Category: Macroeconomics

Minnesota. Address on Public Policy and the American Economy. Heller, 1986

Post author By Irwin Collier
Post date 2024-09-23

The following pre- or post-dinner remarks by Walter W. Heller were spoken on the first evening of a two day symposium celebrating the 40th anniversary of the Joint Economic Committee of the U.S. Congress (January 16-17, 1986). Eight regular panels and two luncheons-with-presentations featured distinguished academic, government and n.e.c. economists. Heller’s remarks were published as an appendix to the symposium volume. The chairperson of the JEC at the time was Rep. David Obey (Democrat-Wisconsin). It appears that the evening event was unofficial, probably sponsored by some other Washington policy-related institution.

Fun fact: At this symposium Herbert Stein uttered his famous quip “if something cannot go on forever it will stop.” An earlier version did appear in Stein’s Wall Street Journal article “My Foreign Debt” (May 10, 1985).

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PUBLIC POLICY
AND THE AMERICAN ECONOMY

Walter W. Heller, University of Minnesota

Remarks at the 40th Anniversary Symposium of the Congressional Joint Economic Committee,
(Washington, D.C. January 16, 1986)

Mr. Chairman, Honored Guests, and Most Honored Guests Senator Jack Javits (in absentia) and Congressman Dick Bolling:

It is a humbling, not to say awesome, responsibility to speak to this assemblage of the movers and shakers of the nation’s economic policy. As I thought about that term, it occurred to me that there really are three classes of economic policy makers—those who shake but don’t move; those who move but don’t shake; and then there are those in this audience tonight, those who both move and shake.

I’ve been asked to do the impossible tonight: examine 40 years of progress—and occasional retrogress—under the Employment Act of 1946 (and its Humphrey-Hawkins successor); the role of the Joint Economic Committee in this saga; the present state of our quest for greater growth, equity, and opportunity; and what direction that quest should take in the future. I was tempted to ask David Obey: “Is that all?”

At the obvious risk of repeating myself, I’ll say that to try to cover all that in my alloted 45 minutes will require me to talk as fast as my late Minnesota compatriot, former head of the Joint Economic Committee, of whom it was said: “Hubert speaks at a rate of 100 words a minute, with gusts up to 200.” Finally, I’lI try to be mindful of Muriel Humphrey’s gentle chiding, when she said, “You know, Hubert, for your speech to be immortal, it really doesn’t have to be eternal.”

THE POSTWAR ECONOMIC LANDSCAPE

In a period when government activism, especially in economic affairs, is under attack—indeed, when President Reagan, charming, disarming, and sometimes alarming tells the country that government’s impact on the economy is somewhere between baneful and baleful and that the greatest contribution he can make is to get governments clammy hands out of our pockets and government monkeys off our backs—against that background, the Joint Economic Committee’s 40th Anniversary is an especially appropriate time to take stock of the role government has played and should play in the economy. I will undertake to do that tonight in my usual fair, objective, detached, realistic, scientific, evenhanded, and nonpartisan way.

Let me begin with a broad-brush comparison of U.S. economic performance in the pre- and post-activist eras. Now that’s not just pre- and post-World War II, because inclusion of the Great depression of the 1930’s would make it a statistical cake-walk for activism. True, the fear of falling into another Great Depression was a prime mover in the passage of the 1946 Act. So one might reasonably claim that it should be included.

David Obey has made my task easier tonight by his superb overview of the post-war experience this morning. I am grateful to him for his lucid litany of the host of constructive measures that made up the web of policy activism to which so much of our postwar prosperity can be ascribed. And I won’t repeat his broad-brush review of the superior postwar performance—at least till 1973—under the new regimen of activist public economics. But I do feel duty-bound, as an economist, to put a statistical point or two on that performance.

First, with respect to comparative economic stability: Excluding the Great Depression of the 1930’s—for including it would make all comparisons a statistical cake-walk for economic activism—but excluding it, we find that the prewar economy spent roughly a year in recession for every year of expansion. Postwar, it has been one year in recession for every four years of expansion. Pre-1930 recessions were not only much longer but much deeper than postwar recessions, with a standard deviation relative to trend growth that was twice as great prewar as postwar. The shape of the typical prewar cycle was a deep symmetrical V, but postwar it was more of a shallow checkmark. Now, for those of you who are not yet sated with statistics on postwar stability, I refer you to a forthcoming JEC publication and to Charley Schultze’s Okun Lectures at Yale, also to be published soon.

