A Thousand Days

by Arthur M. Schlesinger

  Later on, in the presidential years, it was easy to forget that his pervading congressional concern was with domestic affairs. He recruited his senatorial staff, for example—Sorensen, Feldman, O’Brien, Dungan, Goodwin—as knowledgeable men on national problems; he never had a foreign policy specialist in his Senate office. His House issues were those of urban and industrial liberalism: the minimum wage, social security, unemployment compensation, housing, labor reform. To this roster he now added as Senator a growing concern with the structural problems of his state and region—the decay of older industries, like shoes and textiles; the stagnation of historic mill towns; the losing competition with the low-wage South.

  The special character of his New England problems led him in the fifties to think less about fiscal and monetary and more about structural remedies—in other words, direct attempts to strengthen New England’s position in the national economy. His membership on the Labor and Education Committee encouraged the structural approach. (Though he sought appointment to the Joint Committee on the Economic Report, which dealt with fiscal and monetary issues, he did not make it until 1960.) In general, he looked for programs which he thought would at once benefit New England and the nation, like redeveloping depressed areas (he served as floor manager of Paul Douglas’s first area redevelopment bill in 1956) or raising the minimum wage (and thereby reducing the South’s competitive advantage) or repealing the Taft-Hartley Act (and opening the way for the unionization of the South). On occasion, he would vote against what Massachusetts considered its local interest, as when he supported the St. Lawrence Seaway. On other occasions, he was ready to help New England at possible expense to the general welfare, as when he favored special protection for textiles or, for a while, opposed farm price supports on the ground that they worsened New England’s terms of trade with the rest of the country.

  To these analytical and political influences on his economic thought, a third must be added, though his advisers were always uncertain when it would come into play and how much weight the President gave it himself. This was the practical business wisdom he had heard so long—and from time to time continued to hear—from his father. The older Kennedy was, of course, far from a conventional businessman. He had been an outsider who made his money because he was more astute, daring and imaginative than the established leaders of business, and he was free in expressing his contempt for business grandees. On the other hand, if Mr. Kennedy had no particular faith in the leaders, he had deep faith in the system and deep mistrust of those who sought to tamper with it. In Henry R. Luce’s New York apartment, on the night John Kennedy accepted the Democratic nomination for President, when Luce ventured the remark that of course the candidate would have to be left of center on domestic affairs, Joe Kennedy, in Luce’s somewhat refined recollection, said, “Blank, blank, how can you imagine that any son of mine would be any blank blank liberal?” This was a considerable miscalculation, but it suggested the direction of his thought. The elder Kennedy had in particular the business belief in the mystique of ‘confidence’ and used to warn against actions or appointments which might impair that sacred commodity. And he also had the orthodox business reverence for the Eleusinian mysteries of the international monetary system and was apprehensive that ‘lack of confidence’ would drain America of its gold. These attitudes had some sort of effect on the President, though when he expressed them, one could never be sure whether he was doing so because he thought there was something to it or because he wanted to know the quick answer.

  To this combination of influences, Kennedy added his own devouring curiosity about the way things worked. If at the start of his administration he was sometimes unsure of technical detail, he readily acquired an excellent command of economic analysis. In addition, he had shrewd economic intuitions, though perhaps more on national than on international problems. “He was the most perceptive of critics,” Walter Heller later said—“he could pick out a sentence or a paragraph and see its weakness. Even though he might not have understood the analytic bases for its weakness, he had the feel for it, and this was uncanny.” His approach to economic and social policy, in short, was that of an experimentalist and activist, restrained by politics and prudence but unfettered by doctrinal fetish or taboo.

  As President, he meant to assure himself a wide range of intelligent advice. Having chosen Douglas Dillon as Secretary of the Treasury, he chose Walter Heller as chairman of the Council of Economic Advisers. “I need you both,” he told Heller, “for a proper balance in economic matters.” Diverging institutional interests created in any case a balance, or at least a tug of war, between the Council, charged by statute with working “to promote maximum employment, production and purchasing power,” and the Treasury, primarily involved in taxation, the management of the debt and the protection of the dollar. But Kennedy was further pleased by the personal contrasts: the economics professor vs. the investment banker; the liberal vs. the moderate; the man who worried about deflation vs. the man who worried about inflation; the Democrat vs. the Republican.

  Dillon, if to the right of Heller, was by no means an economic conservative. He understood the value of academic advice, restored the economists to the Treasury Department, from which they had been driven out by George Humphrey, made Seymour Harris (at Kennedy’s suggestion) his economic adviser and encouraged Harris to set up a panel of outside consultants, whose meetings the Secretary regularly attended. Harris, who had a realistic grasp of the political problems of economic policy, became an effective bridge to the Council. Nevertheless, both Dillon’s personal background and the institutional predilections of the Treasury inclined him to a particular solicitude for the business community. He was also an exceptionally skilled operator within the bureaucracy, ready to pull every stop and cut many corners to advance the Treasury view, always (and justifiably) confident that his charm could heal any feelings hurt in the process.

