Kennedy (78 page)

This time the speech was a success, and so was the bill.

The Kennedy tax bill, as finally enacted with the help of his successor, and the unparalleled period of expansion both its anticipation and enactment helped bring to the American economy,’ stand as monuments to the economic wisdom and political tenacity of John Kennedy. They embody a repudiation of the most persistent fiscal myths and fears which have so long dominated this nation. Prevented by the balance of payments and a conservative Congress from relying too heavily on the familiar Democratic remedies of still lower interest rates and still higher budgets, he had nevertheless broken the trend of postwar recessions by blazing new trails and rejecting old dogma. While it cannot be claimed that either the country or the Congress fully accepted his philosophy along with his bill, his actions shed more light on the once “dismal science” of economics than a generation of speeches and lectures.

In the process, John Kennedy’s own thinking had come a long way in a short time. In a message to Galbraith requesting information on a particular problem on the balance of payments, he asked for “as much technical detail as seems appropriate and without the limitations that you might feel in discussing the matter with one who is not a professional economist.” To this he added in a scrawl: “—but who knows a hell of a lot about it after taking Ec-A under Russ Nixon at Harvard.”

Whatever he had learned in Ec-A, he had received a good education in economics in the White House. For a man pressed with other problems, he had been a good student; and for the country as a whole, he had been a good teacher.

R
EMEMBER,”
shouted Richard Nixon to a Cleveland, Ohio, crowd in 1960, “if you want to inflate your money, if you want to raise your prices, you have our opponents to vote for.” In 1961 many an expert, who assumed that inflation was certain to accompany recovery, thought the Vice President’s reasoning wrong but his prediction right. John Kennedy proved his prediction to be wrong as well.

The experts did not lack faith in Kennedy. They simply knew that price rises had usually occurred during rapid economic expansion—that Kennedy’s increases in defense, space and antirecession spending would produce the kind of large Budget deficits assumed to produce inflation—that traditional Democratic sympathies for the worker and farmer usually led to higher wages and food prices—that traditional Democratic opposition to high interest rates and hard money also invited inflation—and that the President had no power to prevent powerful industries and unions from adopting inflationary price and wage increases. They calculated that prices had risen nearly 10 percent in the second term of a Republican administration dedicated to halting inflation, so how could Democrat Kennedy, dedicated to greater growth, ever hope to do better?

But John Kennedy was determined to do better. The precedents of party and history did not dissuade him, for he faced a world-wide threat to the dollar and a chronic slack in the economy that knew no modern precedent. The imbalance of payments posed a clear and present danger which could never be averted if American goods were too high-priced for world markets. His whole concept of growth would mean little
if prices rose as rapidly as income. Increases in Social Security, minimum wages and welfare benefits would represent little progress if the recipients could buy no more with those larger checks than previously. His efforts to show a prudent Budget posture were doomed if Defense and other procurement agencies had to pay more to buy less. His efforts to persuade the Federal Reserve Board to keep long-term interest rates low were doomed if an inflationary spiral began. And his efforts to help those living on fixed incomes—pensioners, annuitants and others clearly in need—would suffer the most from this “cruel tax upon the weak,” as his Economic Message termed it. In short, his whole economic program would be impaired unless this tradition of inflation could be broken.

He was not obsessed by this problem over all others. He paid no heed to those who said inflation was a greater danger to our economy than unemployment, or to those opposing every proposal for increased spending or decreased taxes on the grounds that runaway inflation was just around the corner. But neither would he listen to those alluring voices of the easy excuse, including even such citadels of conservatism as
Time
magazine, which asserted on June 1, 1962, that economic growth and price stability were incompatible, that “inflation has long been a companion to economic boom,” that “the price of a prosperous and growing economy is a ‘normal,’ or controlled, inflation of 2% to 3% a year,” and that “the alternative to ‘normal’ inflation…is economic stagnation or downright recession.”

He would not countenance continued slack in the economy in order to postpone fighting inflation. He would not tighten long-term credit or avoid necessary spending in order to fight it. Yet neither did he favor peacetime controls or a tightly managed economy. The challenge was clear; the answer was not. But the challenge had to be met. Just as Woodrow Wilson had pioneered in the creation of a modern money and banking system, just as Franklin Roosevelt had pioneered in the adoption of more realistic Budget policies, so John Kennedy, convinced that the new balance of payments problem made continued inflation intolerable, decided that the time had come to confront the even more elusive problem of constantly rising prices in a free and expanding economy.

Once he had made that commitment, he did not back away from it. His battle with Big Steel was both the chief symbol and the chief crisis in this war on inflation, and, as he said of that battle, “There is no sense in raising hell and then not being successful. There is no sense in putting the office of the Presidency on the line and then being defeated.”

He succeeded. Prices remained stable under the Kennedy administration to a degree unmatched in the tenure of his precedessor or, during
the same period, by any other industrial country in the world. It was the first of the postwar recoveries from recession in which wholesale industrial prices actually fell while production and income were rising. Three years after Kennedy’s inauguration, the Wholesale Price Index was lower than when he took office; and the Consumer Price Index was comparatively steady, well below the “normal inflation” of 2-3 percent a year. A record rise in national output, business profits and labor incomes was real, undiminished by any noticeable rise in prices.