Second, as to comparative economic growth: Here, updating some of Arthur Okun’s numbers, I find that the era of economic activism wins again. Compared with an average real growth rate of 2.8 percent from 1909 to 1929 (and 2.3 percent from 1929 to 1948), the postwar pace was a hefty 3.8 percent before slowing down after 1973 and lagging even more in the Eighties, as I will examine later.

Third, as to the comparative use of our GNP potential: The postwar activist economy operated far closer to its potential than the prewar economy. Measuring the “net gap” under the trend lines connecting prosperity years, one finds that the gap averaged 5 percent of GNP, prewar, even leaving out the Great Depression, but less than 1 percent postwar (from 1948 to 1979).

Now, where has that progress come from? You would not expect me to give the same answer that Richard Nixon gave an audience in Jackson, Mississippi during the 1960 campaign when he noted that the Mayor told him that they had had a doubling of population during his 12 years as mayor. Nixon went on to say: “Where has that progress come from? That progress has not come primarily from government, but it has come from activities of hundreds of thousands of individual Mississippians, given an opportunity to develop their own lives.”

Contrary to Mr. Nixon’s answer, I would agree with Okun that the improved performance record, especially the greater economic stability, must be credited to public policy. As he put it, “It was made in Washington.” The automatic stabilizing effect of a larger public sector—both on the tax and on the spending side—undoubtedly played an important role. Coupled with it was an aggressive fiscal-monetary policy that, while not always on time and on target, assured private decision makers that recessions would be relatively short and shallow and depressions were a thing of the past.

Paralleling the improved economic performance in the postwar era of economic activism was a dramatic decline in the incidence of poverty. From an estimated 33 percent of the population in 1947, poverty fell by one-third, to 22 percent, by 1960—a decline that must be attributed primarily to economic growth plus some increases in public assistance and transfer programs.

Then came the uninterrupted growth of the 1960’s coupled with the War on Poverty and other Great Society programs, which cut the remaining poverty in half.

Contrary to Mr. Reagan’s assertion that “in the early Sixties we had fewer people living below the poverty line than we had in the later Sixties after the Great War on Poverty got under way,” the President’s 1985 Economic Report (page 264) shows us that the percent of the population in poverty dropped steadily from 22 percent in 1960 to 19 percent in 1964 to 12 percent in 1969, and then bottomed out at 11 per-cent in 1973. From then until 1980, growing transfer payments just managed to offset sluggish economic performance, and poverty stayed in the 11 percent to 12 percent range until it shot upward in the 1980’s. More of that later.

Perhaps the most gratifying testimonial to the success of activist socio-economic policy is the striking advance in the economic status of the elderly, a cause with which Senator Javits has been so closely identified. Since the media have recently discovered and hence covered this phenomenon at length, I need only to cite one or two salient facts: 25 years ago, 35 percent of older Americans (65 and above) were in poverty. But 1984, that number had dropped to 12.4 percent, 2 points lower than the poverty rate for Americans overall.

DOWN MEMORY LANE

Now let’s turn some of the pages in our postwar economic history, partly to make a few points about good and bad policy and about the reshaping of the 1946 Magna Carta as the decades passed, and partly just to reminisce a bit, as seems appropriate on an anniversary like this. In doing so, one should not forget Jackie Gleason’s dictum that “the past remembers better than it lived” and the companion warning that “reason is to nostalgia as wind is to fog.”

The early postwar years were really vintage years in our fiscal policy annals. We ran appropriate surpluses (that alone shows I’m dealing in ancient history) in 1947 and 1948. Then, in mid-1950, the Joint Economic Committee, in one of its finest hours, recognized the inflationary potential of the Korean War and led the charge to reverse gears, i.e. to take a tax cut that was half way through the Congressional mill and help convert it to a tax increase. As has been true so often, it was providing the intellectual leadership in Congress on economic policy. But I must add that not everyone followed.