  Heller, on the other hand, had the knack of composing breezy memoranda on economic problems—some hundreds in three years—and Kennedy read them faithfully. Both Heller and Dillon were urbane and articulate men; and much of the debate between them was conducted in the President’s presence. The directors of the Budget also made significant contributions to the dialogue: David Bell was himself a professional economist, and Kermit Gordon, who succeeded Bell at the end of 1962, had been on Heller’s Council. The Treasury, the Council and the Bureau soon constituted an informal national economic committee known as the “troika,” meeting every two or three months with Kennedy for discussions of the economic outlook. In addition, Kennedy met more often with the Council as a whole than any of his predecessors, finding in Heller and Gordon a congenial blend of doctrine and practicality and in James Tobin, who was a brilliant theorist sometimes impatient of compromise, an economic conscience. The President also consulted with Galbraith, Harris, Paul Samuelson, Carl Kaysen and other economists and talked regularly with William McChesney Martin, Jr., of the Federal Reserve Board. All these sessions contributed to his growing proficiency in economic matters.

  2. THE DEBATE OVER EXPANSION

  The first problem was the recession. It had deepened throughout 1960, and Kennedy had made it a central issue in the campaign. Deriding Nixon’s errant comments about economic “growthmanship,” Kennedy had argued that the resumption of economic progress was “the number one domestic problem which the next President of the United States will have to meet.” Growth, he said, was necessary not only to end the recession but to provide for the staggering increase in the national population—20 per cent, nearly 30 million people, in the single decade of the fifties. This increase, he pointed out, “has not been matched in our public plans and programs”; and it called for, he said, 25,000 new jobs a week for the next decade. The economy had to expand at an annual rate of 5 per cent, he told his audiences, “to keep you working and your children working.”

  He threw out a variety of suggestions during the campaign to-bring the growth rate up to 5 per cent: using the
budget “as an instrument of economic stabilization”; reversing the tight money policy of the Eisenhower years; providing special assistance to areas hit by economic decline and technological change; making “the public investments which provide a solid foundation for the private investment which is the key to our free enterprise economy”; developing the country’s resources; encouraging plant modernization; training manpower for an increasingly automated economy; improving the educational system; assuring equal opportunity for employment.

  He believed, of course, that these things were worth doing for their own sakes. But, with his innate skepticism, he was not at all sure they would produce the growth rate he desired. This worried him, and he quizzed every economist he met in the hope of findings out how to bring the expansion rate up to 5 per cent. In August 1960 he summoned Galbraith, Seymour Harris, Archibald Cox, Paul Samuelson of the Massachusetts Institute of Technology and Richard Lester of Princeton to a seminar on the boat off Hyannis Port in an effort to learn the secret. They did their best, but there was no philosopher’s stone. In October, when Hubert Humphrey introduced him to Walter Heller before a campaign speech in Minneapolis, Kennedy’s first question inevitably was, “Do you really think we can make good on that promise . . . of a five per cent rate of growth?”

  Now as President he had to make good. The recession had continued to deepen in the weeks after the election. By February 1961 unemployment reached the astonishing figure of 8.1 per cent of the labor force. In deciding how to set in motion the processes of recovery and re-employment, Kennedy met again in the world of economists the two currents of thought he had already brushed in his own experience—the structural and the fiscal schools.*

  The first school attributed unemployment below a certain level—say, 4 per cent—to structural transformations in the economy. It argued that, given the pace and progress of automation, the scarcity of educated and skilled labor would constitute a bottleneck in an expanding economy, forcing an expansion stimulated by fiscal and monetary policies alone to stop short of full employment. Thus there might be a shortage of highly skilled labor in Detroit while there was unemployment in Appalachia; nor would aggregative policies solve the problem of the San Diego aircraft worker displaced in the missile age, or of untrained teen-agers or Negroes in a time of increasing technical demand. Professor Charles Killingsworth of Michigan State University and Gunnar Myrdal of Sweden thus identified a ‘manpower drag’ to be solved by the modernization of the labor market through better schools, vocational education, manpower retraining, improved labor exchanges, area redevelopment and the like.

  The fiscal school, on the other hand, attributed stagnation and unemployment to deficiencies in aggregate demand; and it came to place particular emphasis on the theory, popularized by Heller, of the ‘fiscal drag’—the theory, that is, that with rising levels of output high tax rates drained away needed purchasing power and thereby forced expansion to stop short of full employment. To prove the efficacy of budgetary policies, extreme fiscalists liked to cite the experience of the Second World War when heavy government spending lifted the economy to unimagined heights, reduced unemployment by 1944 to 1.2 per cent and brought jobs to precisely the groups deemed on the outer fringes of employability—housewives, youth, Negroes, illiterates.

