How economists should advise Governments: lessons from Walter Heller who pushed Kennedy to cut taxes…

Beatrice Cherrier’s blog is quickly becoming one of the blogs to read.

In her recent post, she points how Walter Heller as a Chief Economic Adviser managed to advise the Kennedy Government. This is important as there is lot of criticism on role of economic expertise:

Trump’s decision to demote whoever might be nominated chairman of the Council of Economic Advisers (CEA) from his cabinet has been interpreted as a final blow to a though year – in which economists’ advice has been systematically ignored by voters- within a though post-financial crisis decade. Economists are under the impression that since 2008, their expertise has been increasingly challenged, and they have offered several analyses and remedies: more micro, more data, more attention to distribution and less to efficiency, more humility, more awareness to the moral and political element in economic expertise, more diversity and more interdisciplinarity –economic education included- Few of these however rely on the whopping literature on the history and sociology of scientific expertise.

….

Histories of how economists painfully gained reputation and trust during the XXth century abound. Most of them are focused on public policy – data on private businesses are more difficult to obtain, and tracking economists’ influence on the public is elusive–. And none of them fail to mention the canonical proof that economists’ expertise is/have been influential: it was Walter Heller, 4th CEA chairman, who convinced J.F. Kennedy and L.B. Johnson to propose a massive income and business tax cut, passed by the Congress in 1964.

The facts are well-known: Eisenhower’s legacy was a sluggish decade, with growth stuck at 2,5% per year and unemployment at 8%. Recurring budget deficit, which topped 12 billions in 1959, prevented much needed defense, education and welfare expenditures. Kennedy’s campaign was consequently focused on the promise of restoring growth, of “get[ting] this country moving again.” The candidate had nevertheless straightforwardly rejected the fiscal stimuli proposed by those economists, including Paul Samuelson, who had participated in his Democratic Advisory Committee. Kennedy came to the oval office with the notion, inherited from his father, that the budget should be balanced and the money supply tightly controlled. Under the influence of his CEA chairman, Walter Heller, Kennedy became more favorable to sustaining a budget deficit, and by early 1963, he had submitted to Congress the largest peacetime voluntary budget deficit: $12 billion. He proposed to reduce income tax rate from 20-91% to 14-65% and corporate income tax rate from 52 to 47% and to abolish loopholes and preferential deductions to enlarge the tax base. He promised that, should the Congress pass his tax cuts, the 1965 budget would be equilibrated. The proposal was finally enacted in 1964, under Johnson. 1965 saw the smallest Federal deficit of the decade (1 billion), strong growth and unemployment down to 4%. The trend persisted throughout the decade, with inflation pressures slowly building in response to Johnson’s spending frenzy.

Thought the contribution of the tax cut to this period of prosperity, and to subsequent imbalances, is still fiercely debated, its positive spillovers on the whole profession commands wide agreement. Heller’s CEA has contributed to shift economists’ image from ivory tower technicians to useful experts and to strengthen public trust. It has been heralded as the canonical example for economists’ ability to increase society’s welfare, a symbol of a (some would say lost) golden age. The scope of Heller’s influence has, in fact, extended ways beyond the tax cut. He was instrumental in putting poverty on the presidential agenda, and, as recently unearthed by Laura Holden and Jeff Biddle, he was the one who turned human capital theory into an argument in favor of federal funding for education. His peculiar status as the “economic experts’ expert” was immediately recognized. He made Time’s cover twice in two years. No other CEA chair made the cover of the magazine before the late 1976, and none ever made it twice as CEA chair. But if the fallouts of his expertise are well known, its determinants are less so. The nagging question remains: how did he do it?

Read the post for more details.

What is interesting is how in US you can actually remain relevant as an economist knowing about policy and people. These ideas are so important for history of thought. Whereas in India there is no chance despite such a rich history..

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