Joe Pechman will vividly recall those early-1951 days when we sat in Executive Session in the Ways and Means Committee room (side-by-side with Colin Stam and Charles Stewart) carrying the ball for the Treasury proposal for a $10 billion tax increase to fight off the inflationary consequences of the Korean war. As we made the case for that huge tax hike, the 88-year old chairman of the Ways and Means Committee, “Muley” Doughton looked at us sternly and said, “If I thought that even one dollar of that $10 billion was for those new-fangled ideas about fighting inflation instead of sending guns and tanks and planes to our boys in Korea, I’d vote against it.” As I recall, my response would have done credit to Cap Weinberger. (In passing, I might note that I’ve discovered the real reason why Mr. Reagan initially signed the Gramm-Rudman Bill without any ceremony. He feared that Cap might take his presidential pen and commit hara-kiri with it on the spot.) We got $7 out of $10 billion out of Congress. When Ike dismantled the Truman price-wage controls, demand had been so successfully curbed that wages and prices hardly budged. In fact, 1952-56 were years of calm on the inflation front.

But the rest of the 1950’s, with three recessions in 7 years, were hardly good years of economic policy. Economic signals were missed, the Fed slammed the brakes too soon, and relaxed them too late. It was not activist policy at its best.

Let’s jump to the Golden Sixties, truly a watershed, a revitalizing of the Employment Act of 1946. President Kennedy asked us to return to the letter and spirit of that Act and ended equivocation about the intent of the Act by translating its rather mushy mandate into a concrete call for meeting the goals of full employment, price stability, faster growth, and external balance—all within the constraints of preserving economic freedom of choice and promoting greater equality of opportunity. He went on to foster a rather weak-kneed anti-recession program in 1961 and a powerful growth-promoting tax cut program in 1962-64. In that process, I counted six firsts for presidential economics:

He was the first president to commit himself to a numerical full-employment target, namely 4% unemployment, and growth, namely, 4.5%.

He was the first to adopt an incomes policy in the form of wage-price guideposts developed by his Council of Economic Advisers. The guideposts, flanked by sensible supply-side tax measures to stimulate business investment, by training and retraining programs, and the like, helped maintain a remarkable record of price stability in 1961-65, namely, only 1.2 percent inflation per year.

He was the first president to shift the economic policy focus from moderating the swings of the business cycle to achieving the rising full employment potential of the economy. In that process, he moved from the goal of a balanced budget over the business cycle to a balanced budget at full employment. He was the first president to say, as he did in January 1963, that budget deficits could be a positive force to help move a slack or recession-ridden economy toward full employment.

As a capstone, he was the first president to say that a tax cut was needed, not to cope with recession (there was none) but to make full use of the economy’s full employment potential.

All of that may have been old stuff to economists, but it was bold new stuff for a President. I recall that the big tax cut proposal was greeted with grave scepticism by the community at large, but the JEC helped carry the mail and the message. Most vividly, I remember the JEC Hearing early in 1963, which was distinguished, first, by Gardner Ackley’s pioneering exposition, with charts and all, of the tax multiplier concept to the Committee, and second, by gaffe on the Puritan Ethic. When Martha Griffiths asked me why it was that the American people seemed so reluctant to accept this bonanza of a Kennedy tax cut, I suggested that it might be the Puritan Ethic. The next day, Johnny Byrnes, the ranking member of the Ways and Means Committee, and a worthy predecessor to Bob Dole as the ranking wit in Congress—wound up his attack on me for denigrating the Puritan Ethic with this zinger, “I’d rather be a Puritan than a Heller!”

Those were the halcyon days of economic policy. Aided and abetted by the Fed the 1964 tax cut worked like a charm. In mid-1965, just before the July escalation in Viet Nam, we saw the happy combination of an inflation rate of only 1.5 percent; unemployment coming down steadily, to 4.4 percent; defense expenditures continuing their four-year decline from 9 percent of GNP in 1960 to 7 percent of GNP in 1965; and the cash budget running $3 billion in the black.

Then came the dark years of Viet Nam in economics as well as in foreign policy. Unlike 1950-51, we did not reverse gears in spite of the timely warnings of the Joint Economic Committee and most of the economists, both inside and outside the government, who were advising LBJ.

A case in point was my trip from Minnesota to the Ranch in late ’65 to plead for a tax increase. In the midst of an interlude of deer hunting on Lynda Bird’s “back 2000” from the LBJ-driven white Cadillac convertible—with George Hamilton as shooter and me as spotter—LBJ turned to me—perhaps I should say turned on me—and asked: “What do you want me to do, call Congress back into special session and rescind the repeal of those temporary excise taxes?” A wise and wily man. (As some of you will recall, those temporary excise taxes had been on the books since 1933 and were universally regarded as a good riddance.) He did not propose a tax increase until early 1967, and no tax action was completed until 1968, long after the inflation horse was out of the barn.

