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Keynesian in Nixon’s Insanium Cranium

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Richard Nixon (conservative)

British economist, John Maynard Keynes, developed a new theory of economics that dominated macroeconomic thinking in the postwar era. Keynes presented his ideas in 1936, in a book called The General Theory of Employment, Interest, and Money.  He desired to develop a comprehensive explanation of economic forces. An explanation like this could give politicians and economists insightful information on ways to get out of economic crises like the Great Depression. This form of demand-side economics gained the favor of President Richard Nixon as he proudly declared himself “a Keynesian in economics,” on January 4, 1971. This was a rather unusual statement for the arch-conservative president because Keynes was viewed as being well to the left, both politically and economically. Regardless of his political party, the president aimed to balance the budget on a “full employment” basis, a Keynesian idea. Conservatives viewed this “as a license to run budget deficits forever,” according to the New York Times.

A key component to Keynes’s ideas is to see the economy in a broader view and focus on the economy as a whole. Keynes looked at the productive capacity of the entire economy, which is the maximum output that an economy can sustain over a period of time without large increases in inflation. The British economist attempted to answer a question concerning the Great Depression: why does the actual production in an economy sometimes fall short of its productive capacity. The answer Keynes proposed included the fact that neither consumers nor businesses had an incentive to spend enough to cause a rise in production. It did not make sense for a company during that time to spend money to increase production when no one else had enough money to buy the products. Also, unemployed consumers could not spend money that they did not have. Nixon became the first president to balance the budget based on “full employment” which meant the United States would “spend as if it were at full employment to bring about full employment, thus justifying an acceptable amount of deficit spending.”

According to the Congressional Budget Office, the “recent economic downturn has increased the budget deficit by about 2.5 percent of the gross domestic product annually since 2009.” The Congressional Budget Office also calculates that “if the economy were operating at its potential based on its productive capacity” (what used to be called “full employment”), gross domestic product would be $1 trillion larger this year.

John Keynes

John Keynes

“Conservatives do not like calculating the deficit any way except literally,” says Bruce Bartlett. “All of the adjustments to the deficit are assumed to be tricks to make it look smaller, they believe.” But back in 1971, having a Republican president adopt a left winged idea such as an expansionary budget policy and balancing the budget on a “full employment” basis was radical stuff indeed.

When Nixon first took office, he tried a conservative method to tighten the money supply, however this method did not work and the economy appeared to be heading into a recession.  With the American federal budget deficit totaled at $23.03 billion, combined with Nixon’s failure of obtaining more revenue through tax reform legislation in 1969 and rising unemployment (4.9 percent) and inflation (5.7 percent) rates in 1970, Nixon decided it was time for a change and proudly proclaimed himself to be a conservative Keynesian, hoping to turn things around. The administration then turned to fiscal policy solutions.

Nixon’s new Keynesian methods turned out to be a short-term domestic success.  His New Economic Policy “attempted to balance U.S. domestic concerns with wage and price controls and international ones devaluing the dollar.” N.E.P. worked so well that by early 1972, the output rose sharply and unemployment fell, however inflation increased. Nixon became the only president since World War II to bring about an economic upturn in a presidential election year. This astonishing fact contributed to his landslide re-election in 1972.

When President Nixon resigned in 1974, inflation was at 11 percent and unemployment rates increased to 5.6 percent; however the deficit was down to $6.14 billion. Although he was a conservative president, he adopted more liberal Keynesian methods and succeeded in his attempt to balance the budget on a “full employment” basis.

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