What would Galbraith say?, by Richard Parker, Commentary, Boston Globe: 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, August 1962
Treasury Secretary Timothy Geithner’s debut … of his … rescue plan sent Wall Street into a tailspin… 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)… John F. 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… But they disagreed about what to do. …
White House chief economist Walter Heller, a tax specialist … favored … deep tax cuts. Ken Galbraith … wanted spending – deficit spending – that focused on building schools, roads, and parks, and creating public jobs…
Galbraith had a … worry:… Costs for … 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 … 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 … stimulus was clearly needed. Getting tax cuts passed first by a conservative Congress would be easier.
Kennedy[‘s]… tax cuts … went into effect in 1964 under Lyndon Johnson. Initially, 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.
Originally published at the Economist’s View and reproduced here with the author’s permission.