But that was an excess-demand horse, the kind we understood, the kind that even I warned against in my rather exuberant Godkin Lectures of 1966, those lectures in which I had said “Nothing succeeds like success,” but the London Economist unkindly corrected that to “nothing exceeds like success.” My references to the “treasured but treacherous territory around full employment” to the fact that “prosperity without a wage-price spiral” was “a goal that has hitherto eluded not only this country but all of its industrial partners in the free world” were understandably ignored.

As I put it in testimony before the JEC in July 1970, “there are no magic formulas, no pat solutions, no easy ways to reconcile full employment and price stability. No modern, free economy has yet found the combination of policies that can deliver sustained high employment and high growth side-by-side with sustained price stability.” That was all well and good, as far as it went, but in light of the experience of the 1970’s it did not go nearly far enough.

The policy travails of the Seventies are too well known to require lengthy review, especially in light of Chairman Obey’s deft characterization of them this morning.

First, there was the Nixon fiasco of freezes and phases serving as a facade for pumping up the economy with tax cuts, spending increases and a rapid run-up in the money supply, with sure-fire consequences of an overheated economy.

Superimposed on that were the supply shocks in 1973-74—oil prices quadrupling, food prices jumping 40 percent in two years, and other world raw material prices doubling in about the same time—that served to consolidate stagflation. The shocks, of course, were not just to the price level, but to the economics profession, led by Keynesians. We learned the sad lesson that as to wages and prices, what goes up, propelled by over-stimulated monetary-fiscal policy and a series of external shocks, does necessarily come down when the fiscal-monetary stimulus and supply shocks subside. We’ve learned a lot about sticky wages and prices that stay in high orbit even with (sic, “without” is probably meant here) visible means of fiscal-monetary support. At least, they stayed there until we administered a dose of sadomasochism, better known as the double-dip recession of the Eighties, the deepest since the Great Depression.

One should not recite the economic sins of the Seventies without acknowledging one bright fiscal episode, namely the tax rebate and tax cut enacted in the second quarter of 1975. Granted, it was a bit late to blunt the recession, but it provided a welcome boost to an economy that had fallen into what, until topped by the recession of the early Eighties, was the deepest recession since the depression. The 1975 tax cut was a winner in both size and timing.

Though prices behaved very well in 1976, when inflation averaged 4.8 percent (with the help of good crops and no increase in the real price of oil), the combination of an overly strong expansion (partly resulting from economists’ over-estimates of GNP potential) and the second oil price shock soon pumped inflation back into the double digits. It was a time for economists to be mighty humble—though I suppose one should bear in mind Golda Meir’s admonition: “Don’t be so humble, you’re not that great.”

As one surveys the whole period, activist economics and New Deal intrusions into the market place can surely take credit not only for building in strong defenses against depression but for 25 years (in 1948-73) of high-octane operation of the economy and sharply reduced instability. Within that framework, one can criticize anti-recession fiscal policy as often too little and too late, monetary policy as sometimes too easy and other times overstaying tightness. And surely, the far-too-late and considerably-too -little tax increase to finance the war in Viet Nam, coupled with excessive monetary ease in 1967-68, has to go down in the annals as one of the flat failures of post war fiscal-monetary policy.

Still it is worth reminding ourselves that even in the face of high performance, inflation of the 1949-72 period rose above 6 percent only once (during the Korean War) and averaged only 2.3 percent. If inflation was the price of activism in public economics, it was a long time in coming.

THE HAUNTED PROSPERITY OF THE 1980’s

Now, we have passed through the economic portals into the Eighties, the age of anti-government. Some of this actually began with that social liberal but fiscal conservative Jimmy Carter. I don’t refer to deregulation of transportation, communication, and finance where competition has a fair chance to do well what regulation did badly. Nor do I refer to the harnessing, where possible—that is without sacrificing public purpose and values—of market incentives, the profit motive, private self-interest to the accomplishment of public purpose. Using taxes or auction rights to make depollution profitable and pollution costly is a case in point. But I do refer to sluffing off functions and responsibilities on grounds that delivery of the services has been inefficient in the past or on grounds that there is an inevitable too-costly clash between efficiency and equity.

