The Economic Education of JFK: Arthur Okun's recollections

JFK with Dillon (first to JFK's right) and Heller (standing behind Dillon)

Nate has posted on JFK State of the Union address in 1963, when the tax cut was proposed to deal with the high level of unemployment of about 5.7 percent. Transcripts from an interview with Arthur Okun (of Okun's Law fame) conducted by David McComb and deposited at the LBJ Library tell the story of how that came to be.

Walter Heller was the chairman of the Council of Economic Advisers (CEA) at this time. Here is Okun on the CEA's views of the economic problem early in the JFK administration:

"The economist's diagnosis of the ills of the economy right at the start in 1961 was that it had been over-sedated with an excessively restrictive budget, which had so sapped its strength that you weren't getting the revenues from that budget; and therefore the budget looked as though it wasn't restrictive. Still you had a deficit, but the deficit was associated with trying to get too big a surplus and therefore holding down incomes and profits to the point where the revenues weren't coming in. We developed a concept called the 'full employment surplus' of trying to show where the budget would be if the economy was on a high employment growth path and trying to show that basically you had a much too tight budget, and that from the economist's point of view the right medicine was one of a more stimulative budget which would bring the economy to full employment, reduce unemployment,  strengthen investment, give us a lot more output for which there were and remain very urgent uses.  Obviously, this would mean in the short run that you'd have to do things which would make the budgetary deficit a lot bigger."

This was not the view held by Douglas Dillon, the then Secretary of Treasury, and a Republican one might add, and initially wasn't either Kennedy's view, since he had promised a balanced budget. As Okun's says: "There's no question that from the outset Dillon and Heller were giving President Kennedy quite different advice." Dillon remained a balanced budget defender. Okun tells the story of JFK's conversion to the Heller side.

"An amusing incident that I recall hearing about—President Kennedy made some statements that seemed to be wiggling off the hook of this balanced budget commitment at a press conference in August or September '61 . Dillon called him the next day and told him that we'd upset foreign bankers and urged him to clarify what he meant and reaffirm his determination. Walter, who had been delighted by the President's ability to see this more pragmatically, was told that Kennedy felt he had to do this, that he did indeed reaffirm that and that there was a balanced proposal in the fiscal '63 budget, which never materialized at all. I think the key manifestation of Kennedy's conversion to the Heller creed was the commencement address that Kennedy gave at Yale in June 1962, which was something—he really wanted to do this. And it was clear—again operating on other people's stories—he wanted a myth-exploding speech, and he ordered that it be focused on economic policy. He really went after the balanced budget myth as the key myth that needed to be destroyed."

On the substantive issue of what made JFK change his mind Okun is unclear, but Heller was central. And not just regarding the disputes within the administration. he says:

"I don't really know just how much of what kind of communication there was between Heller and President Kennedy. I know there was a flood of paper that went from the Council to the White House. Even after Kennedy was personally sold there was a further educational problem of convincing the public and convincing the Congress… Heller did a great job of public education. He got a lot of press attention to… try to popularize a notion that an underemployed economy was a great national waste. One of my first tasks on the Council was to try and estimate what our potential was. That estimate of potential output I guess remains my best known professional contribution as an economist. It's widely referred to as Okun's Law.’"

In fact, the education of the President, Congress and the public was in Okun's view the main task of the CEA at that time. In his words:

"But this was the first item on the priority list that the doctor could order for a patient. The problem was that of getting the patient to take the medicine rather than knowing what to prescribe. It was that that put all the emphasis on Educating the President, the Congress, the public, making the case publicly—you know, really improving the packaging, the labeling, the palatability of the medicine rather than improving the prescription at that time. Obviously, we did a lot of economic analysis on how big a tax cut we'd like ideally, what the appropriate unemployment target might be, what could be done to supplement general fiscal policy through manpower programs, how well guideposts could help to fend off the evil day that inflation reared its ugly head, and all that. But I think still you'd find that the largest emphasis of the Council's activity was on the salesmanship of a product rather than on the development of a superior product, because that was what the real need was."

After Kennedy's assassination Heller's task of educating LBJ wasn't as difficult. Again, according to Okun:

"I don't think he had as much trouble breaking down the balanced budget myth all over again. I think that notion of fiscal orthodoxy had been pretty well dispelled. I'm not sure it ever played as much of a part in President Johnson's ideology as it perhaps had in President Kennedy's."

Of course the task is much harder these days, since the doctors don't understand the problem and their diagnosis is often incorrect. Rather than a problem of public education, there is a problem of educating the doctors, the economics profession. The balanced budget myth and fiscal orthodoxy are back with a vengeance.