Fiscal Policy, Monetary Policy, and the Carter Presidency

The Carter years have often been characterized as a period of profound economic malaise brought on by weak and misguided leadership. Indeed, not since Herbert Hoover left office in 1933 has a president faced such pervasive allegations of economic mismanagement. However, examination of broad indicators of economic conditions demonstrates that the economy performed quite well during the Carter years. Moreover, fiscal policy during the Carter Administration was relatively stable and less volatile than fiscal policy during other postwar presidential periods and appropriate in its countercyclical thrust. In contrast, monetary policy was highly erratic compared to monetary policy during other presidential terms and represented a destabilizing influence in the late 1970s. The “Ranking of Presidents,” according to Clinton Rossiter, “has always been a Favorite Indoor Sport of history-minded Americans.”1 An important aspect of ranking the president involves drawing analogies and making, at times, tortuous comparisons. While Jimmy Carter has sometimes been compared to fellow Democrat Franklin Roosevelt, more often he has been compared to the only other engineer turned president, Herbert Hoover. Carter shared Hoover’s disdain for the compromises of politics and thought “politics was incompatible with good government.”2 Carter and Hoover both distrusted strong central government.3 More importantly, however, Hoover and Carter both became associated with economic decline and mismanagement. As Sidney Weintraub saw it, Carter was “likely to succeed where all Democrats—and Republicans—have failed—namely, in making his own name a synonym for economic mismanagement and expunging memories of Herbert Hoover dawdling at the onset of the Great Depression.”4 So strong was this comparison that during the second half of his Administration Carter acquired the unenviable nickname “Jimmy Hoover.”5 Not since Hoover left office in 1933 has a president faced such pervasive allegations of economic mismanagement. Like Hoover, Carter saw himself as an activist, a leader, a problem solver. And like Hoover, Carter was defeated after one term in office. To be fair, economic circumstances did conspire against Hoover and he did reign over the worst economic crisis in our nation’s history. But what about Carter? How do the Carter years compare with economic performance throughout the postwar period? Was fiscal and monetary policy inappropriate or misguided? How did Carter respond to the economic environment facing him in the late 1970s? 700 a n n m a r i m a y i n p r e s i d e n t i a l s t u d i e s q u a r t e r l y 23 (1993) Economic Performance and the Perception of a Failed Presidency In the 1970s, structural changes in the U.S. economy conspired to make good economic performance an elusive goal. The large influx of workers from 1964 to 1980, a result of the postwar baby-boom, made low unemployment difficult to attain while increases in world energy prices put upward pressure on inflation. Although these pressures affected economic performance throughout the 1970s, the Carter years are most generally associated with economic decline. However, recent studies indicate that economic performance during the Carter years was not as dismal as our collective memory might lead us to believe.6 Economic growth during the Carter years was quite strong. In fact, the average growth in real GNP of 3.1 percent during the Carter years was stronger than either the Reagan, Eisenhower, Nixon, or Ford years and represented the longest peacetime expansion, at that time, in the postwar era. Although the unemployment rate in the 1970s was higher on average than that which prevailed in the 1950s and 1960s, the unemployment rate during the Carter years was lower than in either the Ford years or the Reagan years. Moreover, the unemployment rate was falling throughout most of the Carter years, at least until 1980.7 It is quite true that during the Carter years inflation was high—averaging about 8 percent. This rate exceeds the average inflation rate of the 1950s and 1960s as well as the inflation rate during the Reagan years. However, the average rate of inflation during the Ford years was higher, averaging 8.1 percent. Moreover, the rate of inflation was 9 percent on an annual basis for only one year during the Carter Administration whereas the rate of inflation was above 9 percent for two consecutive years during the Ford Administration. A ranking of economic performance during seven postwar presidential periods on the basis of growth in output and employment, unemployment, inflation and interest rates, productivity, and capital investment shows that the Carter years outperformed the Ford, Reagan, and the Nixon years. Only in the Eisenhower years was peacetime economic performance better than during the Carter years, and only marginally so.8 What appears to have influenced popular perceptions of economic performance during the Carter