But I digress from the subject at hand, which I designate as our haunted prosperity of the 1980’s, a perceptive term borrowed from Al Sommers, of the Conference Board. Exactly what is it that haunts our prosperity in this new era of belittled government? The answer is sobering.

First, it is slow growth. After enjoying 4.2 percent annual real growth in the Sixties, and managing to average 3.1 percent even in the Seventies, we have slipped to less than 2 percent in the first six years of the Eighties. Even if we optimistically assume that there will be no recession in the next four years and an average 3 per-cent growth rate, the decade would come out with just a 2.4 percent real growth rate. And even if we adjust these numbers for the slowdown in the growth of the labor force, the Eighties as a whole seem destined to go into the economic annals as a period of pallid performance.

Second, we are haunted by resurgent poverty. The percentage of our population in poverty jumped from 12 percent in 1979 to 15.3 percent in 1983. Recovery brought the poverty rate down to 14.4 percent in 1984 but leaving aside the Reagan years, this is still the highest rate since 1966. It is worth noting that without cash transfers by the government, the poverty rate would be 25 percent and that with non-cash transfers like food stamps, the rate comes down to 9 percent. But even that is almost a 50 percent jump in poverty since the late Seventies. The tax and budget cuts of the Eighties undercut the incomes of the poor, and boosted the incomes of the wealthy. The tax reform proposal, embodying more generous earned income credits, standard deductions, and personal exemptions, would be a welcome first step in reversing this doleful story.

Third, we are haunted by wasted potential. With the unemployment rate, after 5 years, still stuck at about 7% and utilization of our manufacturing capacity stuck at 80 percent throughout the third year of expansion, we are wasting a big chunk of our productive capacity, presumably as a means of safeguarding the great and welcome gains that have been made on the inflation front.

Fourth, productivity advances have fallen far short of expectations. A respectable performance in manufacturing has been more than offset by disappointing productivity gains elsewhere in the economy.

Casually correlated, with this change for the worse in growth, poverty, and wasted potential are some other economic changes that haunt us.

From 1950 through 1979, the Federal deficit averaged less than 1 percent of GNP. Now, the deficit is stuck at more than 5 percent of GNP, most of it structural rather than cyclical.

The huge deficits and high interest rates have spawned an over-valued dollar and enormous trade deficits. From roughly $25 billion in the late 1970’s, readily financed by a flow of earnings from overseas investments the trade deficit zoomed to nearly $150 billion, with no offset from service earnings because we have become a net debtor nation. This dismal record on savings and investment is another concomitant of the huge budget deficit. Far from being in an investment boom, we have been on a consumer binge financed by liquidating our assets abroad, by gorging on a huge flow of imports, and by depressing national saving and investment to the lowest level since the 1930’s. Since this runs counter to popular impression, let me cite chapter and verse. First, net private saving—individual plus business saving minus replacement investment—ran close to its long-run level of 8 percent to 9 percent of GNP in 1984. Second, half of it had to be used to finance the federal deficit with the result that the national saving rate fell from 8 percent to just over 4 percent. Third, only by sucking in huge amounts of foreign saving was net investment rate held at about 7 percent of GNP. But savings and investment by Americans have dropped to the lowest levels in fifty years.

Apart from such damning economic development, the Eighties have also seen the rise and fall of what Herb Stein aptly calls “punk-supply-sideism,” to distinguish it from sensible classical supply-side policies for investment, productivity, and growth. Alan Blinder put the matter well when he said, “Monetarists offered statistical evidence with no theory. New Classicists offered an elegant new theory with no evidence. Combining the best of both tactics, supply-siders offered neither theory nor evidence.”

And that makes another point. With super-supply-sideism falling flat on its face, with monetarism failing to deliver, and with rational expectations, elegant as the theory is, proving to be a non-starter in the policy sweepstakes, Keynesians have regrouped, built Milton Friedman’s natural rate of unemployment into their models, developed a credible theory of wage-price rigidities and regained the intellectual and policy-oriented high ground in economics. By being eclectic, pragmatic, and realistic, the Keynesians have made a remarkable comeback. (If you think I’m grinding a doctrinal axe now and then, you are right.)

