standard stump speech. "If we stand still here at home, we stand still around the world."2

Fifteen years after World War II, that reasoning resonated powerfully with most Americans. The Cold War spawned an unrelenting sense of threat. Democracy and free enterprise were locked in a death struggle with communism and collective ownership. It was not clear then which system would triumph. The Soviets' launch of Sputnik, the first artificial Earth satellite, in 1957 shocked Americans, shaking their faith in U.S. technological superiority. Sputnik made more menacing and credible the Soviets' boasts that they would overtake the United States economically. Kennedy played to these fears, while also appealing to voters' immediate self-interest in greater prosperity. Although he didn't have a program, he did have a disposition to appoint people who did.

Chief among them was Walter Heller, a forty-six-year-old economist from the University of Minnesota who became the chairman of Kennedy's Council of Economic Advisers (CEA). Heller was probably the CEA's most influential chairman ever, not because he was the most brilliant but because he succeeded—more than any other—in getting the president to adopt his ideas. Heller was an aggressive salesman for what ultimately became known as the "new economics," a popular label for Keynesianism. Keynes's ideas already dominated the mainstream among economists, and Heller was determined to put them into practice. By the time he left the CEA in 1964, he had succeeded, probably beyond his wildest imagination. After Kennedy's assassination, Congress had passed a major tax cut—as recommended by his economists—to spur economic growth; and Lyndon Johnson had embraced the idea of active economic management. In 1966, Heller wrote triumphantly:

Economics has come of age in the 1960s. Two presidents [Kennedy and Johnson] have recognized and drawn on modern economics as a source of national strength and Presidential power. Their willingness to use, for the first time, the full range of modern economic tools [reflects a] ... narrowing of the intellectual gap between economic advisers and decision makers. The paralyzing grip of economic myth and false fears on policy has been loosened, perhaps even broken.3

Heller's enthusiasm typified the times. Conditioned by victory in World War II and postwar technological advances (jet travel, nuclear power, television), Americans were supremely confident in their power to solve problems. Heller was hardly a one-man band. He was simply the conductor, leading an orchestra of like-minded economists: Paul Samuelson of the Massachusetts Institute of Technology, a chief Kennedy adviser in the campaign;* James Tobin ofYale, a member of the CEA; Robert Solow of MIT, a top staff economist on the CEA; Kermit Gordon from Williams College, first a member of the CEA and then director of the Bureau of the Budget; and Seymour Harris, an adviser to the Treasury, formerly of Harvard before moving to the University of California at San Diego. Their collective intellectual firepower was considerable. Three (Samuelson, Solow and Tobin) later won Nobel Prizes in economics; Samuelson

* No relation to the present author.

had authored what would remain for many years the leading college economics textbook; and Gordon subsequently became the head of the Brookings Institution, a major Washington think tank. All believed that the American economy could perform better.

In some ways, their conceit was astonishing. Compared to almost any period in U.S. history, the economy had performed impressively since World War II. At war s end, with the Great Depression fresh in people's minds, fears of another economic collapse were widespread. In 1946,60 percent of Americans thought a depression might occur within a decade. In 1947, Harry S. Truman warned that "the job today is to see to it that America is not ravaged by recurring depressions and long periods of unemployment." Reality stood these worries on their head. Americans enjoyed a prodigious boom, marked by headlong suburbanization and an orgy of car and appliance buying. In the 1950s, the U.S. population grew by 28 million, nearly a fifth. Two-thirds of the growth occurred in the suburbs. "[J] ust as the census of 1890 announced the passing of the frontier, the census of 1960 announced the passing of the great city," one commentator wrote. Couples were breeding enthusiastically. This was the heyday of the postwar baby boom.4

Children signaled Americans' renewed optimism and faith in the future. In the 1930s, birth rates had plunged, reflecting widespread gloom. But after the war, America's mood improved along with the economy. By 1960 and allowing for population growth, average per capita incomes were up 24 percent from 1946 and 94 percent from 1929. The recessions that occurred in 1949,1953-54,1957-58 and 1960 were, compared with the Depression, mild. The highest monthly unemployment, 7.5 percent in July 1958, was not close to the double-digit levels of the 1930s, when joblessness averaged 18 percent. An altered relationship between the economy and government also bolstered confidence. "Given the experience of the 1930s, it was inconceivable that the government would fail to commit itself to maintaining high employment," the economist Herbert Stein later wrote. Congress made that commitment with the Employment Act of 1946, creating the Council of Economic Advisers to monitor economic conditions and make recommendations to the president. A Democratic Congress had passed the Employment Act, and in the 1950s, a Republican president, Dwight Eisenhower, embraced its precautionary consensus. Eisenhower believed in a balanced budget and stable prices. But he also thought that government had to act— that is, run deficits and cut interest rates—if the economy risked a deep recession or depression. Government would avert calamity.5 Under Eisenhower, it did.

