David Stockman was elected to the U.S. House of Representatives in November 1976 and took office in January 1977. Prior to that, he’d worked since 1970 as a congressional staffer. Stockman was first elected to office in the same election which ended the electoral career of President Gerald R. Ford.
Ford had become president upon the resignation of President Richard Nixon. Ford had been Nixon’s vice president. Before becoming vice president, Ford had been elected, and then many times re-elected to the House of Representatives. Both Ford and Stockman had spent most of their lives in Michigan, and had represented that state in Congress.
Stockman would go on to have a multi-faceted and famous career after the November 1976 election, ultimately becoming the Director of the Office of Management and Budget from January 1981 to August 1985, being a part of the administration of President Ronald Reagan.
The political dynamics which influenced monetary, fiscal, and budgetary policy during Stockman’s tenure in the Office of Management and Budget (OMB) were eye-opening to him, and ultimately ended his political career, and — some observers might suggest — turned him into a bit of a bitter cynic. Stockman learned that political interests — i.e., elected officials doing what they need to do in order to get reelected — will usually trump the prudent advice of serious economists.
In the case of the Reagan administration, a simple formula — cut taxes and cut government spending — seemed to gain widespread agreement and approval, until the time came when specific and real budget cuts had to be identified. At that point, legislators worked to make sure that their pet projects — “set asides” and “pork barrel” items — were not going to be cut. With each legislator defending some expenditure, no expenditure was left to be reduced.
The predictable result of taking the first step — tax cuts — without taking the second step — spending cuts — was an increasing deficit. Stockman knew that deficits are harmful, and the plan had been to avoid them. But the political reality was that no legislator would embrace a spending cut that affected his electoral base. The tax cuts during the Reagan administration fueled economic growth and wage increases for the working class, but in the long run, the national debt increased during those same years, laying the foundation for problems in the future.
In hindsight, Stockman saw that this bitter experience in the 1980s was foreshadowed by President Ford’s similar experience in the 1970s. Stockman writes:
After assuming the presidency in August 1974, Gerald Ford had started off on the right foot. As a fiscally orthodox Midwestern Republican, he had been frightened by the recent runaway inflation and repulsed by the insanity of the Nixon freeze and the ever-changing wage and price control rules and phases which followed. Ford had also been just plain embarrassed by Nixon’s five straight years of large budget deficits.
President Nixon had hoped to fix the inflation problem by regulation: wage and price controls. Retailers could not set the prices of the goods on their shelves: the government did. Employers could not decide how much to pay their workers: the government did. The result was shortages of consumer products and the development of numerous workarounds designed to help businesses sidestep the government regulations. The inflation problem continued unabated.
President Ford, when he took office, saw the error of Nixon's policies and determined not to repeat the folly of Nixon’s economic regulation and Nixon’s deficits.
Ford’s first approach was to try to be serious about disciplined budgeting and to eliminate wasteful spending. The government’s budget for any one year should be the amount needed, and no more, to carry out the legislated tasks given by Congress to the executive branch.
Stockman recalls Ford’s attempt to instill sobriety into the Congressional budgeting process:
So for a brief moment in the fall of 1974, he launched a campaign to get back to the basics. Ford proposed to jettison the notion that the budget was an economic policy tool, and demanded that Washington return to the sober business of responsibly managing the spending and revenue accounts of the federal government.
Because he understood that a balanced budget and the avoidance of deficits was one of the primary responsibilities of the government, President Ford was even willing to consider a temporary tax increase. To obtain a responsible balanced budget, spending cuts must always be the primary method, but occasionally tax increases must be employed as well. If managed correctly, the tax increases would ultimately lead to tax cuts in the future, if the budget were brought under control.
The trends and fashions of politics can change from decade to decade. Ford was a conservative midwestern Republican. In the 1970s, it was thinkable for him to advocate for a tax increase. In later decades, conservative midwestern Republicans would be known often for opposing tax increases. Stockman’s narrative continues:
To this end, he called for drastic spending cuts to keep the current-year budget under $300 billion. He also requested a 5 percent surtax on the incomes of corporations and more affluent households to staunch the flow of budget red ink. At that point in history Ford’s proposed tax increase was applauded by fiscal conservatives, and there was no supply-side chorus around to denounce it. In fact, Art Laffer had just vacated his position as an underling at OMB.
One of the changes which happened after the 1970s was that the government budget came to be viewed, in later decades, as a tool for repairing the economy. Changing the levels of taxation and spending were later seen as ways to tweak the national business climate. In the 1970s and in earlier decades, the government’s budget was understood to simply be the funding for the government to carry out whichever tasks were essential and necessary as legislated.
