Friday, November 22, 2013

President Nixon: Alone in the White House 8

On pages 262-263 of President Nixon: Alone in the White House, Richard Reeves talks about inflation:

"But Nixonomics was shot down by Nixon----and by some bad luck.  The 'Nixon Game Plan,' as it was called in the beginning, was pretty basic Republican economics...The idea was to hold down federal spending while the Federal Reserve Board restricted money supply enough to cut demand enough to raise unemployment enough to moderate wages and prices enough to stabilize inflation."

Well, I suppose that's one way to get wages down: to increase unemployment so that more people are competing for jobs, and employers can then offer lower wages because people will be willing to work for virtually anything.  But that doesn't sound particularly humane.  Of course, the end-goal would be lower inflation, which would allow people to buy more and for their dollars to stretch farther.  Perhaps the idea is that then the economy would pick up, as people took advantage of the lower prices, and employment would go back up.

Of course, Nixon did not follow this policy consistently, for there were times when he favored expanding the money supply to improve the economy, whereas Federal Reserve chairman Arthur Burns favored a more restrictive monetary policy.

Does restricting the money supply and increasing interest rates necessarily lead to lower inflation?  It can, as occurred during Paul Volker's tenure as Federal Reserve chairman.  But perhaps one can also argue that an expanded money supply and lower interest rates can stimulate the economy, result in increased production of goods, and thus enable supply to overtake demand, thereby controlling inflation.  But, then again, what if businesses choose to take advantage of high prices to make money?  Would there be an incentive for them not to produce in such a manner that supply would overtake demand?

Anyway, those are my non-economist economic ramblings for the day.

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