Herbert Stein's What I Think is one of my favorite books on economics. It's so . . . humble. Stein, who was head of the CEA under Nixon, doesn't pretend to have all the answers. Regarding many of the most contentious issues of the day, he basically says, "It probably doesn't matter all that much." To others, "Why are you so sure you're right?" Words to live by, left or right.:
Even now, I am amazed to think of how little we looked ahead during that exciting weekend at Camp David when we (the president, really) made those big decisions. We were going to freeze wages and prices for ninety days. What would happen after the ninety days? I don't remember any discussion of that. We all assumed that the comprehensive freeze would not last beyond the ninety days. Some people, at least, assumed that we would then fall back to what used to be called "some kind of incomes policy," meaning moral suasion addressed to hte larges unions and businesses. But that idea was not explicitly raised.
As it turned out, we were in the price-and-wage-control business, although with diminishing coverage and rigidity, not for ninety days but for nearly a thousand. we were in the business of controlling energy prices for much longer. Would the Nixon team have embarked on the controls in August 1971 if we had foreseen that? I don't know, but i is surely a real question. Was it foreseeable? Perhaps it was not a certain outcome, but it was surely a possible outcome. Probably the whole idea of the controls was so alien to us that we could not imagine that we would be living with them for very long. About two months later, when George Shultz and I gave Mr. Nixon the suggested plan for phase two of the controls, to follow the ninety-day freeze, the president said, "If this baby gets too strong we can strangle it in its cradle." But we could not strangle it in its cradle.
We had created a system upon which tens of millions of people depended, and we could get out of it only gradually. Some time in the fall of 1971, when I was working on the plans for what would follow the freeze, a Canadian economist concerned with price controls in his country sent me these lines from Macbeth: "I am in blood stept so far that, should I wade no more, returning were as tedious as to go o'er." The lines were all too apt.
Some people at Camp David had a theory of what we were doing with the ninety-day freeze. The theory was that the inflation then under way (about 4 percent a year as measured by the consumer price index) was propelled by expectations of inflation and not by underlying demand and supply conditions. The ninety-day freeze would knock those expectations in the head by demonstrating that prices and wages would not rise rapidly forever and the economy would then subside into price stability. It was a rather flaky theory, and we were not prepared for the strong possibility that it was wrong . . .
I describe the incidents of that weekend in August 1971 because they are a dramatic example of not looking ahead, but they are by no means unique. Looking ahead means something more than sketching out the most comfortable, or even the most probable, future scenario. It means recognizing that even the most probable forecast is uncertain and preparing for the eventuality that the forecast turns out to be incorrect. Defined in this way, failure to look ahead is extremely common in government policy making. (I refer to government in this connection only because I have had more experience with it, not because I know that things are any better in the private sector.)
The Bay of Pigs venture and various injections of troops into Vietnam are probably good examples of failure to look ahead. The decision to launch Medicare is another important case. When the Johnson administration made that decision, it had estimates of its future cost. But those estimates were highly uncertain. There was no preparation in the public mind or in policy for action to be taken if the costs grossly exceeded the estimates, as they did. Thirty years later, we are still struggling with that problem. Ronald Reagan's decision in 1980 to make a big tax cut the centerpiece of his election campaign is another example. There were in his camp several theories about what would happen after the tax cut was enacted, but there was no agreed theory and no plan for what to do if none of the theories turned out to be correct, as was the case.
Looking back at these failures to look forward raises questions about what is going on today*. . . . Perhaps there are good answers to these questions. I hope so.
* The late 1990s.
So when I'm utterly fed up with all the screaming, I often dip into the book at random. I usually come away comforted. Here's what I found the other day: his description of the decision under Nixon to implement wage and price controls