New Dimensions of Political Economy
Walter Heller’s years in Washington as the chairman of the Council of Economic Advisers proved to be enormously successful. He was raised from a figure of academic respectability to one of the three or four best-known economists in the nation. He presided over a period of almost unbroken economic expansion—an expansion, moreover, which had the grace to continue for two years after his departure from the Council. He is associated with—and in this volume of Godkin Lectures explicitly claims much credit for—the adoption of the “new economics” as the new orthodoxy of public policy in America.
Nor may even an economist so critical of Heller’s works as I am wish to begrudge him praise. He recruited a staff of outstanding economists, and if with time the glamor of the Council has inevitably diminished, the Council continues to attract very able professional workers. Heller himself worked with a wholly unrealistic intensity and deserved two salaries even without a premium for overtime. His dedication to the “new economics” was matched by the skill and tenacity with which he advanced its cause. His conduct in political office greatly pleased his (overwhelmingly Democratic) professional brethren.
Heller and his fellow new economists believe that they know how to keep a nation fully employed and progressive, and that the fulfillment of this goal is the number one priority of the economist. Not only because the output of the economy has unlimited private and public uses but also because high prosperity contributes generously to the amelioration of other social and economic problems—poverty, deficient medical care, and poor schooling, for example—the goal of full employment justifies (these are my words, and the Council’s actions) almost any risk in other areas. The panoply of ugly and inefficient measures to conserve our gold supply, and the creeping advance into direct price controls by means of guidelines, are unpleasant but bargain prices to pay for 2 per cent less unemployment or $40 billion more of GNP. And look at the record!
HELLER’S CONFIDENCE in the omnipotence of fiscal policy—given a little more education of President and Congress so that directions of policy may be reversed quickly—is complete: He does not even consider the possibility that this position needs scientific defense. Let the level of public expenditures be governed by social needs; then simply reduce taxes if the economy is not at its maximum level, and increase taxes if the economy becomes “over-heated.” It is almost as simple as that. Perhaps he is right, although this gives enormous emphasis to the last five years and one-and-a-half episodes of tax change. But quite possibly he is wrong, and the splendid economic expansion of the early 1960s was due to a monetary policy which had the effect of steadily increasing the supply of money until in the past eighteen months the policy became irresponsibly volatile. So, for example, Milton Friedman argues, and with a wealth of historical evidence which has no counterpart in either Heller’s book or the general literature of economics. (The scientific debate over the comparative historical validities of the income-expenditure and traditional monetary theories fills the September 1965 American Economic Review.) This issue between the new economics and monetary economics may be submitted to a conspicuous test in the next twelve months: The present tight monetary policy, if continued, may produce a business downturn for which current fiscal policy has no explanation.
Let us hope, and not for Heller’s sake, that the new economics can maintain our prosperous ways. If fiscal policy proves to have been a minor force, the new economics will have been an awful failure. For this is the only thing the new economics has achieved: The use of the plural in the title of Heller’s book is belied by his one-dimensional world in which only fiscal policy is worth talking about.
And the costs to America of the single-minded reliance upon fiscal policy have been onerous. There are the Schachtian techniques to balance our foreign accounts: the equalization tax foreign security issues; the tied foreign aid grants; the gentlemen’s agreements on imports from the Orient; the quotas on foreign bank lending and upon foreign investment by American corporations—not a single measure compatible with the free movement of goods or the efficient use of resources. But presumably this autarchy is excusable if we are achieving all of that additional employment and income. There is the spreading—even though collapsing—guideline policy on wages and prices. Heller’s Council triggered the Kennedy intervention in steel prices in 1962 through the regrettable 1961 letters to the steel companies, and he shares with Ackley the responsibility for the spread of this technique of direct but irregular intervention. The guideposts are said to be “a good instrument of education” (p. 46), but there is nothing new or educational about the degree to which the Council has forgotten, in cases such as copper and steel, what prices are supposed to do: The Council’s 1965 Report to the President on Steel Prices does not discuss the role of steel prices in either controlling supply or rationing demand. The active role of the Council in seeking price roll-backs through argument and vilification has been an unpleasant legacy of the guidelines, which has seriously compromised the professional economic character of the Council. All may be forgiven if fiscal policy avoids inflation and depression, although there is much to forgive.
FEW WILL DOUBT that it is easier to persuade a politician (or any other ordinary mortal) to reduce taxes and to increase spending than it is to move in the opposite directions, and Heller diffidently suggests that a tax increase in early 1966 would have been a wise anti-inflation measure (p. 97). But the economics of Heller is too new: In a world in which Kennedy and Johnson are the first modern economists in the White House (p. 36) the previous centuries of unenlightened fiscal policy are not very instructive. Therefore one copes with the problem of inflation by preaching a little harder, not by seeking to design a system which takes account of the nature of the democratic political process, with its expensively bought lesson of legislative control over taxation. His unlimited faith in the efficacy of education would be more plausible if Heller did not plainly hint that it was impossible to educate our times to such desirable steps as the adoption of flexible foreign exchange rates (pp. 25, 48).
Heller’s talents do not extend to book-making: This little volume meets only the tolerant standards requested of an attractive man delivering a popular message to a sympathetic audience. Heller’s undivided loyalty to fiscal policy leaves all other areas of recent economic policy virtually unmentioned. The problems which he finds worthy of no more than brief mention include monetary and international balance of payments problems and the grotesquely inefficient anti-poverty program, and he wholly omits other areas such as the legislative controls over competition among financial institutions and the Council’s abortive attempt to improve national transportation policy. Even within his self-assigned limits, Heller achieves neither professional economic precision nor illuminating insights into the political life of economic theories. The unfailing courtesy of his account—hardly a sentence would need be altered were he still holding office in the Administration—adds to the book’s blandness. Heller adds a chapter on his pet scheme of grants from the federal government to the states—a scheme which I think has great merit but which I pass over as wholly unrelated to either the new economics or recent public policy.
Stretching Things January 26, 1967