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December 27, 2006
No-WIN situation
PGL at Angry Bear picks up on my comments from last night, as I hoped someone would. He quotes extensively from the 10 point WIN proposal and notes that Ford also called for capital gains tax cuts and investment tax credits. So allow me to call attention to point number nine:
Number nine: Federal taxes and spending. To support programs, to increase production and share inflation-produced hardships, we need additional tax revenues.
I am aware that any proposal for new taxes just 4 weeks before a national election is, to put it mildly, considered politically unwise. And I am frank to say that I have been earnestly advised to wait and talk about taxes anytime after November 5. But I do say in sincerity that I will not play politics with America's future.
Our present inflation to a considerable degree comes from many years of enacting expensive programs without raising enough revenues to pay for them. The truth is that 19 out of the 25 years I had the honor and the privilege to serve in this Chamber, the Federal Government ended up with Federal deficits. That is not a very good batting average.
By now, almost everybody--almost everybody else, I should say--has stated my position on Federal gasoline taxes. This time I will do it myself. I am not-emphasizing not--asking you for any increase in gas taxes.
I am--I am asking you to approve a 1-year temporary tax surcharge of 5 percent on corporate and upper-level individual incomes. This would generally exclude from the surcharge those families with gross incomes below $15,000 a year. The estimated $5 billion in extra revenue to be raised by this inflation-fighting tax should pay for the new programs I have recommended in this message.
Ford was not a Pigouvian--that much is certain. However, one can see that his understanding of fiscal policy was probably more nuanced than that of many presidents due to his experience in the House. In point number five, he asked for spending to help provide public service employment during the time of recession (you might think he sounds like a quaint New Dealer at this point). But he realizes that this together with the investment tax credits would balloon the deficit if there wasn't some kind of offsetting tax increase. This is the point that I wanted to make earlier, and I thank PGL for the comment that gave me an excuse to refine the point.
This point number nine in the WIN proposal was, however, the only place I could find reference to Ford calling for tax increases, which is why in yesterdays post I was careful to state that he called for tax cuts as well. But, like PGL, I found this to be a rather curious thing. As PGL points out, Ford also calls for monetary restraint and lower interest rates as well. There were some contradictions there. After reading the whole proposal, I get the feeling that he was trying to be revenue neutral (increasing some taxes and decreasing others) while stimulating economic growth and reducing inflation. The cynic in me wonders why he didn't ask for a pony as well, since this was already an impossible list.
But the better part of me wants to cut him some slack. This was two months after taking office in a most undesirable way and one month after making a tough decision that cost him politically. Why not lay it all out on the line? WIN was an impossible dream. Anyone who thought it would whip inflation and bring back prosperity before the 1975 State of the Union Address was not being honest with himself. But Ford did start the ball rolling on some important initiatives that included tax reform and regulatory reform. And the WIN speech was where some of those ideas were rolled out. As usual, Gerald Ford was thinking beyond the next political cycle. Such thinking tends not to get one re-elected, but we could use a bit more of it. The biggest problem with WIN, as I see it, was that it was bound to fail as a short-run solution even though certain aspects of it would have carried long-term benefits. That is a familiar problem in political economy.
As the months wore on, it was the tax cuts that took center stage in Ford's economic policy, but his was not a policy of tax cuts for the wealthy alone. He vetoed a bill that didn't include enough tax relief for the middle class and that didn't include spending cuts.
PGL concludes:
By the time Gerald Ford made this speech, the unemployment rate had increased from 4.9% to 5.9%. By May 1975, the unemployment rate reached 9% and still at 7.7% when voters went to the polls to decide between Gerald Ford and Jimmy Carter. My problem with the WIN program was less its details and more with the fact that this President seemed to ignore the fact that we were on the verge of a rather significant recession.
Check that. By NBER dating, the economy had already been in recession for just short of a year when he made this speech and was only 5 months away from pulling out of it. The labor market is a lagging indicator, so while the unemployment rate was still high, it was trending downward as Carter took office. He was a victim of poor timing in that regard. That is, unless you are going to tell me that the continuation of that trend and a decline of 1% in the unemployment rate in Jimmy Carter's first 12 months in office was due to Carter's economic policies. If so, I would respectfully disagree. Remember also that Ford had to work with a heavily Democratic congress. The wheels turned slowly. The divided government, while perhaps slowing the recovery, also kept either side from pushing the pendulum too far to either side and led to a slow but sustained recovery until the oil crisis reared its head again in Carter's term.