WHERE DO WE GO FROM HERE?

Where should activistic economics go from here? There are plenty of new ideas floating around—and even a few good new ideas—but none will make much difference unless we restore the essential conditions for faster and more sustained economic growth and stop the consumption binge fostered by the irresponsible fiscal policies we have been following in the name of letting the private economy breathe free. What a travesty: the monstrous deficits generated in the name of breathing free are depriving the body economic of the oxygen essential to the growth of private saving and investment.

David Obey made the case for growth in eloquent terms this morning. I won’t repeat it here. But it is worth reminding ourselves that it will take a skilled balancing act to put the economy back on the track of long-term growth while maintaining our expansionary momentum in the near term.

Clearly, the vital first step is to shrink the gigantic deficit that, to change the metaphor, is leeching the lifeblood out of growth by absorbing over half of our private savings. One has to hope that a Gramm-Rudmanized budget process will lead to a deficit disarmament conference and an agreement to couple tax increases with bearable budget cuts.

Second, even as we move fiscal policy toward restriction, we must maintain and even step up the level of aggregate demand in the economy. That’s where the high-wire balancing act comes in, namely offsetting the reduction in aggregate demand from a more restrictive fiscal policy by running a more stimulative monetary policy. That in turn means keeping one eye on the substitution of investment for consumer spending as the budget deficits shrinks and interest rates fall and the other on the shift of demand from imported goods to domestically produced goods and services as the trade deficits shrinks. There is nothing in the market economy, left to itself, that will make the necessary adjustments.

Third, we will need to adjust our structural policies, applying the classical supply-side precepts designed to beef up our productive capacity and productivity—everything from boosting investment in physical infrastructure, in human brain power, and in research and innovation, to stimulating private saving and investment.

Lurking in the background of this whole process will be the personal trade-off question: Is an attempt to improve our growth and expansion performance going to reignite inflation?

What does past experience tell us about the need to curb our appetites for expansion and faster growth? Is it possible that we are mis-applying past experience, that we are like the cat that sat on a hot stove and now won’t sit on a cold one? The tradeoff between unemployment and inflation may well have moved in our favor. With the hard core of inflation, namely, wage norms, coming down sharply, with plenty of excess capacity in the economy, and with these tendencies buttressed by falling oil prices and soft world commodity prices, isn’t it time to test the waters with a more expansion- and growth-oriented policy as outlined above?

And since there’s no guarantee that growth alone will reduce inequality—and worse, that with the incidence of poverty shifting so strongly to single-parent families and their children, there’s no guarantee that growth will lift all the boats—isn’t it about time that the richest country on earth (as we still are, in terms of both wealth per capita and annual goods and services per capita, according to the Kravis-Summers University of Pennsylvania studies), with the lowest taxes of any advanced country except Japan (and they are just a whisker behind us), and with the least socialized industrial economy on earth (as established by late seventies IMF data and a recent update by the London Economist), isn’t it about time that we stopped asking the poor to take the main brunt of the build-up of our defenses?

And isn’t it about time that we came out and said that it is a shameful thing to be gorging ourselves on imports and feasting on resources that ought really to be devoted to investment and growth, all in the name of hands-off economics and in the wake of irresponsible deficits and a White House that sees taxes, not as the price we pay for civilization, but as the root of almost all economic evil? And isn’t it time to stop shortchanging the future by stunting growth and running up huge foreign debts in what Rudy Penner calls “fiscal child abuse”?

The fear and loathing of deficits in Congress is palpable. The JEC and the Congressional Budget Office have spearheaded the drive to bring some sanity into fiscal policy. Indeed the record shows—as Norman Ornstein’s study for the AEI so clearly demonstrates that the Congress, as he put it, “thought (sic, “throughout”?) the broad sweep of American history, Congress has struggled to restrain the growth of Federal spending and to limit deficits on the public debt, through direct action and through periodic adjustments of its own structures to minimize the deleterious effects of political pressures.” He pays special tribute to the budget reforms of 1974, whose prime mover, Dick Bolling, we honor here tonight.

Thanks to courageous Congressional initiatives led by Senators Dole and Domenici, in 1982 and by those two and others in 1983-84, with the President playing tag-along, the deficit is at least $100 billion a year less than it otherwise would have been.

