Economic Lessons Learned From President Ford's Short Time in Office

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Gerald Ford was a decent man and a healing president. And that’s just what the nation needed at that moment.

Had a politician more confrontational and less reassuring taken office after Richard Nixon resigned, there’s no telling how this nation would have reacted. He may well have saved the country from a constitutional crisis.

Of course, that doesn’t mean he did all the right things for the country. President Ford believed in the Nixon/Kissinger policy of detente, the essence of which stated that we maintain our “cold” war status with the Soviet Union rather than trying to win the war, as Ronald Reagan believed we could.

President Ford also believed we could beat the rising costs from inflation with a national campaign against rising prices, summed up by his “WIN” buttons (an acronym for “Whip Inflation Now”). Of course, the root causes of inflation were far more fundamental than something that a button could cure, and Ford knew that. Those causes had to do with the huge spending habits of Congress, irresponsible printing of dollars to pay for that spending, rising tax rates, and the hangover from Richard Nixon’s price controls, which let inflationary forces build up as in a regulatory pressure cooker.

Gerald Ford did his level best to keep the economy from crashing and burning. He pulled out his veto pen 66 times in two-and-a-half years, mostly to cut back on a heavily Democratic Congress’ spending habits.

President Ford knew that the more money politicians spent, the more cash the government printing presses would print to pay the bills. And the more cash that was printed, the less each individual dollar was worth. So everything began to cost more, as the money earned was worth less. Salaries were raised, but they never quite kept up with inflation. And the more money one made, the more often one got kicked up into a higher tax bracket. That’s the perniciousness of inflation.

But there’s another component to inflation that Ford didn’t appreciate. Inflation is either too much money, or too few goods. If there aren’t enough goods in the market, you can charge higher prices for each good produced, and that causes prices to rise, too.

Production was down in the Ford era because tax rates began to creep up with inflation. Tax rates had become so high that producers were producing less. We ended up with the worst of both worlds: Too much money and too few goods. We called this double whammy “stagflation;” high inflation with stagnating production. And it was killing us.

Ford was doing his best to address the excess of government spending. But he never really addressed the key issue, which was how to get our economy producing again.

It really wasn’t until Ronald Reagan became president that both the money and the production side of stagflation were addressed. Reagan combined squeezing the money supply (through his full support of the new inflation-fighting Fed Chairman Paul Volker) with a dramatic reduction in tax rates at all levels. This allowed folks to keep more of what they earned. And sure enough, in 1983 — after the Reagan tax cuts kicked in — U.S. production started to boom. The Reagan tax cuts also helped to lower inflation by creating more goods.

What Reagan believed in his gut (but Ford and his top advisors didn’t) was that America could grow strong without inflation. It’s hard to imagine now, but that was heresy at the time. President Ford and his advisors actually believed that if the economy began producing “too much,” it would become “overheated” and actually create more inflation.

We now know that this is not at all the case.

In the 25 years since the Reagan tax cuts, it’s become clear that you can have strong economic growth with low inflation and low unemployment. But to the book balancers in the Ford administration, this was an impossible notion.

In 1984, a year after Reagan’s huge tax rate cuts were implemented, Ford’s chief economist Herb Stein wrote in the Wall Street Journal: “In my opinion, the tax-cut side has been greatly overdone relative to the expenditure side.” If Herb had waited another couple of years, he would have seen that the tax revenues greatly increased after the tax rate cuts, because the economy was producing so much more.

Ronald Reagan believed that if you let Americans keep more of what they earn, instead of taxing it away, they will work a lot harder. And if Americans work harder and make a lot more money, more money will be sent to the taxman. In other words, individual taxpayers and corporations will pay out more money in taxes, even though they are paying lower tax rates. That’s called a “dynamic” or supply-side effect of lower tax rates.

Gerry Ford and his political ally George H.W. Bush called all this “voodoo economics.” But Gerry Ford and George H.W. Bush were proven wrong and Ronald Reagan was right. “Voodoo economics” turned out to work.

After the Reagan tax rate cuts, we got much higher production with low inflation and low unemployment (the same thing happened after the 2003 George W. Bush tax rate cuts). Americans were working harder when they were given the freedom to keep more of what they earned. And tax revenues doubled in the seven years between 1983 and 1990, even as tax rates were cut in half.

But before the Reagan revolution, few could see or acknowledge the power of a supply-side push to the economy. Most of the economists of the time told President Ford that you couldn’t have both low inflation and strong growth. It took a visionary like Ronald Reagan to take on the establishments of both the Democratic Party and the Republican Party, both of whom doubted that the American workforce could dig us out of stagflation.

Yes, we needed to cut inflation. But we also needed to get the supply side of the economy pumping out more goods. We needed to provide incentives to folks who produced things. Reagan had the vision to think out of the box we were in. Ford was not such a visionary. But he did keep the nation together at a time when there was a real possibility that it could come apart at its seams.

If America had gone through a wrenching constitutional crisis after the Nixon resignation, it’s unlikely that Ronald Reagan would have had his chance to try out his audacious policies of economic freedom. So in a real sense, Reagan owed his success, and we owe our prosperity, to the handiwork and patience of Gerald Ford, the extraordinarily decent man from Michigan.

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David Asman is the host of "Forbes on FOX" which airs on the FOX News Channel, Saturdays at 11 a.m. ET.