The Kennedy economists found that approach too cautious. Government could do more, they thought, than merely prevent disasters. Heller and others believed that they could keep the economy expanding perpetually and operating close to "full employment." When unemployment was too high, government could stimulate spending and production. It would cut taxes, increase federal spending—even plan a deficit—and reduce interest rates. This was essentially sophisticated "pump priming." If too much priming aggravated inflation—pushing up prices because demand was greater than supply—then the process could be reversed. Taxes and interest rates could be raised; federal spending could be cut; the budget could swing to surplus. The economy would slow; inflation would subside. This sort of "activist economics" cast economists as public-

spirited engineers who could deliver everlasting prosperity. Not co-incidentally, their power and prestige would ascend.

"Fine-tuning" is what this approach was ultimately called. Some of the Kennedy-Johnson economists later complained that the label was a journalistic simplification and exaggeration. Not so. In 1965, President Johnson—no doubt reading words that his economists had written or approved—declared, "I do not believe that recessions are inevitable." As late as 1970, Arthur Okun, a Yale economist who served on Johnson's CEA from 1964 to 1969 (with a year as chairman) wrote, "Recessions are now considered to be fundamentally preventable, like airplane crashes and unlike hurricanes." Many of these economists promoted "fine tuning," by whatever name. The Great Depression had profoundly influenced them. "Words and statistics cannot convey to people who did not live through it and do not remember it anything like an adequate picture of the Depression," as one put it. "We saw the unemployed, the breadlines, the foreclosed homes, the abandoned farms directly, and not through statistics or television film."6

In classical economics, business cycles were inevitable but self-correcting. Recoveries would occur spontaneously through automatic shifts in wages, prices and interest rates. Lower prices would spur more buying; lower wages would spur more hiring; lower interest rates would spur more borrowing.Yet, this hadn't happened in the 1930s. Only Keynes seemed able to explain why. As he argued, wages might be "sticky" and not decline sufficiently in a slump. Even at low interest rates, gloomy businesses and investors might not borrow more. Thus, spontaneous adjustments wouldn't always correct serious economic downturns. Unless government intervened, economies might settle into a high-unemployment stagnation. Keynes infused economics with political relevance and scholarly energy. "We were attracted to the subject [economics] by the happy combination of intellectual excitement and the promise of dramatic social improvement," Tobin wrote.7

By the 1960s, the American Keynesians believed that technical advances in economics allowed them to go beyond the master. Before World War II, economic statistics were primitive—reports on the economy's output (Gross Domestic Product), unemployment and inflation became routine only in the 1940s and 1950s.* It was then thought possible to estimate the economy's "potential output"— what could be produced when all companies operated at maximum capacity and all willing workers had jobs, t New computer-driven eco

* The concept then widely used was Gross National Product, or GNP, rather than today's Gross Domestic Product, or GDP. The two are virtually identical. The main difference is the classification of income of foreign-owned enterprises. In GNP, U.S. income of foreign-owned firms was excluded and overseas income of U.S. multinational firms was included. GDP reverses that: It includes the U.S. income of foreign-owned firms (say, a Japanese auto plan operating in Ohio) and excludes income of American firms operating abroad. I have used GDP—the current convention—in the text to avoid unnecessary confusion.

t On paper, the calculation was simple. Output equaled the number of hours people might work multiplied by average productivity (output per hour worked). Suppose, for example, the economy's "potential output" had been $100 billion this year and that both productivity and "hours worked" were increasing at rates of 2 percent a year. Then, potential output in the second year would increase by 4 percent (2 percent for extra labor and 2 percent for higher productivity). It would be $104 billion.

nomic models aided the process. These models showed how different economic variables (consumer spending, interest rates, housing construction) interacted with each other. The models could, it was thought, therefore, provide accurate forecasts. They could determine how far the economy was straying from "potential output." They could also predict recessions and inflation, it was believed. Thus, corrective policies could be adopted. If the economy was below full employment, it could be nudged up. If it were in an inflationary zone, it could be nudged down. With better information and theories, economics seemed a reliable form of social engineering.