So while there is much to be said for a brave new world of innovation in public economics—I will let others prescribe it—our first order of business is to clear the fiscal decks for action, promote growth with some fairly orthodox measures, and use a modest portion of our vast wealth and taxable capacity to share more of our affluence with the poor and disadvantaged. That may be a bit old fashioned but show me something new-fashioned that would be better.

And this might just be the year when we will get on with it. Pursuing this thought, let me close with some words of hope with which Joseph Kraft ended one of his last columns: “Except in its blindest moments, the United States is not a country that sins against the light… Normally, on the contrary, the United States plays host to a humane society. Few things, certainly not the tyranny of abstract numbers, drive us to barbarous, even unfeeling behavior. So my hunch is, when all the figures come up on the table, when Gramm-Rudman is in its heaven; Americans will figure out a way to beat the odds. We will balance welfare and defense and investment and social improvement in a rough way that does not blight vast numbers of lives. Both in dealing with the Russians, and in dealing with ourselves, we will make good the promise of a turnaround year.” Amen !

Source: Appendix to “A Symposium on the 40^th anniversary of the Joint Economic Committee.” Hearings Before the Joint Economic Committee, U.S. 99^th Congress, 1^st session (Jan. 16 and 17, 1986), pp. 893-899.

Image Source: Screen shot of Walter Heller from the Public Broadcasting Service (PBS) The MacNeil/Lehrer Report (October 21, 1981). Image smoothed and cropped by Economics in the Rear-view Mirror.

Tags HellerWW, Okun, SteinH

Exam Questions Johns Hopkins Macroeconomics Money and Banking

Johns Hopkins. Final exam for monetary economics. Poole, 1968

Post author By Irwin Collier
Post date 2024-09-12

The artifact chosen for this post is the final examination for William Poole’s monetary economics course at Johns Hopkins University in 1968. Not all artifacts at Economics in the Rear-view Mirror are long.

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William Poole’s Career

William Poole became the eleventh president of the Federal Reserve Bank of St. Louis on March 23, 1998, and retired March 31, 2008.

Poole was born in Wilmington, Delaware. He received a bachelor’s degree from Swarthmore College in 1959 and a master’s degree and a doctorate in economics from the University of Chicago in 1963 and 1966, respectively. Before joining the St. Louis Fed, Poole was Herbert H. Goldberger Professor of Economics at Brown University. He served on the Brown faculty from 1974 to 1998 and the faculty of Johns Hopkins University from 1963 to 1969. Between these two university positions, he was senior economist at the Board of Governors of the Federal Reserve System. He was also a member of the Council of Economic Advisers in the first Reagan administration from 1982 to 1985.

Poole has published numerous papers in professional journals and engaged in a wide range of professional activities. He has published two books: Money and the Economy: A Monetarist View in 1978 and Principles of Economics in 1991 (coauthored with J. Vernon Henderson). During his ten years at the St. Louis Fed, he delivered over 150 speeches on a wide variety of economic and finance topics.

In 1980 and 1981, Poole was a visiting economist at the Reserve Bank of Australia; in 1991, he was the Bank Mees and Hope Visiting Professor of Economics at Erasmus University in Rotterdam. He has served on various advisory boards of the Federal Reserve Banks of Boston and New York and the Congressional Budget Office. He is a senior fellow at the Cato Institute, distinguished scholar in residence at the University of Delaware, senior economic adviser to Merk Investments, and a special adviser to Market News International.

Swarthmore honored Poole with a doctor of laws degree in 1989. He was inducted into the Johns Hopkins Society of Scholars in 2005 and presented with the Adam Smith Award by the National Association for Business Economics in 2006. In 2007, the Global Interdependence Center presented him its Frederick Heldring Award.

Source: https://web.archive.org/web/20240607041405/https://www.federalreservehistory.org/people/william-poole

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The Johns Hopkins University
Political Economy 662
— Monetary Theory

W. Poole

Final Exam — 2 hours
May 27, 1968

Answer three of the four questions below.

