Self-Inflicted Wounds: From LBJ's Guns and Butter to Reagan's Voodoo Economics.

On January 1, 1966, Hobart Rowen began his career with The Washington Post, where he has worked for 28 years as a reporter, senior economics correspondent, financial editor, and columnist. In 1965, economist Arthur Okun's "Discomfort Index," a measure obtained by adding the unemployment and inflation rates, was 6.1, the lowest level the index reached in the 33 years between 1960 and 1993.

Rowen joined the Post at the start of the long, slow economic and political decline of the United States. Today, Rowen says, "...America can no longer boast that it is number one. Indeed, we are the world's largest debtor nation, and many critics insist we have become a second-class power unable to lead the world by virtue of either our unmatched economic prowess or our political sagacity."

Though momentarily the nation is modestly recovering from the 1990-91 recession, the economic decline of which Rowen speaks is real. Since the late sixties, the real wage of the American worker has fallen, family income has stagnated, the gap between rich and poor has widened, and productivity growth, the ultimate engine for economic progress, has fallen to less than half its historic average.

The central thesis of Rowen's thoroughly documented book is in the title: Our wounds are largely selfinflicted. Specifically, Rowen says, the immediate fault lies with the last six presidents, each of whom failed at critical times to make the right decisions that would have maintained the nation's economic health.

Rowen is right that the decline began with Johnson, a flawed and tragic figure. Rowen relates in rich detail Johnson's economic duplicity, showing how in 1966 he concealed the exploding costs of the Vietnam War not only from the American public but from his economic advisors, trying desperately to find money for both the war and his Great Society. In 1966, military spending jumped by 21.6 percent over 1965, an $11 billion increase, which at today's prices would be nearly $50 billion. For political reasons, Johnson refused even to consider a tax increase (1966 was an election year), which Keynesian economics dictated and practically every economist in the nation supported.

With unemployment below four percent in 1966, the large increase in military spending without an offsetting tax increase was a sure-fire formula for inflation. The consumer price index jumped from a modest 1.6 percent rise in 1965 to a 5.5 percent increase by 1969.

Enter Richard Nixon, a more evil than tragic figure, as The Haldeman Diaries make clear. Besides his failure to end the Vietnam War before thousands more Americans died unnecessarily, he confronted three major economic problems. The first was the inflation inherited from the Johnson administration; the second was the crisis in the postwar Bretton Woods international monetary system; and the third was the arrival of OPEC (Organization of Petroleum Exporting Countries) on the world economic stage.

As analyzed by Rowen, Nixon's record in each of these cases was not wholly black or white, but dark gray, tending more toward failure than success. Nixon's "game plan" to bring inflation down involved "gradualism," using tight control of money and expenditures to slow the economy down without causing too much unemployment. Gradualism didn't work. The economy slid into a recession in 1970, costing the Republicans dearly in the year's congressional elections.

The failure of gradualism led to Nixon's August 15, 1971 bombshell--his "New Economic Policy" that suspended the gold convertibility of the dollar (for foreign official holders of dollars), devalued the dollar, and, more importantly, ended fixed exchange rates, a key feature of the postwar international monetary system established at the Bretton Woods, New Hampshire conference in 1944; at the same time, it imposed a mandatory system of wage-price controls to curb inflation.

Given the circumstances of the time, Nixon's New Economic Policy was a sound move. (Nixon was apparently unaware that the phrase New Economic Policy--NEP, for short--was the name Lenin gave to his retreat from pure communism in the early twenties.) Rowen, however, sees a major failure in Nixon's follow-through on price controls after August 15. The president's erratic management of the system of controls--from freeze to thaw, back to freeze again, and then dissolution of the whole program--gave the idea of peacetime controls a bad name while strengthening the hand of "free market" zealots who believe there isn't anything markets can't do better than governments.

Nixon was still president when OPEC boosted oil prices four-fold in December 1973 and the Arabs launched their embargo, but he was so paralyzed by Watergate that America was unable to offer any leadership during this first oil crisis. Rowen believes we should have begun gas rationing, persuaded the oil-using industrial states to follow unified policies with respect to OPEC, and undertaken a cooperative effort to develop new energy resources. These things were not done, leaving the West to grovel before OPEC for a decade or more.

After Nixon, we had Ford and Carter--decent men, but largely failures in the presidency. Ford pursued the inflation beast with his toothless WIN (Whip Inflation Now) campaign, even as the nation was sliding into what was to become at the time the worst recession since the Depression. On inflation, Ford stubbornly refused to consider wage-price controls, and as for the recession, the only thing that Ford and Alan Greenspan, his economic advisor, pushed for was a one-shot tax cut that did little or nothing to halt the decline in output.

Carter's problem was not a lack of intelligence--he was probably one of the smartest men to occupy the White House in recent years. But as president, Rowen says, Carter was indecisive and disorganized, unable to escape the influence of his long-time Georgia banker friend, Bert Lance. Lance, Rowen believes, gave Carter disastrous advice that doomed his presidency even before he took office. Carter shouldn't even consider trying voluntary wage-price guideposts, Lance argued, because dabbling with controls would shatter "business confidence." Carter's anti-inflation policy amounted to pleading with business and labor to show restraint, a totally ineffective approach.

And what of Ronald Reagan? As Rowen notes, Reaganomics not only put the aspirations of the New Deal and the Great Society in reverse gear for 12 years, but its reckless destruction of the federal tax base with the ensuing and unprecedented peacetime deficits crippled the power of the federal government to tackle constructively the real problems facing the nation.

What of the future? Rowen is cautiously optimistic, believing that recovery of the American Dream is possible, but it will take more than a decade to reverse course and undo the damage we have inflicted on ourselves. I agree. Needed most, in my judgment, is what Bush never understood--"the vision thing." Providing that vision is President Clinton's great task. As it is said in Proverbs, "Where there is no vision, the people perish."