by Max Barry

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by The United States of Paramountica. . 44 reads.

United States | Keynesian Giant | JAN '66

Paramountica — COUNTRYWIDE

The Washingtonian Keynespeak.

When JOHN MAYNARD KEYNES wrote those words in 1935's the General Theory of Employment, Interest, and Money — he was concluding his most influential book and felt he had established a theory that would move and change the affairs of men. Almost two decades after his passing, his beliefs continue to have a significant impact on free markets around the globe, particularly in the richest and most expansionist country, the United States. Keynesian concepts have been employed by the officials in Washington who design the country's economic policies, not only to prevent the destructive cycles of the prewar era but also to achieve amazingly stable prices and phenomenal economic growth. They expertly implemented Keynes's theories in 1965, along with several of their own inventions, to help the country experience its fifth and best year of the largest, longest-lasting, and most widely dispersed prosperity in recorded history — The United States grew faster than any other large country, expanding by 5% in real terms. The predictions for 1965, even the most sanguine ones, proved to be too low. The gross national product increased by $14 billion beyond the President's economists' projections, from $628 billion to $672 billion. The other new records were for capital spending (16%), auto manufacturing (22%), steel output (6%), personal income (7%), and corporate profits (21%). Viewing the United States as having somehow unlocked the key to continuous, stable, noninflationary growth, officials from other nations on both sides of the Iron Curtain made overt attempts to imitate its achievements. In essence, the economic managers in Washington reached these heights by adhering to the basic thesis of Keynes: the contemporary capitalist system can be made to operate at peak efficiency through government involvement and influence, rather than automatically functioning at that level. Keynes was the first to provide a compelling argument for the government's right and obligation to employ its authority to raise output, wages, and employment. Furthermore, he maintained that the government may accomplish this without impairing liberty or suppressing rivalry. He said that it may accomplish measured prosperity through the manipulation of three key instruments: budgetary, credit, and tax policy. Their application would increase private investment, expenditure, and output.

When KEYNES initially started promoting his beliefs, a lot of people thought they were strange or even subversive, and KEYNES was just a left-wing mischievous. Currently, KEYNES and his theories are so generally accepted that they serve as both the benchmark for economic management in Washington and the new orthodoxy in academic circles, despite the fact that they still cause anxiety in some quarters. They have caused the government to become more involved in the economy of the country than it has ever been during a period of overall calm.

"We can't prevent every little wiggle in the economic cycle, but we can now prevent a major slide.”

CHARLES L. SCHULTZE, White House /Director of Budget

Naturally, a slip is not what the U.S. In 1965, the government's economic managers were concerned because they were following a very expansionist course of action. They implemented a second phase of a two-phase income tax cut, freeing up $11.5 billion for consumer spending and $3 billion for corporate investment. They also implemented a long-overdue cut in excise taxes, which will save $1.5 billion this year and an additional $1.5 billion in the year that starts on January 1. They increased total federal spending to a record high of $121 billion and ran a deficit of more than $5 billion, leveraging the Keynesian theory that an economy is likely to flourish best when the government pumps in more money than it takes out. At the conclusion of the year, Chairman William McChesney Martin of the Federal Reserve Board, who is proudly independent, led through an increase in interest rates, adhering to the traditional anti-inflationary prescription. However, in the meantime, the Federal Reserve Board kept money cheaper and easier than in any other big nation.

Keynesian public programs are generally successful because the private sector of the economy drives their implementation. Businesses were encouraged to grow by the government, but individual entrepreneurs choose whether, when, and where to do so. Millions of regular Americans made the crucial decisions over how and how much to spend, despite Washington providing a stimulus for consumers to spend. Despite all of its benefits from Lord Keynes' theories, the American economy remains the most private and free-enterprising in the world. KEYNES would undoubtedly prefer it to remain that way if he were still living. The men who practice what Carlyle called "the dismal science" have gained new prominence and luster as a result of the recent successes of Keynes's theories — Economists have left their ivory towers and are now firmly positioned at the elbow of nearly every significant figure in government and business, where they are increasingly expected to predict, plan, and make decisions. In Washington, activist economists like GARDNER ACKLEY, ARTHUR OKUN, and OTTO ECKSTEIN — all members of the President's Council of Economic Advisers—as well as the former chairman Walter Heller—as well as Paul Samuelson of M.I.T., Yale's JAMES TOBIN, and SEYMOUR HARRIS of the University of California, San Diego (UCSD) — have brought Keynes' theories into the White House — Initially, Keynesianism was embraced by U.S. economists, and later on, the public and business community as well. Not only is Keynesianism effective, but Lyndon Johnson's ability to make it appealing has won over businessmen who had previously opposed government intervention in the economy. They have accepted the notion that government intervention is necessary to prevent recessions and inflation, and they no longer believe that deficit spending is immoral. Perhaps most importantly, they no longer believe that the government will ever fully pay off its debt, any more than General Motors or IBM find it prudent to settle their long-term debts; rather than expecting payment, creditors would prefer to continue collecting interest.