In principle It would be possible to “automate” monetary policy by deriving an optimal decision rule. Explain how such a rule might actually be determined, and what the difficulties of such an approach to monetary policy might be.
Discuss the theory and the cyclical behavior of the term structure of interest rates. Is an understanding of this behavior likely to be of any value to the policy-maker?
“It has been argued that lags in the demand for money function may off-set lags in the expenditure sector, thus leading to a rapid response of income to monetary policy actions. But this result depends on large interest rate fluctuations and such fluctuations are inconsistent with both the notion of a speculative demand for money and with the Meiselman learning model of the term structure of interest rates.” Discuss.
“In a one-sector neoclassical growth model, money will affect the growth path provided that the money is outside money and that zero interest is paid on money balances. Therefore, a sensible growth policy is to prohibit payment of interest on demand deposits and to increase the rate of growth of the money stock.” Discuss.

Source: Johns Hopkins University. The Eisenhower Library, Ferdinand Hamburger, Jr. Archives. Department of Political Economy, Series 6, Box 3. Folder: “Graduate Exams, 1933-1965”.

Image Source: William Poole at the Federal Reserve Centennial, 2014.

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Business Cycles Harvard Macroeconomics Money and Banking Paper Topics Suggested Reading

Harvard. Suggested paper topics and references for money and banking. Williams and Harris, 1938-1939

Post author By Irwin Collier
Post date 2024-09-02

Economics in the Rear-view Mirror is extremely proud to provide a comprehensive, granular set of references suggested for 137 possible topics for papers to be written in the undergraduate course “Money, Banking, and Commercial Crises” jointly taught by Professor John Henry Williams and Associate Professor Seymour Edwin Harris during the 1938-39 academic year at Harvard College. We have before us the vista of the breaking dawn of Keynesian macroeconomics as experienced by Harvard undergraduates(!).

Warning: I have encountered numerous misprints and I have corrected/edited when noticed. I have tried to transcribe accurately but the devil of typos is unlikely to be contained over 30 pages. Nonetheless I believe the value of the material transcribed below is hardly diminished by cooking and serving this document on the rare side. Certain items are included in many topics, giving an indication of their scope but also an indication of their importance in the eyes of the instructors.

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Course Material from the Other Years

1937-38
1940-41
1941-42

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Source: Harvard University Archives.

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John Hopkins. Final exam for graduate macroeconomic theory. Aschheim, Christ, Mills. 1962

Post author By Irwin Collier
Post date 2024-02-27

The only remarkable thing to note about the following macroeconomics examination from Johns Hopkins is its somewhat confusing scheme for allowing students to select from the questions. No heroic leaps of imagination were demanded of the examinees, which is humane I guess. But an artifact is an artifact, so duly transcribed, posted, and added to the collection.

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MACROECONOMIC THEORY 18.604
Final Examination, May 21, 1962

Messrs. [Joseph] Aschheim,
[Carl] Christ, and [Edwin] Mills

Answer all questions except:

either (a) three of the 12-point questions in Part II.
or (b) one of the 36-point questions in Part I.

Time: 3 hours (i.e., 180 minutes); total credit 180 points.

PART I. 36 points each.

Compare the roles assigned to technological progress in major writings of Schumpeter and Solow.
Write a short critical essay comparing either
1. The growth models of Harrod and Domar, or
2. The models of growth and fluctuations presented by Tobin (JPE 1955) and Duesenberry (Business Cycles and Economic Growth)
Analyze the essential differences between the modern conventional theory of public debt and the recent reformulation of this theory.
The stability of equilibrium in the Wicksellian monetary system has been subjected to opposing interpretations by Myrdal and Patinkin. Review these opposing interpretations in light of Wicksell’s own formulation.

PART II. 12 points each.

Saving equals investment.
The demand for money (as a stock) depends on bondholdings as well as on income and interest rates.
Disarmament would create a major depression in the United States.
The effect of an increase in government expenditure does not depend on how the extra expenditure is financed, as long as it does not come from increased taxes.
If national income is $500 billion and consumption is $400 billion, then for each increase of $1 in government expenditure the equilibrium level of national income will increase by $5.
The multiplier analysis is useful for studying economic growth, abstracting from cyclical fluctuations.

Source: Johns Hopkins University, Sheridan Libraries, Ferdinand Hamburger University Archives. Department of Political Economy, Box 3/1 Series 6 , Folder “Graduate Exams 1933-1965” (sic).

Source: Professor Carl Christ in the Johns Hopkins University yearbook, Hullabaloo 1964, p. 42.

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PUBLIC POLICY AND THE AMERICAN ECONOMY

Walter W. Heller, University of Minnesota

William Poole’s Career

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1938-39

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