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Essay on the Impact of Economic Policy on the Market
Economic policy refers to actions taken by the government on the economy comprising of budgets, money supply, taxation systems, national ownership labor market, and interest rates. Are economic policies always effective? To answer this question, we begin by understanding the economic hardships of 1970s. The Great Inflation happened from 1965 to 1982 and has been hailed as the biggest macroeconomic event of the 21st Century. America abandoned the global monetary system that had been put in place during the World War II, there were two energy shortages and four economic recessions occurred. This period was also marred by price and wage controls that affected the labor market (Siegel, 1994). The energy crisis was initiated by the Arab oil embargo that was ordered by the Organization of Arab Petroleum Exporting Countries (OAPEC) in 1973. This embargo came on the heels of President Nixon’s pledge of $2.2 million
to provide emergency aid to Israel during the Yom Kippur War. This ban was geared to cease US oil imports from trading with OAPEC nations which resulted in a dramatic increase in oil from $2.90 per barrel to $11.65 in January 1974 (Corbett, 2013). The US engaged in discussions with OAPEC and after much deliberation and unwillingness, the embargo was lifted in March 1974.
Arthur Burns, the Chairman of the Federal Reserve Bank at the time, noted that this ban had an awful timing as major industrial materials were in short supply and the embargo meant that the US oil industry could no longer import more oil if needed. When OAPEC cut oil production, the price of oil per barrel increased because America could not increase supply. Later in 1979, the Iranian revolution triggered another oil crisis and this time, the global price of oil tripled. The result of this increase in oil was a “demand and pull” inflation where the level of spending was in excess of what the country could actually produce without needing more expensive resources (Bryan, 2013). Daniel Sargent, the author of A Superpower Transformed: The Remaking of American Foreign Relations in the 1970s, notes that these oil shocks were not temporary aberrations but rather they resulted from economic changes and geological realities. The author explained that as newly independent third world oil producers had gained enough confidence to renegotiate contracts with western oil companies so they could accrue higher profits. Furthermore, the problem was compounded by the increasing demand for petroleum products by US oil companies and the war conflict in Israel that promoted support from third world oil producers (Smith, 2015). These dynamics meant that the US no longer dominated the world as had previously done centuries before. Smaller countries in the Middle East were gaining power and had the potential to cripple an industrialized nation like the US.
Having seen the potential aftermath, President Nixon ended the gold standard that tied the US dollar’s value to gold on the global market. This decision created a decade of stagflation that was solved by double-digit interest rates that led to the 1981 economic recession. Secondly, President Nixon was desperate to win the 1972 re-election and he made more bad choices that affected the US economy. He ordered a 90-day freeze on wages and created a Pay Board and Price Commission that would approve wage increases after the election. Wage controls could not survive in a free-market economy as workers had less disposable income thus lowering demand for goods and services (Healy, 2011). The third policy was in response to the dismantled Bretton Woods Agreement which meant that the US could no longer support dollar’s value with the gold standard. This move broke the trust needed to foster international trade and other countries began printing their own currencies. The dollar’s value fell thus increasing price of imported goods which led to more inflation. Nixon imposed a 10% import tax to reduce the balance of payments but this only served to increase import prices for consumers and the country registered double digits inflation (Amadeo, 2016).
The Keynesian model of economics entails total spending in the economy and its effects on output and inflation. This theory revolutionized economic thinking after the Great Depression by
challenging the idea that free markets would automatically provide full employment provided that wage demands remained flexible. This theory supports government interventions through public policies geared towards full employment and price stability (Jahan et al., 2014). At the beginning of Nixon’s term, inflation was prioritized rather than balancing the national budget. After a failed attempt to tighten money supply, the administration implemented fiscal policy solutions to revamp the economy from a recession. The New Economic Policy was launched in August 1971 to balance domestic wage and price controls. However, Nixon’s plans failed owing to a combination of failure to obtain extra revenue from taxation, rising unemployment (4.7%), and inflation rates (5.7%) which led to a staggering federal deficit of $23.03 billion (Hoff, 2011). Even though the NEP had short term success, by the end of Nixon’s term in 1974, inflation stood at 11% and unemployment at 5.6%. Furthermore, this era affected trade with traditional trading partners in the east such as Japan.
Market failure occurs where there is inefficient allocation of resources in a free market arising from factors such as externalities where a commodity has negative social cost. The government may intervene by creating demand to address welfare policies like Medicare. For instance, the Affordable Care Act of 2010 promoted increased coverage of Americans who were previously uninsured, particularly minorities and low-wage workers. This way, people can seek medical attention without waiting until they can afford it (Cohen, 2016). In conclusion, economic policies can benefit citizens if they are drafted by carefully considering all prevailing factors and not for personal gain like during Nixon’s tenure. Economic policy remains a hot button topic that is often used to sway voters towards certain candidates as seen in the 2016 campaign season.
References
Amadeo, Kimberly (2016). President Richard M. Nixon’s Economic Policies: How Nixon Destroyed the Dollar. About, Inc. 6 Jan 2017: https://www.thebalance.com/president-richard-mnixon-s-economic-policies-3305562
Bryan, Michael (2013). The Great Inflation. Federal Reserve Bank of Richmond. 6 Jan 2017
http://www.federalreservehistory.org/Period/Essay/13
Cohen, Michael (2016). Obamacare: An Unheralded Success. Boston Globe Media Partners, LLC. 6 Jan 2017: https://www.bostonglobe.com/opinion/2016/04/21/obamacare-unheraldedsuccess/montTA45UvggSgwA0Myd8K/story.html
Corbett, Michael (2013). Oil Shock of 1973- 74. Federal Reserve Bank of Richmond. 6 Jan 2017
http://www.federalreservehistory.org/Events/DetailView/36
Healy, Gene (2011). Remembering Nixon’s Wage and Price Controls. CATO Institute. 6 Jan 2017: https://www.cato.org/publications/commentary/remembering-nixons-wage-price-controls
Hoff, Joan (2011). Nixon’s Keynesian Solution. The New York Times Company. 6 Jan 2017
http://www.nytimes.com/roomfordebate/2011/07/20/presidents-and-their-debts-fdr-to-bush/ nixons-keynesian-solution
Jahan S, Mahmud A, Papageorgiou C (2014). What Is Keynesian Economics? The International Monetary Fund. 6 Jan 2017: http://www.imf.org/external/pubs/ft/fandd/2014/09/basics.htm
Siegel, Jeremy (1994). Stocks for the Long Run: A Guide to Selecting Markets for Long-Term Growth, 2nd ed. New York: McGraw-Hill.
Smith, Jordan (2015). The Breakup: American Foreign Policy in the 1970s. World Affairs Institute. 6 Jan 2017: http://www.worldaffairsjournal.org/article/breakup-american-foreignpolicy-1970s