It’s easier to unwind.
Dear Mr. President,
In a future two-volume work, I intend to deal with the relation of a President to economists. I will naturally urge that he listen to them attentively, and indeed with a certain respect and awe. But in times of economic challenge, the President must have a sense of what the people want. Economists only know what people should want – or sometimes what they used to want.
– John Kenneth Galbraith to President Kennedy,
TREASURY Secretary Timothy Geithner’s debut last week of his $2.5 trillion rescue plan sent Wall Street into a tailspin – and raised new concerns about the Obama administration’s savvy – when it became apparent that this was The Plan That Wasn’t One.
The Plan – clearly crafted by the Larry Summers-led economic team – had been fiercely opposed by top White House political advisers (including David Axelrod). The political people apparently feared The Plan, however sketchy, made the White House look like it was bringing back last year’s arsonists to be this year’s firefighters – while doing too little for the millions trapped in our still-burning economy.
To Ken Galbraith, all this would have been eerily familiar (and alarming) had he not died three years ago. The 6-foot-8 Harvard professor had been the nation’s most famous liberal economist from World War II until his death. He served in the Roosevelt, Truman, Kennedy, and Johnson administrations, and knew about the intersection of economics and politics.
For Galbraith, the Geithner Plan would have recalled haunting memories of what happened when he was a top adviser to John F. Kennedy.
Kennedy entered office in 1961, during what was then the worst downturn since the Depression. JFK was a new, young, and untested president, uncertain in economics, a leader attuned to bipartisanship (he chose a Republican investment banker as treasury secretary). His economists were all Keynesians and eager to put their blackboard models to work. But they disagreed about what to do.
Pay close attention.
One camp was led by White House chief economist Walter Heller, a tax specialist who favored a big stimulus package based on deep tax cuts. Ken Galbraith, FDR’s man in charge of price controls in World War II (a job at least as tough as the one facing Geithner), led the second camp. Galbraith wanted spending – deficit spending – that focused on building schools, roads, and parks, and creating public jobs
It wasn’t a dispute about theory. But Galbraith had a second worry: Kennedy was coming under heavy pressure because of a little war in Southeast Asia. Costs for such a war weren’t in Heller’s economic models. If war came in Vietnam, he knew spending would soar but that Congress would put off raising taxes to pay for it.
The “wrong” stimulus strategy would be a recipe for disaster. It might destroy the New Frontier if the package was mismanaged, and decided only by the economists and their models.
Finally, after months of argument, Kennedy imposed a compromise: Heller’s tax cuts first, then Galbraith’s major public spending. JFK was unsure of his decision, but some sort of stimulus was clearly needed. Getting tax cuts passed first by a conservative Congress would be easier.
Kennedy was killed before his tax cuts became law, so they went into effect in 1964 under Lyndon Johnson. Initally, the economy soared – but then LBJ plunged deeper into Vietnam, and war costs soon drove heavy deficits that in turn triggered inflation. Congress dragged its feet about raising taxes quickly enough to curb inflation.
Soon enough, an angry and disheartened public began to hate the Democrats, hate liberals, and hate government. A faltering economy, along with a worsening war, brought Richard Nixon to the White House.
Galbraith’s warnings had proved right, because reality had proved more complex than the economists’ models.
It’s an important lesson to ponder 40 years later: In times of economic crisis, presidents should listen to economists. But then they must listen to the American people, because the stakes aren’t just economic.