Gerald Ford’s WIN Strategy

Bill Polley pays tribute to the late President Gerald Ford by commenting on his Whip Inflation Now strategy:

Looking back on the proposal, we see that he got some things right, but of course it wasn’t until the Federal Reserve got serious about things that inflation really started to come under control. Ford wanted to remove acreage restrictions on farming, improve enforcement of antitrust laws, and improve energy conservation. He rejected price controls (a welcome departure from Nixon’s policies) and even called for increased taxes (though he later called for tax cuts). All of these were steps in the right direction for a number of reasons (many of which not having to do with inflation) but it wasn’t great strategy. Asking people to walk to work and waste less food was not going to cut it when M2 money stock was growing at double-digit rates. Economically speaking, it wasn’t a shining moment.

Take a look at the fourth part of this 10-point proposal:

We need more capital. We cannot “eat up our seed corn.” Our free enterprise system depends on orderly capital markets through which the savings of our people become productively used. Today, our capital markets are in total disarray. We must restore their vitality. Prudent monetary restraint is essential. You and the American people should know, however, that I have personally been assured by the Chairman of the independent Federal Reserve Board that the supply of money and credit will expand sufficiently to meet the needs of our economy and that in no event will a credit crunch occur. The prime lending rate is going down. To help industry to buy more machines and create more jobs, I am recommending a liberalized 10 percent investment tax credit. This credit should be especially helpful to capital-intensive industries such as primary metals, public utilities, where capacity shortages have developed. I am asking Congress to enact tax legislation to provide that all dividends on preferred stocks issued for cash be fully deductible by the issuing company. This should bring in more capital, especially for energy-producing utilities. It will also help other industries shift from debt to equity, providing a sounder capital structure. Capital gains tax legislation must be liberalized as proposed by the tax reform bill currently before the Committee on Ways and Means. I endorse this approach and hope that it will pass promptly.

This baffles the mind – the President calls for monetary restraint but then says he and the Federal Reserve want the money supply to grow rapidly enough to lower interest rates. He also asked for tax cuts to spur investment demand. The President’s sixth proposal calls for stimulating housing demand. Only later does the President call for fiscal restraint by proposing tax increases and spending cuts.

But Bill is correct that the President later changed his mind on fiscal policy. Ford decided to push for a tax cut to stimulate aggregate demand but only if Congress cut government spending by an equal amount. Didn’t the CEA remind the President about the balanced budget multiplier?

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.

Update: Christian Zappone does the Ford economy legacy piece for CNN/Money:

Gerald Ford’s presidential term was as much marked by the economic forces of inflation as it was by the political fortunes of the time. Ford, who was sworn in as president on Aug. 9, 1974, after the resignation of Richard Nixon, faced inflation that was already surging at a 10.9 percent annual rate in that month. It was thrust into overdrive by the OPEC oil embargo of 1974 and the elimination of wage/price controls instituted in the Nixon administration … Rising energy prices also contributed to higher unemployment by slowing consumer demand for companies’ products, according to Mark Ratkus, economics professor at LaSalle University in Philadelphia. Ford’s approach to controlling inflation, according to his White House biography, was through modest tax cuts and spending restraints. He also sought to “decontrol” energy prices in order to stimulate production … “Up to that time, we’d never had inflation and higher unemployment,” Ratkus explained. “It created a stagnant economy and a term that has since entered into textbooks: ‘stagflation.'”

The only cause of the Ford recession was higher energy costs? The fact that short-term interest rates had climbed to 9% by the time Nixon left office and Ford’s attempts to use fiscal restraint had nothing to do with this? The BEA reports that real GDP fell by 3.1% or $135.7 billion (in 2000$) from 1973QIV to 1975QI. The drop in consumption was only $17.6 billion, while investment demand fell by $162.4 billion. And yet, CNN/Money blames higher energy costs leading to a drop in consumption for the 1974 recession!