 ACKLEY and the other council members will have to provide President JOHNSON with a firm economic forecast for the coming year, as well as advice on what policies to pursue. Their choices will be especially important because the U.S. economy is now entering a new phase. Production is pushing the country's capacity to the breaking point, and the war in Vietnam is driving up federal spending and demand. The challenge facing economists is to find a delicate balance between stimulating growth and averting crippling inflation. In doing so, they will be heavily influenced by the legacy of KEYNES. As a young science, only two centuries old, economics was addressed in its second half by KEYNES himself, who was more successful than his predecessors in seeing the field through to the end. Great theorists before him had attempted to take a broad view of economic forces, but they lacked the statistical tools of the 20th century to do the job, and they tended to concentrate on certain specializations: ADAM SMITH on the marketplace, MALTHUS on population, RICARDO on rent and land, MARX on labor and wages. These specializations are now called "microeconomics"; KEYNES was the precursor of what is now known as “macroeconomics"— from the Greek makros, for large or extended — and he concluded that the best way to look at the economy was to measure all the different forces tugging at it, including production and price.

Though the full bloom of Keynes's gospel has only lately blossomed, a school of fervent apostles has been preaching it in the United States for more than a generation; the first great Keynesian teacher, Alvin Hansen of Harvard, taught it to hundreds of economists, many of whom hold prominent positions today; Hansen's brightest pupil was Paul Samuelson, who went on to write a Keynesian-angled college textbook on economics that has sold two million copies and influenced the minds of count less educators and learners. Although KEYNES was first disliked by FRANKLIN ROOSEVELT— “I didn't understand one word that man was saying," the president sniffed after KEYNES lectured at the White House in 1934 — some of ROOSEVELT’s economists eventually started using Keynesian language and reasoning to justify massive deficits; during World War II, Washington planners formulated their policies of deficit spending using Keynesian ideas — Surprisingly, it was DWIGHT EISENHOWER's not-so-Keynesian economists who most effectively demonstrated the efficacy of Keynes's antirecession prescriptions; to fight the slumps of 1953–54 and 1957–58, they turned to prodigious spending and huge deficits. Congress adopted the Keynesian course in 1946 when it passed the Employment Act, establishing Government responsibility to achieve ‘maximum employment, production and purchasing power.’ The act also created the Council of Economic Advisers, which for the first time brought professional economic thinking into close and constant contact with the President . . . Nevertheless, Keynesianism experienced its greatest breakthrough under JOHN F. KENNEDY, who, as ARTHUR SCHLESINGER "was unquestionably the first Keynesian President." KENNEDY's economists, under the direction of Chief Economic Adviser WALTER HELLER, oversaw the emergence of the New Economics as a workable policy and set out to add a new dimension to Keynesianism, using his theories as a basis for both correcting the 1960 recession, which arrived prematurely only two years after the 1957–1958 recession, and stimulating an expanding economy to even faster growth. Kennedy was intrigued by the "growth gap" theory, initially presented to him by Yale Economist ARTHUR OKUN — now a member of the Council of Economic Advisers — who contended that even though the U.S. in particular, he advocated for tax reductions, a move that KEYNES had supported as early as 1933. The Kennedy Administration liberalized depreciation allowances and offered businessmen a 7% tax kickback on purchases of new equipment to stimulate capital investment. KENNEDY also ran on a platform of reducing the overall tax rate to encourage more investment and personal consumption, calling that idea "straight Keynes and Heller."

Revolving around John Mayard Keynes.

After being persuaded by the Keynesian economists surrounding him, Lyndon JOHNSON rushed the tax cut through Congress, despite his initial concerns about the wisdom of large deficits and the need for it. The quick success of the income-tax cuts prompted Congress to try a variant this year, which is the reduction of excise taxes on items like cars, jewelry, and furs — — In 1965, JOHNSON vigorously wielded the wage-price guide-lines" to hold wages and prices down. He also threatened to dump the government's commodity stockpiles from producers of aluminum, copper, and wheat, forcing them to back down from price hikes. Today, JOHNSON is not only practicing Keynesian economics, but is pursuing policies of pressure and persuasion that far exceed anything KEYNES could have imagined. Finally, JOHNSON battled the country's persistent balance-of-payments deficit with the so-called "voluntary" controls on spending and lending abroad. Since these policies primarily restrict capital movements, wages, and prices in certain sectors of the economy while leaving others unrestricted, some Keynesians argue that they contravene Keynes's theory. Additionally, albeit not entirely with conviction—business is, after all, booming—and the government is, on top of that, a huge customer with unrestricted retaliatory powers—businessmen grumble about what they refer to as "government by guidelines" or "the managed economy." Many other countries are moving away from strict central controls over their economy and toward the more laissez-faire American system, while the United States has been embracing the idea of increasing government participation within the confines of private sector. The ruling Laubor Party in Great Britain GB has become almost entirely capitalistic and abandoned any idea of nationalizing industry this year. The Socialists in New Provenance have also done this for a long time in an attempt, to unseat the laissez-faire-thinking Christian Democrats.

