A Matter of Psychology

David Stockman
David Stockman; drawing by David Levine

The following testimony was given by Felix G. Rohatyn before the Committee on Ways and Means of the US House of Representatives on March 5.

Mr. Chairman, I am delighted to testify before your committee. The president’s economic plan, put in its simplest form, calls for a huge budget cut coupled with a huge tax cut and restrictive monetary policy. Putting this plan into effect in a period of high deficits, high inflation, and slow growth obviously raises the possibility that monetary and fiscal policy will increase the potential for a credit crunch and a choked-off recovery. For such a plan to be effective, a dramatic change must take place in investor and public psychology, resulting in lower interest rates and greater savings.

When it comes to economics I am neither a Friedmanite nor a Keynesian; I am a skeptic and a pragmatist. I have seen, at the corporate as well as at various governmental levels, too many economic forecasts and projections to have much confidence in any. There are too many variables, too many unforeseeable and uncontrollable events to make economic forecasting all that reliable and to give real confidence in any set of theories. The record so far should make everyone very humble and very careful.

Having said that, I believe the Reagan program should be given a full and fair trial, although I believe it to involve large risks with the odds rather against its achieving its goals within a reasonable time. However, it is clear to me that this program, or something very much like it, is what the voters have firmly demanded, and, unless disaster would clearly result, I believe that a democracy should heed the will of its majority. Even though I believe it would be reckless to assure you of the success of such a program, I cannot tell you with assurance that it will fail. Its chances of success depend largely on psychology, but maybe, just maybe, thanks to the mood of the country, that psychology could emerge.

Credit, it must be remembered, comes from the Latin verb “to believe.” The Reagan administration has been elected on a wave of belief in a program which promises a great deal; that is its chance of success as well as its greatest danger. If I seem ambivalent, and I am, it is because I live in the world of markets and their psychology, and I am fully convinced that many very different types of economic programs can succeed or fail because of psychological reactions. I also believe that denying to the voters the right to a fair trial of this program would be exceedingly divisive at a time when national unity is sorely needed. And last, but not least, unless this program is perceived as having received a fair trial, no very different or major program for change is likely to get the public support…

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