As the American economy recovers from the COVID-19 crisis, the White House proposes to use this recovery as a justification for remaking the American economy. This remake includes new tax and regulatory burdens in a program that the Administration cynically calls “Build Back Better.” Despite the optimistic-sounding name, history has demonstrated that this program is precisely the wrong path, one that could lead to decades of rising joblessness, stagnation, and misery.
COVID-19 is, in fact, the third respiratory pandemic that Americans have suffered since World War II. After the first, in 1957, America’s economy bounced right back, stronger than ever. In the second, in 1968, America instead plunged into nearly two decades of economic crisis. Neither pandemic was on the scale of COVID-19, but the contrasting episodes serve as a cautionary tale on how to rebuild this time.
America today stands at a crossroads. To avoid economic disaster, Congress and the Administration must refrain from imposing additional burdens on the recovery in the form of taxes, spending, regulations, and top-down mandates. The economy will recover only if government stays out of the way.
A Tale of Two Pandemics: 1957 and 1968
In 1957, the H2N2 virus, at the time called the Asian flu, emerged from China. The pandemic killed nearly 1.1 million worldwide, including 116,000 in the U.S.—equivalent to 220,000 American deaths in today’s population terms. Like COVID-19, the disease first emerged in February of that year, and it was in full force by summer.
The pandemic year of 1957 was brutal for jobs, with unemployment rising from 4.1 percent in 1957 to a peak of 7.4 percent by 1958. Yet the recovery was spectacular: Unemployment plunged by a third within the year, as gross domestic product (GDP) bounded to year-on-year 9.1 percent growth by mid-1959. Inflation was muted, with the Consumer Price Index running around 1.5 percent the following seven years. The Dow Jones Industrial Average, which had dropped by 15 percent during the worst of the pandemic, shot up to 50 percent above its pre-pandemic level. It then kept rising to usher in the early 1960s, “the dawn of a golden age to most Americans.”
Just 11 years after the Asian flu, the world was hit by another respiratory pandemic of similar magnitude. Dubbed the Hong Kong flu, this pandemic also killed roughly 1 million people worldwide, including 100,000 in the U.S.—the equivalent of about 160,000 Americans in modern terms. Like the flu of 1957, the flu of 1968 was highly contagious, having infected 13 percent of the Hong Kong population in about two weeks. It reached the U.S. in September, and was widespread in America by Christmas.
GDP fell again, from 5.5 percent annual growth at the start of the pandemic to an anemic 0.3 percent. Unlike in 1957, unemployment rose only modestly, with just a 0.2 percent rise in joblessness in the first year. Still, like the 1957 pandemic, the Dow had a 20 percent loss in that first year. At this point, it was looking like a repeat of the previous pandemic—tragic but short.
That is where the similarities stopped. Rather than rebounding to a new “golden age,” the American economy plunged into an abyss. In just one year, unemployment nearly doubled to 6.1 percent, then marched upwards to pass 9 percent by 1975. Unemployment continued to rise to 11 percent in a decade-long jobs crisis—the worst since the Great Depression.
Unlike the Great Depression, this jobs crisis was accompanied by brutal rates of inflation not seen since the World Wars. By 1974, consumer price inflation passed 12 percent, ultimately hitting nearly 15 percent. Over the course of the decade, the dollar lost more than half its value, so that a 1970 dollar was worth 47 cents by 1980.
Markets plummeted. Rather than rapid recovery, the Dow crashed by 70 percent, followed by limping returns for more than a decade. Indeed, the Dow did not recover its inflation-adjusted pre-pandemic level until 1995. As hard as the 1970s were for workers, the 1970s reflected a lost generation for wealth creation. President Jimmy Carter solemnly captured the national mood, calling the economy “a crisis that strikes at the very heart and soul and spirit of our national will.”
What Went Wrong in 1968: Taxing, Spending, and Regulating
What made the difference between these two episodes? In short, misguided policy.
In the wake of the 1968–1969 pandemic, a hyperactive Washington laid burden after burden on America’s productive sector, first strangling it then inflating it, in what even the Federal Reserve admits was “the greatest failure of American macroeconomic policy in the postwar period.”
Indeed, President Ronald Reagan trenchantly summed up the government’s approach of the 1970s: “Back then, government’s view of the economy could be summed up in a few short phrases: If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidize it.”
New taxes were the beginning. Just before the pandemic hit, President Lyndon Johnson had imposed a tax hike through the Revenue and Expenditure Control Act of 1968, an act he characterized as “payback” for President John Kennedy’s tax reductions. The act imposed a 10 percent tax surcharge on both individuals and corporations, ostensibly to help pay for the Vietnam War.
The following year, President Richard Nixon joined in, promoting new taxes, including the alternative minimum tax, then going on to propose a rogue’s gallery of economy-crushing legislation that raised the regulatory burden across the board. President Nixon’s burdens sailed through Congress because, as one chronicler put it, “the teeth of conservative Republican opposition have been drawn,” reluctant to criticize the allegedly conservative Nixon.
President Nixon continued his predecessor’s massive spending increases; in just the three years leading up to 1968, President Johnson had raised spending as a percentage of GDP by one-fifth. Under President Nixon, amid a desperate flurry of panicked tax tweaks, the tax burden marched relentlessly higher, driven by inflation that automatically pushed the middle class into progressively punitive brackets. Spending increased to 19.7 percent of GDP by 1975, and kept going to 22.3 percent by 1982—50 percent higher as a share of the economy than 18 years before.
