Sunday, October 12, 2008

1970s Déjà vu

The political and economic situation of 2008 resembles that of the 1970s in several respects. From an unpopular president to an oil-induced recession to a national malaise, the resemblances are uncanny. We should take care to learn from the past in order to avoid the same mistakes.

The most obvious similarity between 2008 and the 1970s is the comparison between the wars in Iraq and Vietnam. In both cases, we aided a domestic government in fighting off an insurgency. In both cases, we used the same ineffective search-and-destroy strategy for years while protests mounted at home.

Also in both cases, the US shifted to a strategy of clear-and-hold. In Vietnam, General Creighton Abrams replaced General Westmoreland as commander of US forces in Vietnam in 1968. Under Abrams’ strategy, US forces cleared areas of Viet Cong and North Vietnamese regulars, and then South Vietnamese Territorial Forces then garrisoned the liberated territory.

By 1972, John Paul Vann, a senior US official in Vietnam, was able to say “We are at the lowest level of fighting the war has ever seen…. The program of Vietnamization has gone kind of literally beyond my wildest dreams of success.”

When the North Vietnamese Army launched a conventional invasion of the south in what became known as the Easter Offensive, the Army of the Republic of Vietnam (ARVN), with US assistance, was able to hold back the NVA. When South Vietnam signed the Paris Accords in 1973, President Nixon promised that the US would intervene if the north resumed the war, that the US would provide material assistance to South Vietnam, and that the US would provide financial assistance to the south.

When North Vietnam launched a second invasion in 1975, none of these promises were kept. On June 14, 1973, Congress had passed the Case-Church Amendment. This law barred any future use of US forces in Vietnam, Laos, and Cambodia without the authorization of Congress. In 1974, Gerald Ford became president after Nixon’s resignation. Also in 1974, Congress sharply cut funding for South Vietnam. When the north invaded, the US offered no assistance and South Vietnam fell to communist forces, amply supplied by China and the Soviet Union, in 55 days. Following the end of the war, hundreds of thousands of Vietnamese became refugees, were sent to re-education camps, or were executed by the victorious communists.

General David Petraeus has successfully used the Abrams strategy in Iraq. Violence in Iraq is at its lowest point since 2004. Presidential candidate Barack Obama says the surge strategy has “succeeded beyond our wildest dreams” even while he continues to call for the withdrawal of all US troops. Obama is determined to end the war in Iraq the same way his Congressional forebears ended the war in Vietnam.

A second parallel to the 1970s is the current sad state of the US economy. In 1973-1975, the US suffered its worst recession since the 1930s. Several factors that are being replicated in 2008 played a role in the recession of 1973.

One of the causes of this recession was Nixon’s attempt at price controls. In 1971, in order to fight inflation and unemployment, Nixon enacted a 90-day freeze on wages and prices. After 90 days, a Cost of Living Council took charge of the controls, which were gradually relaxed. However, they were reestablished in 1973.

The result of Nixon’s price controls was predictable. Farmers stopped selling their produce and shortages resulted as consumers bought the last items off of supermarket shelves. George Schultz, head of the Office of Management and Budget, told Nixon, “At least we have now convinced everyone else of the rightness of our position that wage-price controls are not the answer.” The controls were removed in 1974, except for those on the oil and gas industries, which lasted several years longer.

Nixon was also responsible for a large increase in government regulation. Numerous government agencies, such as the Environmental Protection Agency, the Occupational Safety and Health Administration, and the Equal Employment Opportunity Commission, date from the Nixon Administration. By some estimates, more regulation was passed by the Nixon Administration than any other presidency since FDR.

The other major cause of the 1973 recession was the Arab Oil Embargo. In response to western support for Israel during the Yom Kippur War, the Arab members of OPEC launched an embargo against the United States and the Netherlands and raised the prices by 70% for other western European nations.

Oil prices immediately spiked. The price of a barrel of oil eventually went higher than $5 and gasoline prices increased to more than $1 per gallon. Gas stations ran out of gasoline and people had to wait for hours at stations that still had supplies.

President Nixon called for voluntary conservation of oil. Congress passed a 55-mile-per-hour speed limit to decrease fuel consumption. When OPEC resumed supplying oil to the US, it was at greatly increased prices. The high price of oil led to more inflation, more unemployment and a recession. The recession, in turn, led to a decrease in oil consumption.