Conditioned by the Depression, the Kennedy-Johnson economists didn't worry much about inflation. From 1958 to 1961, unemployment had averaged 6.1 percent annually while inflation was only 1.5 percent. Joblessness seemed the pressing problem. Modest inflation was viewed as a "cost-push" phenomenon: Some industries (steel, autos, rubber), dominated by a few firms and with unionized work forces, had enough independent market power to push wages and prices higher. By contrast, "demand-pull" inflation—too much demand raising all prices—seemed unthreatening. The Kennedy economists took comfort in the "Phillips Curve," which purported to show a stable relationship between unemployment and inflation. A society could select what "mix" of inflation and unemployment it preferred. The curve was named after New Zealand economist A. W Phillips, who in 1958 had first plotted a historical relationship between unemployment and wages for England. (Wages closely tracked prices.) When economists Paul Samuelson and Robert Solow examined the U.S. data, they concluded that there was a favorable "menu of choice." They suggested that 3 percent unemployment might exist with a permanent inflation of about 4.5 percent. This seemed a socially and economically desirable mix.*8

Actually, Samuelson and Solow had called 3 percent unemployment a "non-perfectionist's" goal, implying that in time it might move even lower. The optimism was telling: The Kennedy-Johnson economists were not much plagued by self-doubt. They saw themselves as missionaries for the collective benefits available from modern economics. A new era was at hand, if only political and public resistance could be swept away. "[T]he major barrier to getting the country moving again lay in the economic ignorance and stereotypes that prevailed in the land," Heller wrote. "[M]en's minds had to be conditioned to accept new thinking, new symbols, and new and broader concepts of the public interest." The trouble was that many of the "stereotypes" that produced "ignorance" were not held just by the general public but also by its political leaders, including Kennedy.9

First among the stereotypes was widespread belief in the virtue of balanced budgets; this made it harder to use the premeditated deficit as a tool of economic management. As a general principle, Americans believed that debt was bad. That included government debt. They typically likened the government's finances to their own. People shouldn't "live beyond their means." Neither should government. Moreover, insisting that politically painful taxes pay for politically pleasurable spending checked the growth of government.

* A certain amount of unemployment is unavoidable—people just entering the labor market from school or after childrearing; people changing jobs. This is usually called "frictional unemployment."

These views dated to the start of the republic, though they were often breached in wars and depressions, when deficits were accepted as practical necessities. It was hard to pay for costly wars by immediate and huge tax increases; big tax increases or spending cuts when the economy was collapsing were similarly difficult. But such expediency did not extend to running deficits consciously during periods of peace and relative prosperity. By these precepts, using budget deficits aggressively to achieve full employment was precluded.

A second strand of "ignorance" was the popular hostility toward inflation. People liked stable prices; the Keynesian economists recognized that. But they believed that most Americans had made it an undesirable fetish. Just a bit of inflation—the prospect held out by the Phillips Curve—would be more socially constructive. It would permit more expansive economic policies, lower unemployment and greater output. The benefits were well worth the costs. There was "a vast exaggeration of the social costs of inflation,"Tobin wrote as late as 1974. In 1962, Kennedy's first CEA designated 4 percent unemployment as a temporary target for "full employment." By the U.S. Phillips Curve, that implied the country would run a permanent inflation rate of about 3 percent to 4 percent. The presumption was that most people would adjust to slightly higher inflation without much resentment or serious economic or social side effects.10 It was crucially presumed that inflation would be stable and not accelerate.

A final obstacle to active economic management involved gold. At the time, the United States was pledged to convert dollars held by foreign governments into gold at a rate of $35 an ounce. This commitment, reached at an international conference in 1944 at

Bretton Woods, New Hampshire, aimed to make the dollar suitable as international money to be used for foreign trade and to settle debts among nations. The dollar would be as good as gold. If U.S. inflation eroded the dollar's value, then foreign governments might deplete U.S. gold reserves by presenting their dollars for redemption. To prevent that, the United States would have to slow its economy by raising interest rates or running budget surpluses. Inflation and imports would abate. Fewer dollars would go abroad (Americans paid for their imports with dollars), and foreign governments would have more confidence in the dollar. That was the concept of the Bretton Woods international monetary system. But to the Kennedy economists, this logic might sabotage "full employment" policies at home. Ransoming the domestic economy to gold, they thought, was self-defeating. Better to drop the gold guarantee.

