Yesterday the Federal Reserve announced limited measures to boost the economy. Whatever effect they will have on the economy, they are unlikely to be of any benefit to Obama. Indeed, history shows that the window for presidential action on the economy closes well in advance of the actual campaign itself.
Don’t believe it when people tell you that Senator John F. Kennedy won the presidency over Vice President Richard Nixon in 1960 because of Kennedy’s style, charm or superior debating performance. Nixon’s infamous five o’clock shadow and pallid complexion may have turned voters off. But that was hardly sufficient to turn an election. In 1960, Nixon was defeated by the politics of austerity. And he knew it.
In January – eleven months before the election – Nixon was already getting worried. President Eisenhower had for the prior eight years been the high priest of budgetary rectitude. Over three recessions, Eisenhower had often resisted calls for a stimulus, fearing that government spending would spur renewed inflation. When he did concede the need for spending it was only once signs of a slowdown were advanced – and any stimulus was only of a limited magnitude. Hence the Kennedy campaign’s watchwords stressed the need to restore economic “vigour” and “get the country moving again”.
Nixon’s fears would be stoked in March when Eisenhower’s former economic adviser Arthur Burns came to warn him that the administration needed to act soon. Nixon later recalled that Burns had warned him that “unless some decisive governmental action were taken, and taken soon, we were heading for another economic dip which would hit its low point in November, just before the elections”.
The window was closing. Fiscal policy – involving tax cuts or new spending – worked with a six-to-twelve month lag. Nixon accordingly went to press the General, who had no sympathy for his protégé. Eisenhower rejected Nixon’s call for stimulus, questioned Burns’ judgement and argued that a stimulus should be used only to prevent a “major recession”.
Arthur Burns turned out to have been more right than anyone knew. When October 1960 would see the jobless rolls increase by 452,000, Nixon characterised this development as one which “[a]ll the speeches, television broadcasts, and precinct work in the world could not counteract”.
Nixon was not one to forget a mistake. Eleven years later, in 1971, he found himself in Barack Obama’s shoes. He was a first-term president presiding over a faltering economy. Indeed, for Nixon the situation was worse than Obama. Nixon faced a combination of rising unemployment and inflation: the dreaded impossibility of “stagflation”. Moreover, echoing the European situation of today, Nixon found himself trying to rescue a faltering fixed exchange rate system, in which the dollar was supposed to be convertible into gold.
This time, he would act. In August 1971 – fifteen months before the election – Nixon rejected the politics of austerity. Declaring himself a Keynesian, he announced in a nationally televised address that he was taking the US off gold – signalling the beginning of the end for fixed exchange rates. This would free him to cut taxes and permit the Federal Reserve to print money. Nixon announced a range of tax cuts and investment credits, spurring the economy onward. Nixon even imposed a wage-price freeze: a wildly popular move that served to negate Eisenhower-styled concerns for inflation. As a result, Nixon would avoid his fate of 1960, cruising to reelection in 1972.
To be sure, there must be a happy medium between the austerity playbook of 1960 and the drunken binge of 1972. These are not only economic and political questions, but also ethical ones. Nevertheless, some basic lessons of history seem to have been lost on Barack Obama. In August 2011, he was seeking accord with congressional Republicans on spending cuts – playing the Eisenhower card. Moreover, when Nixon ran the economy at full tilt in 1972, inflation was a real concern, with unions often securing double-digit annual wage increases. In 2012, inflation is as far from a meaningful concern, with workers prizing job security over all else.
Now, in June 2012, it is arguably too late to exert any real effects on the economy. Even with its potentially shortened lag – of say, three to six months – monetary policy can have at best a limited effect. Moreover, pollsters argue that often takes voters an extra three months to “feel” the effects of any improvement in the economy – which means that a revived round of quantitative easing, if implemented by the Federal Reserve today – might not be felt until December.
Obama will no doubt run a hard campaign, but – if things continue as they have been – he will find himself in the shape of the 1960’s Nixon: in a situation that all “the speeches, television broadcasts, and precinct work in the world could not counteract”.