President Ford was dealt a really bad hand. He restored a measure of respect to the office and kept a bad economy from deteriorating any further. He used the power of the veto pen to stand up for fiscal responsibility. He put the nation's interests ahead of his own more than once. He did all this with civility and grace that is becoming ever more rare. He is not the sort of person we tend to elect, but he was there when his country called. He leaves a meaningful legacy to American politics.
UPDATE: Macroblog has more discussion of WIN. David Altig writes:
Seen through contemporary eyes, it is clear that the President Ford's speech hopelessly entangled shocks to relative prices with ongoing inflation of monetary origins.
Indeed. It was, to be blunt, a rather confused attempt to set out inflation's cause and cure. It was a political attack on a monetary problem. It's more about taxes, spending, and conservation. Altig continues:
Are there are any kind words to be found about all of this? More thoughts to follow.
I have tried to find kind words. However, I want to be clear that my kind words are more about what Ford's longer term objectives may have been, and what some of the WIN proposals, and indeed Ford's proposals more generally, were designed to do. I still think that WIN was misleading advertising and a set-up for failure in the short-term. But it was better than Nixon's price controls. Are those the kindest words? I look forward to hearing David's additional thoughts.
UPDATE: Altig does have some nice words to say. James Hamilton, on the other hand, is less charitable. Hamilton says:
And, despite the clever arguments that Dave brings up in the WIN button's favor, I think one great disservice of that campaign was to cultivate the misperception that inflation is somehow the responsibility of ordinary U.S. citizens. In my view, maintaining the purchasing power of a dollar is instead exclusively the responsibility of the people who control how many dollars get printed.
In the long run, yes. In the short run, other things do affect measured inflation, and WIN tried to affect some of these. I still think that it was ill-advised and a set up for failure because it created expectations that could never be fulfilled in the short run (because of politics and policy lags) or the long run (because of Hamilton's argument). Though you must admit that Ford was between a rock and a hard place on this, and although the buttons may have been overkill, some of the policies were worth a shot.
Posted by William Polley at December 27, 2006 1:59 PM
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Comments
I didn't but should have checked with NBER's dating. Note in my update where I criticized that CNN/Money report, I note that real GDP fell from 1973QIV to 1975QI. So it sounds like NBER got it quite right. But then we have the luxury of looking back in time on the behavior of real GDP. What did the CEA know then and what did they tell the President?
Posted by: pgl at December 28, 2006 7:48 AM
As someone who lived through this era as a professional analysts you also have to remember what the economic environment looked like on a real time basis. During the period we now clearly think of a recession the general feeling was that the economy had already weathered the worse in late 1973-early 1974 and we were in a weak recovery, stagflation environment. Few expected the second leg down of the economy in late 1974 - early 1975. The data as first reported created a very different image then the revised data now does. In the fall of 1974 the consensus forecast was for stagnation -- 1% - 2% real growth and 8%-10% inflation. Even in 1975 many people thought of the 1974-75 period as one of two recession with a period of recovery inbetween. If you are looking at this environment many of the things that now look inconsistent were not that inconsistent based on what was known at the time. At the time even the NBER dating was somewhat controversial
Posted by: spencer at December 28, 2006 1:38 PM
I love to tell the story of attending my first annual meeting of national association of business economists in the fall of 1974.
At the time the consensus was for stagnation and essentially everyone I spoke to said that they agreed with the consensus for the overall economy, but it was not happening in their economic sector or industry. They all said that the bottom was falling out of demand in their industry and they were building unwanted inventories. But they all though what was happening in their individual industries, were they had great expertise, was the exception, not the rule because this type of weakness was not showing up in the reported data or the major models .
Posted by: spencer at December 28, 2006 1:44 PM
One could, I suppose, check the printed copies in the library and find out the answer to that question.
I think the larger question is whether a lot of this can be explained by Ford and his CEA trying to counterbalance the expansionary monetary policy response to the oil shocks. How quickly we forget how different things were then compared to now. Credibility of the Fed wasn't much of an issue. So much of what happened in the 1970s offends the sensibilities of economists trained after that era. But that's because we know how things ended. They were still operating in a 1960s paradigm of fine-tuning the tradeoffs between fiscal and monetary policy. In the halls of power, those tradeoffs may not have been stated aloud, but they were well understood.
Posted by: William Polley at December 28, 2006 1:46 PM
Spencer, that sounds about right. With that sort of forecast, and the fact that the economy had been in recession and was pulling out of it (albeit slowly), I think it is reasonable to see inflation as the problem.
Posted by: William Polley at December 28, 2006 1:52 PM