To achieve their goals, Kennedys economists had to remove all these political obstructions—and the job started at the White House itself. Kennedy instinctively disliked budget deficits, as did many other officials in his administration. There was no unanimity of views, because Kennedy didn't want unanimity. "I simply cannot afford to have one set of advisers," he once remarked. So he didn't. Not surprisingly, C. Douglas Dillon, a Republican who was the Treasury secretary, opposed deliberate deficits. Moreover, ditching the antideficit prejudice was politically risky. Republicans routinely attacked Democrats as spendthrifts, addicted to deficit financing. In Congress, fiscally conservative southern Democrats held many key positions. Especially important was Senator Harry Byrd of Virginia, chairman of the Senate Finance Committee, which would consider any tax legislation. Advocating deliberate deficits would vindicate

Republicans and alienate southern Democrats. And for what? Even Kennedy initially doubted the political appeal of Heller's ideas. "The 94 percent employed," he noted privately early in his term,"couldn't care less about the 6 percent unemployed."11

By late 1962, Kennedy had changed his mind. Although the budget was already in deficit, he proposed a huge tax cut in early 1963. In part, the conversion reflected the man himself. Kennedy saw himself as a cautious experimenter, open to new ideas. "[T]he economists never had a President so willing to listen to them," wrote Hugh Sidey of Time magazine. "Kennedy trusted hard facts, not hunches." The economists deluged him with facts that "the politicians could not match ..., and so the pragmatic Kennedy turned to the economists." The economy's lackluster performance aided his conversion. A recession in early 1961 had raised unemployment to 6.7 percent. But in mid-1962, joblessness stopped declining and remained stuck at about 5.5 percent—roughly where it had been in 1960. In June 1962, Kennedy gave a commencement speech at Yale University that tentatively endorsed the "new economics." He denounced economic "myths," including the "myth" that budget deficits were automatically bad. Still, Kennedy didn't decide on a major tax cut until late in the year. What finally persuaded him was the enthusiastic reaction to a speech in December before the Economic Club of New York, in which he portrayed a tax cut as lifting "the burden on private income and the deterrents to private initiative imposed by our present tax system." The audience, mainly of Republican businessmen, reacted warmly. "If I can convince them," Kennedy said, "I can convince anyone."12

Actually, he couldn't. Once the proposal went to Congress, it lan guished. Republicans labeled it "the biggest gamble in history." Although some business groups backed Kennedy, public support was underwhelming. In October 1963, the House of Representatives had finally passed a bill, 271-155, but prospects for Senate action were unclear. After Kennedy s assassination in November, one opinion poll found "fiscal irresponsibility" to be the most unpopular aspect of his administration. No one can ever know what would have happened had Kennedy lived. The proposal s approval the next year resulted partly from national guilt over his death and partly from Lyndon Johnson's mastery of the legislative process. But once it did pass, it seemed an unquestioned triumph. The economy expanded 5.3 percent in 1964 and 5.9 percent in 1965. The unemployment rate dropped to 5 percent by the end of 1964 and to almost 4 percent a year later. Inflation remained at less than 2 percent in both years. If this was not economic paradise, what would be?13

Capitalism seemed to have arrived at a better and permanent future. To mark the moment, Time magazine put Keynes on its cover at the end of 1965. Symbolically, the "new economics" had evolved from an obscure academic theory into a pillar of populism. It was widely embraced, if not completely understood. The United States had, said Time, "discovered the secret of steady, stable, non-inflationary growth." The economy was in the fifth year "of the most sizeable, prolonged and widely distributed prosperity in history." Keynesian-ism had first convinced economists, then the public and, finally, conservative businessmen. "They believe that whatever happens, the Government will somehow keep the economy strong and rising," Time said. There were some signs that inflation was inching up, but

Time was confident (as were most of the economists interviewed) that it could be contained without too much trouble.14

olitics, as much as economics, had changed. Henceforth, reces sions and slumps would not be treated as unfortunate but inevitable occurrences. Political leaders would be blamed because (it was now assumed) competent governments could control the business cycle. Although the "new economics" was Democratic dogma, many Republicans grasped its popularity and embraced it. "Full employment" became the bipartisan standard against which economic success was measured. After being selected by Richard Nixon for a spot on his Council of Economic Advisers, Herbert Stein was asked by the president-elect what the administration's most serious economic problem would be. Inflation, replied Stein. Nixon objected: "[He] immediately warned me that we must not raise unemployment," Stein wrote later. "I didn't at the time realize how deep this feeling was or how serious the implications would be. . . . [T]he country valued continuous high employment above price stability." Nixon particularly valued it, because he believed that he had lost the 1960 election because an economic slowdown had cost him crucial votes. But the sentiment was widespread.15

The result of this mind-set was that the same mistakes were repeated for fifteen years: Inflation was underestimated; policies to "stimulate" the economy (tax cuts, budget deficits, easy money)

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