1975-1977: Congress Rising
Strong Congressional criticism of monetary policy began to take shape in 1975 and Chairman Burns put his political acumen into overdrive to manage the ascendant Congressional Democrats. With the Misery Index reaching new heights in 1974 and 1975, there was significant political will to “do something” and Congress was busy (Charts 10 & 11). In March, House Concurrent Resolution 133 was passed by a large margin. The resolution instructed the Fed to reduce long-term interest rates and maintain the long-run growth of money and credit. It also required the Chairman periodically appear to testify about the ongoing conduct of monetary policy. The bill was non-binding and was the compromise after bills that would have directed monetary policy (HR 3160) and subjected the Fed to a “full-scale” audit by the General Accounting Office (HR 7590) were narrowly defeated. The plans of Congressional Democrats to force the Fed to ease monetary policy were being stymied by Ford’s very active veto pen and a lack of cohesion in their messaging.
By 1976 inflation had cooled to “only” four percent, but unemployment remained at the highest levels since the Great Depression, at that time. Indeed, contemporaries were calling it the Great Recession. Democrats cohered firmly around unemployment as the primary problem facing the country, including presidential candidates. Congressional Democrats introduced the Humphrey-Hawkins Full Employment Bill and the Democratic Party adopted the bill as one of its election year planks at the national convention. The bill mandated reducing unemployment to three percent by 1980 and that the federal government would be used as an “employer of last resort”.
Presidential candidate Jimmy Carter was critical of Nixon and Ford’s handling of the economy, claiming that their policies of austerity and tight monetary policy were to blame for high deficits and high unemployment. Carter claimed that federal employment programs and easier monetary policy were needed to get the economy “moving again” and in September the candidate claimed, “we have a long way to go before we have inflationary pressures.”
Carter won seven out of eight voters who considered unemployment to be the top issue facing the country and took the popular vote over Ford by 49.9% to 47.9%. However, the Electoral College was a close call. A swing of only 8,000 voters in Hawaii or 11,000 in Ohio would have been enough to keep Ford in office. Given Carter’s prior statements about monetary policy, the Fed was reluctant to react to accelerating inflation in late 1976 and early 1977.
When it came to dealing with economic policy, Carter lacked Nixon’s constant short-term political scheming, but he made up for it with earnest and heartfelt haplessness. Carter believed in 1977 that unemployment was high because the economy was suffering a negative output gap due to government austerity and overly tight monetary policy, as a result, he thought inflation and unemployment could be brought down simultaneously if “cost push” factors were dealt with administratively.
Carter rejected using monetary policy to restrict demand as a legitimate anti-inflation tool. Instead, the president favored using government negotiating power and, more promisingly, a reduction of government regulation over key industries. The President began signaling Burns for easier policy on entering office and kept up a steady beat of signals throughout 1977.
Carter’s goal in April 1977 was to return inflation to 4% by the end of 1979, but by July – with inflation accelerating rapidly - the goal had been pushed back to the end of 1980. Chairman Burns expressed hesitancy to raise rates further in July because the Federal Reserve Reform Act of 1977 was then under consideration.
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