The political pressure on the administration to address these problems
became intense. Arthur Okun, who'd been chairman of the Council of
Economic Advisors under Johnson and who was known for his wry sense of
humor, invented a "discomfort index" to describe the dilemma. It was simply
the sum of the unemployment rate and the inflation rate. The discomfort
index now stood at 10.6 percent, and since 1965 it had gone nowhere
but up.*
I watched as my friends in Washington lurched from one remedy to
another. To counter the recession and the chilling effect of the income-tax
surcharge, the Fed cut interest rates and pumped money into the economy.
This helped get GNP growing again but further fueled inflation. Meanwhile,
among some of President Nixon's men, a movement was building
for measures that were anathema to us free-market economists who had
helped Nixon get elected: wage and price controls. Even my old friend and
mentor Arthur Burns, whom Nixon appointed Fed chairman in 1970, began
talking about something similar—incomes policies. I was stunned by
Arthur's reversal—I chalked it up to political exigency combined with
whatever alarming developments in the economy he must be seeing from
his new vantage. Clearly the Fed was worried. (In retrospect, I suspect
Burns was trying to preempt formal wage and price controls.) Finally, on
Sunday, August 15, 1971, my phone rang at home—it was Herb Stein, who
was then a member of Nixon's Council of Economic Advisors. "I'm calling
from Camp David," he said. "The president wanted me to tell you he'll be
speaking to the nation and he'll be announcing wage and price controls."
That evening is memorable to me for two reasons: First, Nixon preempted
Bonanza, America's favorite TV western and a show I loved to watch, to
*The discomfort index was later renamed the misery index and went on to figure in at least two
presidential campaigns. Jimmy Carter used it to criticize President Ford in 1976, and Ronald
Reagan used it to criticize President Carter in 1980.
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THE AGE OF TURBULENCE
announce his policy; and second, I reached for something on the floor and
threw my back out. I had to go to bed for six weeks. To this day, I like to
believe that it was wage and price controls that did me in.
I was glad that I wasn't in the government. Burns and his wife were living
at the Watergate apartment complex, and sometimes I'd visit their
home for dinner. Arthur would muse about the White House's latest initiative
and say, "Oh my goodness, what are they thinking of doing now?" After
Nixon imposed wage and price controls, I'd fly down to meet with Don
Rumsfeld, who was head of the Economic Stabilization Program, the bureaucracy
created to administer them. He also ran the Cost of Living Council,
where Dick Cheney was his deputy. They asked for my advice because
I knew a great deal about how particular industries worked. But all I could
do for them was indicate what type of problem would be created by each
type of price freeze. What they were running into was the problem of central
planning in a market economy—the market will always undermine any
attempt at control. One week the problem was textiles. Because of the
political power of the farmers, the administration could not put price caps
on raw cotton. So the cotton price was going up. But the government did
freeze the price of greige goods—unbleached, undyed woven cloth that is
the first stage in textile production {greige is pronounced "gray"). So the
greige-goods manufacturers were squeezed—their costs were going up but
they couldn't raise prices—and companies were abandoning that part of
the business. All of a sudden, the fabric finishers and clothing manufacturers
were complaining that there weren't enough greige goods. Rumsfeld
asked me, "What do I do?" And I said, "Simple—raise the price." Situations
like this came up week after week, and after a couple of years the whole
system fell apart. Much later Nixon said wage and price controls had been
his worst policy. But the sad thing was that he knew they were a bad idea
all along. It was pure political expediency: a lot of businessmen had said
they wanted to freeze wages, and a lot of consumers liked the idea of freezing
prices, so he decided he had to do it.
The Arab oil embargo of October 1973 only made inflation and unemployment
worse—not to mention hurting America's confidence and self-
esteem. The consumer price index ballooned: the year 1974 gave rise to
the expression "double-digit inflation" as the rate went up to a shocking
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ECONOMICS MEETS POLITICS
11 percent. Unemployment was still at 5.6 percent, the stock market was
in a steep decline, the economy was about to sink into the worst recession
since the 1930s, and the Watergate scandal cast a pall over everything.
In the middle of all this depressing news, Treasury Secretary Bill Simon
called to ask if I would take over as chairman of the Council of Economic
Advisors. Herb Stein, by then CEA chairman, was getting ready to leave.
CEA chairman is one of the three top posts for an economist in Washington,
the others being treasury secretary and chairman of the Fed. In most
circumstances, I would have said yes in a heartbeat. But I didn't agree with
many of the president's policies, and hence felt that I would not be able to
function effectively. I told Simon I was honored and that I'd be happy to
suggest other candidates, but my answer was no. He called a second time a
week or so later, and I said, "Bill, I appreciate it, but I really mean it." "Well,
would you at least go talk to Al Haig?" Haig was President Nixon's chief of
staff I agreed, and a day later Haig asked if I'd come to see him at Key Biscayne,
Florida, where the president liked to spend time. Haig really put on
the White House show of interest, sending a military executive jet, complete
with a steward, to shuttle me down to Key Biscayne. When I arrived,
Haig and I had a long talk. I told him, "You're making a mistake. If I come
in as chairman and the administration starts implementing policies I can't
agree with, I'd have to resign. You don't need that." Wage and price controls
had mostly been lifted by this time, but there was a lot of pressure from
Congress to reimpose them because of inflation. I told him I would have to
resign if that happened. Haig said, "That's not the direction we're heading.
You won't feel the need to resign." As I got ready to leave, he asked, "Do
you want to see him?" He meant Nixon. I said, "I don't see any reason." The
truth was that I still felt very uncomfortable with the man. I wasn't sure
about the job offer, either, and I felt the hardest thing in the world would
be to say no to the president of the United States.
