Nixon and the Budget
When President Richard Nixon came into office in 1968, the economy was still booming, as a result of the war and social programs, but voters were becoming increasingly concerned about the damaging effects of inflation on our economy. Especially hurt were the elderly and people on fixed income, who saw the buying power of their retirement funds shrinking as a result of the government's fiscal irresponsibility. Nixon recognized the necessity of ending the inflationary cycle, but the question was how to do so. The easy answer would have been to slam on brakes, cutting spending and money supply at the same time. However this would surely send the country into a recession, which was politically unviable. The approach Nixon eventually tried was a policy of gradualism. Instead of strongly applying the brakes, he would do so gently, attempting to slowly lower the inflation rate by using monetary controls and by decreasing spending.
Unfortunately the gradualism did not work. Nixon was able to slow monetary growth and so lessen demand slightly, but on the whole he was unsuccessful in his efforts to cut government spending; Congress was unwilling to go along with the idea.
Presidents play a special role in shaping voters' expectations of government. Essentially, they create the standards by which all of our politicians are judged; a politician's re-election often depends on his or her ability to make government behave the way the president has indicated it should. Roosevelt created the standard of activism. From that point on, a successful politician was one who aggressively used the power of government to deal with any problem facing our country. In practical terms, this meant politicians had to link themselves to a problem (preferably one in their own district) and a government program for dealing with that problem.
Johnson modified this standard with the Great Society. He had promised to create a utopia, restructuring society for the satisfaction and betterment of all. Essentially he had created the expectation that government was responsible for insuring our quality of life, and could do so by implementing new programs.
In theory, this seems rather clear cut - government will deal with problems to improve the quality of life. The reality was quite a bit cloudier. In a society as large and varied as this, there is often disagreement about what constitutes a problem, what the cause of that problem might be, and the best manner in which to solve it. Quality of life is even more nebulous, the term meaning different things to different people. Further, what standard does one use to judge quality of life? Lacking a clear goal, a bottom line against which the effectiveness of the government's actions can be judged, the standard most often used is economic; the more money government is spending, the more it is doing to deal with our problems and insure our quality of life.
This false set of expectations became the framework in which members of congress operated. To be seen as doing their job, they had to attach themselves to a program, and see that money was spent on it.
Congressmen, however, did not limit this spending to their own pet programs. In macroeconomic terms, they believed that a dollar spent anywhere in America benefits the whole country, because it increases the Gross National Product. In practical terms, however, it is the point of entry which benefits most, the person to whom the government paid the dollar and the region in which it was spent. To insure their voters were receiving their rightful share of benefits from the government, Congressmen and Congresswomen had to make sure money was spent in their states and districts.
In fiscal policy, Congress had discovered the golden goose. Interest groups provided a steady source of campaign funds. Members of Congress had an easy way to please their constituents. As long as government was responsible for dividing a large piece of the economic pie, they had the tools to almost guarantee their own re-elections. This was not the only motive driving Congressmen and Congresswomen; most were well-intentioned and truly trying to do what they felt was best. However it is reasonable to assume that these factors entered into many of their decisions.
It was this atmosphere which kept Nixon from lowering government spending. Spending had been increased as an answer to the problems the country faced. These problems still existed; how could Congressmen and Congresswomen face their voters and tell them government was doing less to help? Further, for a Congressmen and Congresswomen to vote to cut money on a program with which they were associated would be to admit that the program wasn't important. Congress was discovering that it is quite a bit easier to increase spending than to decrease it. When problems arose, the response was set: more government responsibility, backed up by government money. Government had become a panacea for all that needed fixing. Once inflation had begun, it was inevitable that government spending would continue to rise. Many of the welfare programs of the Great Society had been in the form of entitlements. The government had created legally binding definitions of who was to receive aid and how much they were to receive; the aid was based on income and the poverty line. As inflation drove up the poverty line, more people became eligible for government help, and the amount to which they were entitled increased. Inflation drove up the amount of money the government was required to spend on welfare programs. As well as increasing expenditures, inflation also increased revenues for the government. Wages were tied to the cost of living. As inflation drove wages up, wage earners were pushed into higher tax brackets, increasing the percentage of income they paid in taxes. Government was taking in more money without having to raise taxes, and had no problem spending that extra revenue.
Even if Nixon had somehow managed to control spending, it would not have brought us out of the inflationary spiral. The nature of the inflation had changed. The country had moved from demand pull inflation to what economists call cost push inflation. Cost push inflation occurs when the cost of producing goods is rising. Government had created the expectation of inflation, the idea that it could not control the economy and end inflation, and so people came to expect it to continue. Labor, recognizing that its wage increases throughout the late sixties had netted little gain in net purchasing power, started demanding wage increases higher than the rate of inflation. Interest rates began to rise. The spiral of inflation Johnson had started was now driven by people's lack of confidence in the government.
With the failure of the policy of gradualism, Nixon reversed his field. He decided to implement wage and price freezes, which he hoped would end the cost push inflation. Under this policy, wages and prices for the big companies and large labor unions were to be set by separate wage and price boards. The wage and price controls did produce a temporary lull in inflation, but they were unable to actually correct the situation. After the wage and price freeze ended, inflation once again continued its pace. Inflationary expectations proved to be just as hard to curtail as inflationary demand.