years, however, was the poor performance of the economy in one year, 1980. While output expanded each year from 1977 through 1979, real GNP declined at a .2 percent annual rate in 1980. Unemployment, which had fallen throughout the Carter years from 6.9 percent in 1977 to 5.8 percent in 1979, rose sharply in 1980 to 7 percent. While inflation rose steadily from 1977 to 1979, oil price increases produced a large jump in the inflation rate from 6.9 percent in the fourth quarter 1979 to 10 percent in the first quarter 1980. The poor state of the economy in 1980 undoubtedly contributed to the view, held by many, that the Carter years were a period of economic malaise. Although the president is not solely in control of the economy and quite often has only minimal influence over changes in fiscal and monetary policy, the public attributed the economy’s poor economic performance to Carter’s weak, misguided leadership. The public’s perception of a presidency wrought with indecision was understandable. Carter campaigned in 1976 on a platform to promote growth and reduce unemployment; howf i s c a l p o l i c y , m o n e t a r y p o l i c y , a n d t h e c a r t e r p r e s i d e n c y 701 ever, growing inflationary pressures subsequently led the President to modify his concern for unemployment. The budget deficit of $53.6 billion in 1977 rose slightly in 1978 to $59.2 billion. In 1979, however, the budget deficit fell to $40.2 billion, reflecting a more contractionary policy stance. As the economy turned downward in 1980, the budget deficit swelled to $73.8 billion as Carter publicly supported more expansionary policies. As Erwin Hargrove points out, Carter’s policies “appeared to many to be a presidential strategy of zigzag in economic policy. . . .”9 The increase in the budget deficit in 1980 contributed to another criticism of the Carter Administration. Carter took on the hue of a big spending liberal who, rather than balancing the budget, reigned over the largest annual peacetime budget deficit in U.S. history. In nominal terms, the budget deficit increased by 38 percent in only four years. Even in real terms, the budget deficit expanded from $79.6 billion to $86.1 billion by 1980.10 Although oil price increases in 1979 put significant upward pressure on prices, many associated the rising inflation with the “liberal” policies of the Carter Administration. Fiscal Policy, Monetary Policy, and the Presidency Despite appearances, Carter was, from the beginning, a conservative Democrat— fiscally speaking.11 Throughout his presidency, Carter continually preached the virtues of a balanced budget and warned of the hazards of inflation. Indeed, if we look at the budget deficit as an indication of fiscal policy, we can see that, while the budget deficit has grown throughout much of the postwar era, the deficit was held in check during the Carter years. Comparing the average real budget deficits of postwar Presidents from Eisenhower to Reagan reveals that the budget deficit during the Carter years was an average $74.7 billion per year compared to $103.3 billion during the Ford years and $153.1 billion during the Reagan years.12 While budget deficits were held in check during the Carter years, were fiscal and monetary policy appropriate given the state of the economy? The difficulty in examining stabilization policy in the postwar period stems from the fact that there is no single fiscal or monetary policy measure that adequately reflects discretionary policy changes enacted by policy-makers. For example, the budget deficit, often used as a fiscal policy measure, may expand or contract because of changes in the level of economic activity without any deliberate intervention from policy-makers. The full employment budget surplus or deficit is a better reflection of discretionary fiscal policy. However, this measure is also problematic. According to Alan S. Blinder and Robert M. Solow, “Since the FES fails to weight tax receipts by the MPC [marginal propensity to consume], it is impossible to associate a given change in the FES with a specific change in income; it depends upon how the change is apportioned between taxes and spending.”13 Conventional measures of monetary policy are insufficient as well. The growth rate in the money supply, for example, is inappropriate because changes in the money supply reflect policy as well as non-policy influences.14 That is, the money supply may fluctuate because of changes in the lending behavior of banks or the public’s holding of currency. 702 a n n m a r i m a y i n p r e s i d e n t i a l s t u d i e s q u a r t e r l y 23 (1993) To examine economic policy in the postwar period, impact measures of fiscal and monetary policy are presented.15 These impact measures are derived using a macroeconometric model to estimate the impact of changes in fiscal or monetary policy in a given year on real GNP four quarters later.16 The macroeconometric model is used to compare the simulated real GNP with the actual changes in policy