In ’65, traditionally Socialist Norden elected a conservative government for the first time in thirty years — At this moment, the United States is as close as it has ever been in peacetime to achieving Keynes's beloved aim of full employment of its resources. In ’65, the unemployment rate dropped from 4.8% to 4.2%, an eight-year low. Industry sectors including shipbuilding, construction, and aerospace are starting to feel the effects of a labor shortage, especially among trained workers. At a ten-year high of 91% of capacity, manufacturers are working, but automobiles, aluminum, and several other fundamental industries are just scraping by at 100%. Contrary to common opinion, industrialists dislike running so high because, as many businesses have recently been forced to do, it requires them to start up some of their older, less efficient machines. The effects of this quick expansion are starting to emerge in the economy. In ’65, labor expenditures increased more quickly than productivity for the first time in five years: 4.2% vs. 2.5%. The year before saw a 1.8% increase in consumer prices and a 1.3% increase in wholesale prices—the first increase of any type since 1959. The country's impressive track record of price stability is already in jeopardy because of this. At the current productivity level, the economy cannot maintain its current growth rate without significant price pressure — The Vietnam War will be the primary element influencing 1966's economic policy. If there isn't a sudden ceasefire, defense spending will increase by at least $7 billion, placing a heavy burden on the country's productive potential and raising the threat of inflation — Vietnam and the inflationary danger present Washington's economic planners with an immediate dilemma: should they pursue greater stability or greater growth? In order to lower unemployment to 3%, Labor Secretary WILLARD WIRTZ contends that the government should keep promoting economic growth even at the cost of modest inflation. The advisers to Treasury Secretary HENRY FOWLERcontend just as forcefully that in order to control inflation and restore balance to the country's international payments, the government should tighten up on credit and spending policies — GARDNER ACKLEY, the president's senior economic strategist, is a quiet, capable, and Keynesian guy whose advice will mean most to The PRESIDENT and who will be making the critical decisions in the coming weeks.

The United States can afford to increase its overall federal spending by $8.5 billion without significantly raising inflationary pressure, as prosperity will provide the government an additional $8.5 billion in tax receipts in the upcoming fiscal year. The economists can wield their other Keynesian weapons to combat inflation if expenditure balloons much higher. Despite emphasizing stimulation over restraint, KEYNES also emphasized that his theories could be reversed to restore equilibrium to an overextended economy.

"It should be made entirely clear that KEYNES is a two-way street. In many ways we're entering a more fascinating era than the one I faced. Essentially the job is to maintain stability without resorting to obnoxious controls as we did in World War II and Korea.”

WALTER HELLER, White House Economist

The PRESIDENT's experts would suggest one or more restrictive measures if demand heats up too much, most likely in this order: domestic spending reductions, tighter monetary policy, higher income tax withholding rates (from 14% to 20%), and finally, temporary tax hikes. General and deflationary controls on pricing, salaries, profits, materials, mortgages, and installment credit are the steps that businessmen fear the most, and they would only be implemented as a last choice in extreme cases. For the primary reason that defense spending is unlikely to account for more than 8.5% of the GNP as opposed to 13% during the Korean War, The PRESIDENT will almost certainly not turn to controls . . . Due to this year's wise policy pursuits by the government and business, the problem will be easier to handle next year. The Labor Department estimates that the rapacious capital spending of businessmen — they have spent $190 billion on new machinery and factories over the last five years — will pay off in 1966 with a 3% increase in productivity. This, together with the fact that the Medicare plan will increase social security taxes by $5.5 billion year as of January 1, will help to slow down inflation. According to government experts, wholesale prices will rise by 3% and consumer prices by roughly 2.5%. These increases are not expected to be severe enough to call for drastic corrective action — Government and non-government economists alike are far more optimistic now than they were a year ago. Not only is the economy operating at about peak velocity, but there are also few weak points and no significant excesses. Orders are rising faster than production, wages are rising faster than prices, and corporate profits are now rising faster than the stock market — despite the Dow-Jones average having jumped more than 400 points since mid-62 and closing at an all-time high of 966 last week — In 1966, businesspeople intend to raise capital spending by 15%; steel and automakers anticipate exceeding this year's production records. ACKLEY and his associates predict that the GDP will increase by a further 5% in real terms in 1966, reaching $715 billion, maybe even more. The fact that the U.S. economy is improving is more significant than smashing records. Under Lyndon Johnson's profit-driven administration, government planners have learned how critical it is to support private enterprise investment in order to generate demand, jobs, and money. The PRESIDENT is aware that the United States' ascent to the moon, the Vietnam War, and his Great Society initiatives all depend on a robust economy — In order to achieve that goal, he speaks with hundreds of businesspeople on a daily basis and welcomes many of them to the Oval Room to hear their thoughts, more than any other President since Herbert Hoover. The United States has a government that is simultaneously committed to growth, pro-business, and Keynesian economic principles under the JOHNSON Administration — — If there are any economic issues facing the country, they are related to high employment, high growth, and high hopes. Entering what seems to be the sixth year in a row of economic growth, the United States' economic experts cheerfully acknowledge that they have nearly reached the edge of their expertise.

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