Stockman explains how Ford attempted to redirect the executive branch and the legislative branch toward a responsible budgeting process:
In attempting to get Washington off the fiscal stimulus drug, Ford was aided immeasurably by the fact that Schultz had vacated the Treasury Department and had been replaced by Bill Simon. The latter was from a wholly different kettle of fish.
Both Congress and the entire bureaucratic apparatus of the executive branch, however, had momentum in a direction different from President Ford’s goals. This momentum came from a decade of ever-increasing government spending, apathy about growing debt and deficits, and policies which viewed taxation as a way to steer the economy rather than a way to raise revenue to fund legitimate government tasks. This decade was the combined years of the Johnson administration and the Nixon administration. Although in many ways opposed to each other, Johnson and Nixon had similar economic views.
Rather than let a deregulated business environment find its way to an optimum and natural equilibrium, Johnson and Nixon had continuously tinkered with regulations, thinking that the government knew best.
The momentum of bad economic policies for a decade proved to be the brick wall against which Ford’s common sense would crash; Treasury Secretary Bill Simon fared no better:
Bill Simon’s militant crusade within the Ford administration for the old-time fiscal religion and unfettered free markets was consequently short-lived. To be sure, his advocacy was not the run-of-the-mill Republican bombast about private enterprise. In speeches and congressional testimony, Simon offered consistent, forceful, and intelligent opposition to all forms of federal market intervention designed to stimulate the general economy or boost particular sectors like housing, agriculture, and energy.
The vertical separation of powers — between city, county, state, and federal governments — provided a clear example. The federal government has no responsibility to pay for the bad decisions of city governments. Yet when President Ford made a principled stand against using taxpayer dollars to pay for a city government’s bad spending, his reasoning was not universally accepted, as David Stockman reports:
In famously telling New York City to “drop dead” in its request for federal money, Gerald Ford betrayed a fundamental sympathy with his treasury secretary’s approach to fiscal rectitude. Yet the economic wreckage left behind by the Nixon abominations soon overwhelmed Ford’s best intentions.
The mess left by Johnson and Nixon was too big to fix without pain, and too many people were not willing to accept the pain: not Congress, not the media, not the lobbyists, not the labor unions. While many businesses were willing to ride out the bumps of a free market to get back to a healthy economy, some businesses relied on cronyism-type relationships with the government. Instead of offering good products at competitive prices, such businesses relied on governmental regulations to tilt the marketplace in their favor: they did not want a truly free market.
Under political pressure, President Ford changed his policies, against his own better judgment. The new policies, accompanied by similarly-designed legislations from Congress, were nearly opposite to Ford’s original position: The new policies moved away from a truly free market and moved toward a cronyism between a few businesses and the government; the new policies implemented tax cuts, not because they were analogous to the federal government’s obligations and responsibilities, but because they were part of an anti-inflation tactic, as David Stockman describes:
As the US economy weakened in the winter of 1974-1975, the Ford administration reversed direction at the urging of businessmen like OMB director Roy Ash and big business lobbies like the Committee for Economic Development. In the place of October’s tax surcharge to close the budget gap, Ford proposed in his January 1975 budget message that Congress enact a $16 billion tax cut, including a $12 billion rebate to households designed to encourage them to spend.
Although President Ford knew better, political realities forced him to allow a type of “crony capitalism” to gain ground against “free market capitalism” — the result was that, instead of the marketplace being a level playing field for free and fair competition between businesses, a few businesses were favored over all the others, leading to higher prices, leading to shortages, leading to increasing unemployment, and leading to falling wages and to falling standards of living for the working class.
And although he knew better, Ford was pressured into allowing tax policy to be used as a way to attempt to tweak the economy, instead of being used in a straightforward way to gather the necessary revenue.
As usual, the legislators ignored budget cuts, which can reduce the deficit and fight inflation. Cutting taxes without reducing spending leads inevitably to economic downturns and leads necessarily to increased deficits and debt, which in turn fuel inflation and unemployment. While inflation may cause nominal wages to rise, it causes real wages to fall, and the standard of living to fall as well. David Stockman quantifies the situation:
At length, Congress upped the tax cut ante to $30 billion. It also completely ignored Ford’s plea to make compensating spending cuts of about $5 billion.
Tax cuts may seem like generosity from the Congress, but they are salutary only if spending cuts accompany them. The generosity is an illusion because, for the consumer, any benefit from the tax cuts will be negated by inflation, shortages, and falling real wages.
