The Education of Presidents

NEW DIMENSIONS OF POLITICAL ECONOMY by Walter W. Heller. 203 pages. Harvard University Press. $3.50.

When Walter Wolfgang Heller was appointed Chief Presidential Economist early in 1961, John Kennedy urged him "to use the White House as a pulpit for public education in economics." Heller did--and Kennedy himself was Heller's first student. This book, Heller's first since he left the Administration two years ago for a $50,000-a-year income as a private consultant and professor at the University of Minnesota, is an admirable account of the political machinations that underlay the recent age of discovery in economics--and welcome not least because he writes with crispness, clarity and elan.

The Tax Battle. Kennedy was a hard learner. For all his 1960 campaign talk about the need to spur the economy's growth, he was at first much less adventuresome and more conservative than his economists. He was determined to balance the budget and mighty reluctant to try the deficit-spending theories of the late John Maynard Keynes. It took Heller and his activist aides almost two years and 300 memos to convince Kennedy of the Keynesian notion that both economic growth and Government income would be increased by a tax cut.

Kennedy still wavered on tax reduction, was almost talked out of it by three powerful forces: Oklahoma's late Senator Robert Kerr; Cabinet members; and Economist John Kenneth Galbraith, then the U.S.'s Ambassador to India, whose "long shadow had fallen across the White House." Finally, the tide was turned by businessmen. In a speech to the Economic Club of New York late in 1962, Kennedy extolled the good sense of tax cuts and got such a rousing reception from 2,000 business leaders that he himself became convinced and proceeded to press enthusiastically for reductions. Said he afterwards: "I gave them straight Keynes and Heller, and they loved it."

But Congress had little affection for the idea until Lyndon Johnson became President. Though he had been conditioned to traditional fiscal notions, he was so impressed by the success of earlier Government stimulants--such as the tax credit for capital investments and liberalization of depreciation allowances--that he put his power and prestige behind tax-cut legislation and in 1964 persuaded Congress to go along. Largely as a result of that and of the whole range of Government stimulants, the nation's real output and real wages since 1961 have increased by one-third, while corporate profits and the economy's growth rates have doubled.

Drags & Dividends. If, as Heller expects, the economy should keep growing annually at its present 41% rate, federal tax revenues will swell by $9 billion every year, and that will present a new problem of prosperity. Once the demands of Viet Nam are over, this surplus will be a "fiscal drag" that could lead the economy into recession, unless policymakers return the surplus to the people in the form of "fiscal dividends." Heller is less keen on tax cuts now; he has, in fact, been calling since early this year for strictly temporary and quickly reversible tax increases to frustrate inflation.

He argues that much of the post-Viet Nam fiscal dividends should be paid directly to the states and localities, whose legitimate needs for education and other spending cannot be met by Great Society programs alone. His idea, borrowed from Andrew Jackson, will make every Governor, state-university president and homeowner drool. It calls for no-strings subsidies to states of roughly $30 per capita at first. This would enable the states to spend what they should and yet hold down their property and sales taxes. While the plan would penalize rich states to benefit poor ones, Heller contends that it would serve the cause of "creative federalism." Heller believes that his idea is no more radical than the earlier changes of the 1960s. Conservatives now recognize the need for frequent Government manipulation of taxes, spending and subsidies, while liberals like himself, says Heller, have a new understanding of the role of private investment Practically no one any longer sees danger in rising federal debts and rising wages--as long as the economy grows faster than the debt, and labor productivity grows faster than labor costs. The gloomy science of economics has fallen on happy times because old economic ideologies are dead.

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