While this was partly a continuation of the stability which had prevailed since 1958, and partly due to a persistent surplus in manpower and plant resources as well as increasing foreign competition, it was also due to some intense Presidential leadership. “For the first time since Grover Cleveland’s day,” wrote one observer, “a Democratic President had succeeded in stabilizing the internal value of the dollar.”

This was not achieved by the imposition of any direct controls. It was not achieved by the substitution of government for business or labor in the setting of prices and wages. But neither was it achieved without bringing some chill to President Kennedy’s political relations with both business and labor. And that is the real story of this chapter.

Just as most Congressmen are all for economy measures so long as they fall on someone else’s state, so most business and labor leaders are against inflation for each other but not for themselves. It should not have been a surprise, therefore, that both sides, in varying frequency, expressed resentment with a President who brought the prestige of his office and the power of public opinion to bear on their decisions—who promulgated economic guidelines within which their price-making and collective bargaining should take place—and who believed it was his obligation, as Kennedy said in his 1960 National Press Club speech, to be “a vigorous proponent of the national interest, not a passive broker for conflicting private interests.”

Walter Heller called it the “jawbone” method of keeping wages and prices down.
¹
The Kennedy approach was not founded on any statute or backed up by any sanctions. He commented almost enviously one day on the variety of weapons and controls used by De Gaulle to fight price increases in France, an impressive array of powers which called into question the thesis that European inflation would eventually equalize our balance of payments. But he sought to make up for what he lacked in statutory authority by greater ingenuity and greater effort.

The effort was focused partly on a variety of legislative proposals and administrative steps, including the first Presidential message to
Congress on consumers’ interests and a Special Consumers’ Council. Administration bills sought to lower the price of housing, transportation, education, medical care, drugs, credit and other items, and to increase competition through strengthening antitrust laws, lowering tariff barriers and stimulating small business. The Department of Justice Antitrust Division was particularly successful against price-fixers in a record number of prosecutions which not only ended those conspiracies but deterred others. Legislation favoring “Fair Trade” or resale price maintenance was strongly opposed, and tax incentives for the purchase of new machinery were aimed at the higher productivity which could raise profits and wages without raising prices.

But the bulk of the effort was not legislative. It lay in an unprecedented, ceaseless, tireless use of the “jawbone”—in general and specific warnings to labor and management, in Presidential messages, press conferences and speeches, in talks to their conventions, letters to their negotiators and private conferences with their leaders.

The bulk of the ingenuity lay in two new techniques:

First was the President’s Advisory Committee on Labor-Management Policy, with members drawn from unions, business and the public. Tripartite bodies of this kind in peacetime had consistently failed in the past. This one succeeded, stayed together and served as a useful channel to and for the President on labor-management relations and wage-price stability.

Second was the enunciation of national wage-price guidelines, promulgated with Presidential approval in their first annual report by his Council of Economic Advisers. The guidelines represented the first attempt by the Federal Government to indicate a general standard by which the public could measure whether wage and price increases were in the national interest. Stressing that no hard and fast rules were possible, these guidelines were based on the recognition of the fact that labor and management obtain their greater gains out of greater productivity; that, as new skills and machines enabled each worker to turn out more of the employer’s product in each hour worked, those savings would permit increased profits and wages without any price increases and possibly with price reductions; and that excessive wage settlements, paid for by price increases, on the other hand, would merely pass the bill on to the rest of the economy with inflationary results hurting everyone. When specifically applied to a single industry or company, the guidelines raised more controversies than they settled, but they were a courageous injection of the public interest into an area where it had long been overlooked.

The President refuted, in his talk to the editors in 1963, the notion that private wage-price decisions were none of his business. If they lead
to a national emergency strike, then the law made that his business, he said. If they wreck the balance of payments, then the maintenance of our troops overseas was his business. “When things go badly…if we have another recession, the President of the United States is to blame,” he said. “So I think it is our business.”

The jawbone method was directly applied most often to labor. An arbitrarily shortened work week was opposed by the President at every opportunity. He called upon the AFL-CIO Convention, in a 1961 address, to recognize labor’s responsibility in keeping our goods competitive, urging “those of you who are in the areas of wage negotiations [to] recognize the desirability of…maintaining stable prices.” He called upon the Steelworkers Union, by letter in the fall of that year, to “ensure that their collective bargaining proposals are fashioned so that…the public interest in price stability is protected.” He called upon the leaders of the Communications Workers, gathered in the flower garden in February, 1962, to meet their responsibility to the country as they prepared their bargaining position. And he called upon the United Auto Workers Convention, in the spring of that year, to seek “a noninflationary and peaceful settlement…in your forthcoming negotiations in the aircraft and missile industries.” Meanwhile, his Secretary of Labor, economic advisers and other appointees were carrying the same message to union meetings even more frequently and specifically.