Political presentations about tax cuts or tax rebates can seem like generosity — but this is an illusion, because all of that money belonged to the citizens in the first place. A tax cut is not a gift, it’s merely the government taking less from the people than it did the year before. By analogy, a victim of crime would not consider it to be ‘generosity’ if a burglar decided to steal only a computer instead of a computer and a smartphone.
A tax cut is not a gift from Santa Claus. It is merely the government’s decision to confiscate less wealth from people than it might have otherwise seized:
Then in the fall of that year (1975) the Ford White House escalated the tax stimulus battle further, proposing a tax reduction double the size of its January plan. This led to even more tax-cut largesse on Capitol Hill, a Ford veto, and then a final compromise tax bill on Christmas Eve 1975. Senate finance chairman Russell Long aptly described this final resolution as “putting Santa Claus back in his sleigh.”
Just as the 1974/1975 economic trouble was beginning to self-correct, the government’s efforts to fix it kicked in. These unnecessary measures simply drove the economy back away from equilibrium and caused more trouble:
Thus, the 1969-1972 cycle repeated itself: by the time the big Ford tax cut was enacted, the inventory liquidation had run its course and a natural rebound was under way. So the 1970s second round of fiscal stimulus was destined to fuel a renewed inflationary expansion, and this time it virtually blew the lid off the budget.
A single bad action simultaneously drove inflation and increased the deficit. Freemarket thought, by contrast, would have the government stand down from any contemplated intervention, and allowed the organic forces of buying and selling to nudge the economy back toward equilibrium.
With the horizontal separation of powers, it is always questionable whether one should ascribe credit or blame to the President or to the Congress. In most cases, the glory or the shame is shared. President Ford could have resisted interventionist tendencies more. Congress could have done the same. Neither branch of government behaved perfectly. Ford’s instincts were probably better than Congress’s, and even if he’d done exactly the correct thing in each case, Congress still had the ability to override his veto.
Political factors having nothing to do with economics — mainly Nixon’s Watergate scandal — played into Congress’s ability to override Ford’s veto. The Watergate scandal had also brought candidates into Congress who had a significant tendency to spend — there being no direct link between Watergate and excessive spending, but such are the dynamics of electoral politics, as David Stockman depicts them:
Despite Ford’s resolute veto of some appropriations bills, his red pen was no match for the massive Democratic congressional majorities that had come in with the Watergate election of 1974. Their urge to spend would not be denied, as attested by the figures for budget outlays.
The problems which confronted President Ford between August 1974 and January 1977 can be traced back to a meeting in August 1971. President Nixon called the meeting at Camp David, and invited most of his important economic advisors. It was at this meeting that the concept of wage and price controls became a policy. The results were disastrous, and even after Nixon was gone, and his wage and price controls were no longer in effect, the ripple effects of that meeting continued to plague the economy:
Federal spending grew by 23 percent in fiscal 1975 and then by more than 10 percent in each of fiscal 1976 and 1977. All told, federal outlays reached $410 billion in the Ford administration’s outgoing budget, a figure nearly double the spending level in place six years earlier when Nixon hustled his advisors off to Camp David.
The history of Ford’s economic policies is in some ways a tragedy. President Ford was a lonely advocate for common-sense measures: reduce spending and deregulate the economy. He was defeated, not by economic theorists who had better equations and graphs, but by the political reality that Congressmen like to make themselves popular by spending government funds — funds which in actuality belong to the people.
It is no coincidence that in February 1976, halfway around the globe, Margaret Thatcher made her famous comment about governments which spend “other people’s money.”
Once expensive government programs have legislatively been put into place, it is difficult for anyone to stop them. A president cannot overturn legislation. Congress can overturn its own legislation. A court can nullify congressional legislation if such legislation violates the Constitution. But a president is powerless in such cases — by design: this is the separation of powers in action, as David Stockman explicates:
This was ironic in the extreme. Ford was a stalwart fiscal conservative who went down to defeat in 1976 in a flurry of spending bill vetoes. But the massive increase in entitlement spending enacted during the Nixon years, particularly the 1972 act which indexed Social Security for cost of living increases just as runaway inflation materialized, could not be stopped with the veto pen. In fact, the specious facade of the Nixon-Schultz full-employment budget provided cover for a historic breakdown of financial discipline.
The reader will be aware that both David Stockman and President Reagan were, as policymakers and elected officials, sometimes controversial. There are various interpretations of the narrative about Stockman’s years in the Reagan administration.
What, however, is uncontroversial, is the basic narrative of economic policies and economic conditions during the Ford administration. The events of the Ford administration in some ways foreshadowed Stockman’s career in the Reagan administration.
The axiom to be learned is this: the pressures of electoral politics will often overrule serious economic thought.