I'd barely returned to my office in New York when the phone rang
again. This time it was Arthur Burns. He asked me to come to see him in
Washington, which I did. That was my mistake. My old mentor puffed on
his pipe and played on my guilt. Referring to the Watergate scandal, he
said, "This government is paralyzed. But there's still an economy out there
and we still have to make economic policy. You owe it to your country to
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THE AGE OF TURBULENCE
serve." Besides, he pointed out, I'd been building Townsend-Greenspan for
twenty years; wasn't it time to see if the company could fend for itself? By
the end of the conversation I was persuaded that maybe I could do something
useful in Washington. But I told myself I'd take an apartment on a
month-to-month lease, and figuratively at least, keep a suitcase packed by
the door.
If Nixon hadn't been in such trouble, I doubt I'd have taken the job. I
viewed it almost as a caretaker position, to help hold things together. I expected
to be there a relatively short time. If Nixon had somehow continued
in office through the end of his term, I would probably not have stayed
more than a year. But events took a radically different turn. My Senate confirmation
hearing was on the afternoon of Thursday, August 8, 1974; that
very evening, Nixon went on TV to announce his resignation.
I'd met Vice President Ford only once, for an hour-long conversation
about the economy a few weeks before. But we'd gotten along well, and on
the urging of Don Rumsfeld, who headed his transition team, he reaffirmed
Nixon's appointment of me.
The Council of Economic Advisors is essentially a small consulting
firm with a single client: the president of the United States. It has rooms in
the Old Executive Office Building, across the street from the White House,
and consists of three council members and a small staff of economists,
mostly professors on one- or two-year leave from their universities. Under
Nixon, the CEA had become quite political, with Herb Stein frequently
speaking on the president's behalf. Though Herb was an effective chairman,
it is very difficult to be both an adviser and a spokesman (normally it is the
treasury secretary who is the economic spokesman for the administration),
and I wanted to return the council to its advisory role. After discussing this
briefly with the other council members, William Fellner and Gary Seevers,
I canceled the regular monthly press briefings. I decided I would make as
few speeches as possible and as few congressional contacts as necessary; of
course, I'd have to give testimony when called upon.
As chairman I was an unusual choice, because I didn't yet have a Ph.D.
and because I looked at the economy differently from most academicians.
At Townsend-Greenspan, we had computers and state-of-the-art econo
64
ECONOMICS MEETS POLITICS
metric models that any professor would recognize, but our focus was always
industry-level analysis, not macrovariables such as unemployment
and federal deficits.
F
F
ord and Nixon were as different as day and night. Ford was a secure
man, with fewer psychological hang-ups than almost anyone I'd ever
met. You never got strange vibes from him, never any sense of hidden motives.
If he was angry, he'd be angry for an objective reason. But that was
rare—he was exceptionally even-tempered. In 1975, just after the fall of
Saigon, the Khmer Rouge in Cambodia seized the Mayaguez, a U.S.-flagged
container ship in a shipping lane off their coast. I was sitting next to Ford
in an economics meeting when Brent Scowcroft, the deputy director of the
National Security Council, came in and put a note in front of him. The
president opened it up. He read it. This was the first Ford had learned of
the incident. He turned to Scowcroft and said, "Okay, provided that we do
not shoot first." Then he turned back to the meeting and continued the
discussion. I never read the note, but it was clear that the president had
just authorized the military to shoot back if necessary against the Khmer
Rouge forces.
He always understood what he knew and what he didn't know. He
didn't think he was intellectually superior to Henry Kissinger or that he
knew more about foreign policy, but he wasn't intimidated. Ford was secure
in himself—probably one of those rare people who would actually
score normal in psychological tests.
Though he wasn't terribly articulate on the subject of economics, I
found that President Ford had a sophisticated and consistent outlook on
economic policy. Years on the House Appropriations Committee had
taught him everything there is to know about the federal budget, and his
budgets as president were truly his own. More important, he believed
in restraint in federal spending, a balanced budget, and stable long-term
growth.
Ford's top priority was to develop a solution to inflation, which in his
first address to Congress he identified as public enemy number one. With
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THE AGE OF TURBULENCE
the dollar losing more than 10 percent of its purchasing power that year,
inflation had everybody spooked. People cut back on spending because
they worried about making ends meet. In businesses, inflation creates uncertainty
and risk, which makes planning more difficult and discourages
managers from hiring, or building factories, or indeed doing any kind of investing
for growth. That's what happened in 1974—capital spending essentially
froze, making the recession far more severe.
I agreed with the president's priorities, but I was horrified to learn how
his White House staff planned to tackle the issue. My first experience of
policymaking in the Roosevelt Room of the White House almost sent me
racing back to New York. It was a senior staff meeting at which the speech-
writing department unveiled a campaign called Whip Inflation Now. WIN,
as they wanted it to be known ("Get it?" one asked), was a vast program
that would involve a national voluntary price freeze, a summit conference
in Washington in October to discuss inflation with preliminary task forces
and minisummits all over the country, and many other features. The speech-
writers had ordered up millions of Whip Inflation Now buttons, samples of
which they handed out to us in the room. It was surreal. I was the only
economist present, and I said to myself, This is unbelievable stupidity. What
am I doing here?
Because I was new, I wasn't sure of the protocol. I didn't think I should
just say what I thought. So I zeroed in on things that made no economic
sense. I pointed out, "You can't ask small-business owners to voluntarily
forgo price increases. These people operate on thin margins, and they can't
prevent their suppliers from raising prices." Over the next few days, I succeeded
in getting them to water down a few of the provisions, but Whip