  Very few economists were either pure structuralists or pure fiscalists. The pure structuralist argument, for example, omitted the consideration that, so long as, say, 6 per cent of the labor force was unemployed, there were few vacancies to be filled by retraining and that the only way to create more jobs was through the enlargement of demand. And the pure fiscal argument omitted the consideration that an immense structural apparatus—price and wage controls, material priorities, manpower direction—was required during the Second World War to prevent the massive budgetary injections from producing a runaway inflation.

  Most government economists in the end therefore sought a combination of fiscal and structural positions—enough of a deficit to produce new jobs, enough redevelopment or retraining to equip men for the jobs. But a critical issue arose as to the best way to create the deficit. Here fiscalists especially sensitive to political urgencies favored tax reduction on the ground that it would slide down congressional throats more easily. Those especially sensitive to structural deficiencies argued, on the other hand, that the deficit should be brought about by an increase in public spending designed to improve education, labor mobility and so on.

  Within the administration the Federal Reserve Board was a stronghold of structuralism, partly in order to head off pressure to unbalance the budget; and the Departments of Commerce and the Treasury, partly for the same reason, and the Departments of Labor and of Health, Education and Welfare, because of the character of the problems with which they dealt, all had structuralist tendencies. Those who wished to unite the structural and fiscal approaches in a single program argued in the spirit of The Affluent Society for increased investment in the public sector. The strongly fiscalist Council of Economic Advisers, on the other hand, after some interest in public works in 1961, espoused the tax reduction approach for the next two years.

  3. POLICY: 1961

  Thus the spectrum of possibilities: but in the President’s mind what was theoretically desirable had to be tempered by what was politically feasible. His campaign had emphasized discipline and sacrifice; his victory had been slim; his Congress was conservative; and, at least in the mind of the business community, his party had a reputation for fiscal irresponsibility. As Kennedy told Heller in December 1960, “I understand the case for a tax cut, but it doesn’t fit very well with my call for sacrifice.” Nor did it fit very well with the need, increased by the shaky balance-of-payments situation, to appear, though a Democrat, a defender of the dollar. The science, so called, of economics had to return to its honorable antecedents and become the art of political economy.

  Paul Samuelson, heading an interregnal task force, adjusted his recommendations to fit the presidential and congressional mood. While a believer in deficits and inclined toward social spending, he refrained from recommending investment in the public sector, apart from defense, and mentioned a temporary tax cut only as an emergency weapon. As for the use of monetary policy—the traditional Democratic remedy of lower interest rates—this, he thought, was seriously limited by the international payments problem. All this left structural measures, along with defense spending, as Samuelson’s main recommendation and the administration’s main resort.

  Kennedy’s special message to Congress on February 2 therefore concentrated on the extension of unemployment insurance, area redevelopment, the increase of the minimum wage, housing and community development, acceleration of procurement and construction and the like. More novel though hardly more radical was a proposal for special tax incentives to investment. The message even catered somewhat to congressional fears about the budget, promising balance “over the years of the economic cycle.” Later messages through the spring called for other institutional measures. And Congress proved responsive to the structural approach. Within six months it passed an area redevelopment bill, an omnibus housing bill, a farm bill, a rise in the minimum wage, the liberalization of social security, temporary unemployment benefits, benefits for dependent children of unemployed parents and a program to combat water pollution—a record of action on the domestic front unmatched in any single sitting since 1935.

  Still, this was a program of welfare, perhaps a program to end the recession, but not a program of economic expansion. Kennedy himself restlessly continued to seek the answer to the 5 per cent growth rate. A few weeks after his special economic message, when an Americans for Democratic Action delegation called on him, he singled out Robert R. Nathan, a Washington economist from New Deal days, and asked him the usual question. Nathan replied that the President could get his 5 per cent growth rate, but the price would be a deficit of $5 billion a year for the next ten years. The President said skeptically that would be great if only Nathan would organize the pol
itical support for such a policy.

  As Kennedy told Walter Lippmann and me at luncheon a few days later, most economists were evasive when he tried to pin them down as to what exactly government could do to stimulate growth, but Nathan had been frank; and an addition of $50 billion to the national debt would of course be very little compared to the extra growth and revenue which could be thus induced. Only the systematic creation of annual deficits, he said, was the one thing which the political situation, short of a depression, precluded his doing. “I don’t want to be tagged as a big spender early in this administration,” he said on another occasion. “If I do, I won’t get my programs through later on.”

  Thus when Heller argued within the administration for the stand-by public works program which Senator Joseph S. Clark was proposing on the Hill, he encountered opposition both in the White House, where the President and Ted Sorensen felt that the new plans for military and space spending put further domestic appropriations out of the question, and in the Treasury. Douglas Dillon had made it clear from the start that in case of depression he would recommend deficits; and he had cheered the New Frontier economists in the White House meeting on fiscal policy by saying, “What the country needs for the coming fiscal year is the largest deficit that will not frighten foreigners, say $5 billion.” But a deficit of this magnitude was coming anyway; and Dillon did not wish to increase it, partly because he hoped to hold out the dream of a balanced budget to the business community, and partly because he wanted to use limited tax reduction at some later point to trade off in Congress for a program of tax reform.