In nominal dollars, and thanks to that same inflation, the trend was even starker: from the Johnson to the Carter Administrations, nominal tax collections rose nearly six-fold, from $117 billion to $599 billion. Despite the new revenue, the federal government increased spending even more, driving the deficit from $1.4 billion in 1964 to $79 billion by the time of President Carter’s final budget. As spending fed inflation, President Nixon pulled the dollar off the gold standard, then imposed draconian price controls and wage freezes, only to give up on price controls as the economy-gutting impact became clear, including long lines at gas stations.
Spending in the 1970s
Fed by those new taxes and deficits, spending rose across the board. Billions went to city-scale housing projects and urban development, with mass public transit cutting swathes across urban moonscapes. The nation’s railroads were bailed out, with passenger lines nationalized as government-owned Amtrak. Millions of new welfare recipients were created, social security beneficiaries massively expanded, and Washington was abuzz with talk of a “guaranteed annual income” mirroring today’s universal basic income.
Meanwhile, on the other end of the income distribution, crony payments went out to influential lobbyists; $1 billion for the supersonic transport (SST) Boeing 2707 boondoggle that supposedly would compete with the doomed Concorde, then an outright $700 million grant to keep contractor Lockheed in business. The Chrysler Corporation, once a crown jewel of the American economy, received $1.5 billion in taxpayer loan guarantees. Influential Senator Jacob Javits (R–NY) proposed bailing out any company that suffered losses at all.
The second ingredient that created the economic crisis was the explosion of the regulatory state. President Nixon, with the support of Congress, created entire regulatory agencies, including the Environmental Protection Agency. Regulatory budgets at the federal level went from $6.8 billion in 1967 to nearly $20 billion (adjusted for inflation) by 1980—nearly tripling in just 12 years. Over that period, the number of regulatory staff grew from 78,000 to nearly 150,000 bureaucrats, a veritable army dedicated to handicapping the American economy.
Congress passed a series of laws leading to new regulations, including the Endangered Species Act and the establishment of the Occupational Safety and Health Administration, the Consumer Product Safety Commission, and the Equal Employment Opportunity Commission. Each new agency piled new compliance costs and new business risks on firms and entrepreneurs already struggling amid the slow growth. Existing regulatory agencies, meanwhile, received massive budget hikes: The Department of Justice enforcement for alcohol, tobacco, and firearms got a six-fold nominal boost, the National Labor Relations Board a seven-fold hike, and the Federal Trade Commission received a 10-fold budget hike. Each budget increase allowed the agencies to hire yet more bureaucrats to impose and enforce mandates on American businesses and the American people.
Between rising taxes and rising regulatory burdens, the vibrant economy that had allowed America to recover and reach a new “golden age” after the 1957 pandemic instead left the country simultaneously wracked by what many economists had thought impossible: “stagflation”—economic stagnation and inflation at the same time. By March 1975, industrial production fell by nearly 13 percent, while yearly inflation jumped to 12 percent. The phenomenon continued through 1979, driving the “misery index”—the sum of inflation and joblessness—to levels not seen since the Great Depression. As one observer described the mood:
Big or small, virtually every industry today is fighting for its existence. We are plagued by a shortage of materials, of equipment, of fuels, of capital, of workers. If we solve these shortages, we are then frustrated in our attempts to build a new plant or replace an old one. If we manage to make a profit, demagogues will accuse us of stealing from consumers; and, if we do not make a profit and have to shut down, the same demagogues will accuse us of creating unemployment. Meanwhile, in every aspect of our business—from research and development to production, marketing, and selling—we are hindered in every way by the bipartisan mismanagement and crippling controls of a government gone amok.
Where America Stands in 2021
As America recovers from the current pandemic, one can already recognize some of these 1970s concerns: shortages of materials and workers, rising inflation, and slowing growth. The country now stands at a crossroads where it can choose whether it will recover quickly or if government once again drives the economy off a cliff with spending, taxes, regulations, and mandates.
Governments have a pernicious instinct to use crises as an excuse to expand and to impose new burdens at the exact moment when Americans most need government to get out of the way. America’s history of economic recovery from pandemics suggests that Congress and this Administration should give the economy a chance to recover before piling on their wish-lists of yet more trillions in spending and taxes, or yet more thousands of full-time bureaucrats and regulators. This is true whether those new burdens are pandemic-related or whether they are found in a dusted off political wish list that now seems viable because of the crisis.
Concretely, allowing the economic recovery to unfold means rescinding any unwarranted lockdown restrictions, it means normalizing monetary policy, and it means continuing to reform and focus entitlement spending so that the crucial social safety net remains solvent and able to fulfill the solemn promises already made.
Ideally, it would also mean proactively removing pre-pandemic tax and regulatory burdens on entrepreneurship, job creation, and work, not creating new burdens that impede recovery.
Rather than a “build back bureaucracy” approach that sacrifices the economy, America needs solid growth, healthy job creation, and entrepreneurs who are optimistic, driven, and unchained by mandates. The 1970s demonstrated what the socialist playbook of tax, spend, and regulate brings: joblessness, inflation, and misery.
This is the time to hold the line, to shelter this fragile recovery from new burdens and mandates, and from perverse incentives that punish work or handicap entrepreneurs. Brighter days are possible for America, but only if leaders have the wisdom and the humility to stay out of the way of the American people.
Peter St. Onge is Research Fellow for Economic Policy in the Thomas A. Roe Institute for Economic Policy Studies, of the Institute for Economic Freedom, at The Heritage Foundation.