The embargo also spurred construction of the Trans-Alyeska Pipeline (TAP). Environmental groups had sued to stop construction of the TAP in 1970. On November 16, 1973, President Nixon approved construction of the pipeline as a response to the oil crisis. The TAP was completed in 1977 and Alaskan oil played a role in keeping prices low in the 1980s and 1990s.

In 2008, proposals have been discussed for new price controls on oil, gasoline and healthcare. Wage controls have also resurfaced as limits on pay for corporate executives. There is no reason to believe that economic realities of enacting new government controls in the marketplace would have a result that is different from the problems they caused in 1973.

Oil prices have fallen recently, largely due to the deepening worldwide recession, but previously reached record highs in 2008. The problem is similar. In 1973, the shortage was artificially induced by OPEC. The current oil shortage is one of increased demand and limited supply.

Today, as in the 1970s, environmental groups resist drilling for oil domestically even though the US has large reserves in the Alaska National Wildlife Refuge (ANWR) and off the US coasts. Utilizing these oil reserves would bring more oil to the market just as the construction of the TAP increased oil supplies in the 1970s.

A third similarity is the unpopularity of the President of the United States in the 1970s and today. Richard M. Nixon had to deal with an unpopular war in Vietnam as well as a weak US economy. The death knell of his administration was sounded by the Watergate scandal in 1973 and he resigned in 1974.

Gerald Ford, who had replaced Vice President Spiro Agnew after his resignation in 1973, became president upon Nixon’s resignation. While he lowered inflation and unemployment through deregulation and tax cuts, the brief Ford Administration is remembered mainly for his pardon of Richard Nixon, the fall of Saigon, and his seeming clumsiness.

In 1976, the country was ready to put the Nixon years behind it. Jimmy Carter was virtually unknown outside of his home state of Georgia. In the 1976 campaign, he won media support with his message of hope and change, which enabled him to win the Democratic nomination and then the presidency.

In reality, the Carter presidency was a time of high inflation, high unemployment, and a renewed energy crisis. In 1978, the Iranian Revolution caused oil prices to double within a year, this time to $39 per barrel. Carter’s energy policy focused on increased conservation and gasoline rationing was seriously considered. There was no actual shortage of oil in 1979, and this Second Oil Shock was resolved by increased oil production in Alaska and the Gulf Coast. By 1986, after the oil industry deregulation took effect, oil prices returned to $10 per barrel.

Rising oil prices during Carter’s administration led to a return of high inflation. A slowing economy caused an increase in unemployment. By the end of Carter’s term, the misery index, inflation plus unemployment, approached 21%.

Carter’s sole foreign policy victory was the Camp David Accords, a peace treaty between Israel and Egypt that has held to this day. While Carter correctly deemed human rights to be important, his emphasis on human rights in Iran under the Shah helped pave the way for the revolution that brought the Ayatollah Khomeini to power and ushered in a much more abusive regime. Carter’s lax attitude towards Soviet expansion led to the invasion of Afghanistan in 1979.

Ironically, a final response of President Carter to the oil crisis was the introduction of the Carter Doctrine. The Carter Doctrine held that “an attempt by an outside force to gain control in the Persian Gulf” would be regarded as “an assault on the vital interests of the US” and would be “repelled by any means necessary, including military force.” This policy set the precedent for the Persian Gulf War as well as the Iraq War.

In the election of 2008, Barack Obama proposes to repeat many of the same mistakes of the 1970s. His attempts to prematurely remove US troops to force an end to the Iraq War would put the gains of General Petraeus’ surge at grave risk. His reticence toward domestic oil drilling would lead to further supply problems and, ultimately, a return to higher prices as the economy recovers. Obama’s calls for heavier regulation and wage controls for CEOs in the wake of the Wall Street crisis would strangle the free market just as they did for Richard Nixon. Obama’s plan to increase taxes would also prolong our current crisis.

American voters should consider the mistakes of the 1970s when voting for a presidential candidate in 2008. A return to those failed policies would further damage the US economy as well as leading to increased instability abroad. A diplomatic failure with Iran in the next presidential term could lead to a nuclear-armed terrorist state whose reach could extend past Israel all the way to the United States. The next president should enact positive market-based reforms and negotiate from a position of strength to avoid the mistakes of the past.


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