
tax rates to near 50%.
On the money side, he replaced William McChesney Martin, who had been
the head of the Federal Reserve since 1951, with Arthur Burns, Nixon’s
longtime advisor, who had suggested in 1960 that Nixon’s bid for the
presidency would be helped by a strong dose of “easy money.” The
Federal Reserve – namely, Bill Martin – did not cooperate, and Nixon
lost to Kennedy by a small margin.
Burns took office at the Fed in February 1970. Nixon also aimed for 5%
growth in time for his re-election in 1972. This was going to be
accomplished by the printing press. To produce 5% “real” growth, it was
decided that 9% nominal GDP growth was to be the target. Burns set to
work.
It was high taxes and “easy money” – the opposite of the Magic Formula
that Kennedy had used. Specifically, it was a nominal GDP target, to be
achieved wholly via the actions of the Federal Reserve. The target
seemed reasonable – indeed, it was just what had been achieved by the
Kennedy “policy mix” a few years earlier.
Nixon’s strategy also worked: nominal GDP growth was 9.8% in 1972, and
“real” growth was 5.2%. Nixon was re-elected in 1972 by a large margin.
Then came the consequences. In the process of reaching Nixon’s “nominal
GDP target,” the value of the dollar fell to an average of $63.91/oz.
of gold in December 1972, a decline of 45% from its previous $35/oz.
gold parity. Along the way, in August 1971, any remaining commitment to
maintaining that gold parity was abandoned, with enormous consequences
that we are still wrestling with today. The world monetary system broke
apart, was put back together by Nixon in December 1971, and then broke
apart again in early 1973. It is still broken.
Afraid to cause another recession with “tight money,” the Federal
Reserve allowed the dollar to fall to $184/oz. in December 1974. The
dollar was worth less than one-fifth of its pre-Nixon value, vs. gold.
A decade of stagflationary malaise began. Nixon, and the rest of the
U.S. elites, eventually blamed Arab oil. The rest of the world called
it “the Nixon
Shocks.”
U.S. Wages Adjusted by CPI, 1880-2015. Source: measuringworth.com
Today, there are many calls for “nominal GDP targeting,” whether in a
“rules-based” automated form, or as a guideline for discretionary
policy as it was for Burns and Nixon (or most every central banker
today). But you can’t create prosperity with the printing press, then
or now or ever. You might be able to create an artificial boost, as
Nixon did, but in the longer term, funny money manipulation only leads
to mediocrity and decline.
Don’t do it the Nixon way.
Do it the Kennedy way. Keep the money stable in value, and then do
everything else you can think of – tax reform, regulatory reform,
education reform, or a dozen other things – to make people prosperous
and happy. Especially tax reform.
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