Annenberg media e that private enterprise can give full employment to our people. 1944. Franklin roosevelt declares that every american has a right to a job. Can the government guarantee that well never have another Great Depression . 1952. Dwight eisenhower prepares to take office as the first republican president since herbert hoover. How will he handle his first economic crisis . The torch has been passed to a new generation of americans. 1961. John kennedy has promised to get the country moving again. How will he keep his promise . Three president s, three policies, but one common resolve the government must never permit another Great Depression. Can we control our economy . Thats the story well investigate with the help of economic analyst richard gill on this edition of economics usa. Im david schoumacher. The 20 years after world war ii brought selfconfidence to american political economics. The lessons of depression and war convinced economists and politicians alike that the government could promote prosperity by manipulating taxes and spending. These continuing adjustments are called fiscal policy. For the two decades after world war ii, each new administration asked itself how fiscal policy could be used to control the economy. Our story begins in 1944. Americans had vivid memories of the Great Depression. They remembered 1 4 of the work force without jobs, factories closed, families hungry. And they remembered an inspirational leader who showed them that the government cared. It was the war, not the new deal, that ended the depression. By 1944, 12 Million People were in uniform. 66 million more had jobs supporting the mightiest war machine ever known. Amidst this world conflict, senator harry truman said, war is hell, but peace might be worse. Working with truman was senate staff aide bertram gross. The big upturn during world war ii was based on Government Spending for more production. When those contracts were withdrawn, we said things could topple to pieces. Everyone felt that way. Ed. It could have top people feared a return of hard times. The man leading the nation out of the depression made bold promises. A second bill of rights under which a new basis of security and prosperity can be established for all regardless of station or race or creed. Among these are the right to a useful and remunerative job in the industries or shops or farms or mines throughout the nation. Roosevelt captured the high ground in his state of the Union Message with the economic bill of rights. Republicans were forced to say, me, too. Jobs for all. The air was full of it. We had to have jobs for all. However, after working in the campaign, i began to feel, this is nice rhetoric. Will they do things . Out of that thinking came the original full employment bill. Based upon the idea of both parties committing themselves to jobs for all, lets have them write it down in legislation. Bertram gross drafted a full employment bill that was introduced in the senate in january 1945. It instructed the president to use a variety of approaches, including spending programs, to promote full employment. Much of the theory came from john maynard keynes. Keynes argued that an industrial economy could get stuck at high levels of unemployment. The depression proved this. He predicted strong Government Intervention such as tax cuts and spending programs would restore prosperity. This seemed to be happening during world war ii. By 1945, many people accepted keynesian theories, but were reluctant to see them legislated. To bridge this gap between economics and politics, a council of economic advisers was suggested. The question remained where to put this new body. We put it in the executive office of the president , which tied it up to president ial power and fit it into the basic idea that the president is the manager of economic affairs. While conservatives and liberals debated in congress, a weary president died. The nation mourned Franklin Roosevelt and wondered about its new leader, the unknown, uncharismatic harry truman. For all his supposed shortcomings, the new president had commonsense ideas on unemployment. Leon keyserling, original member, council of economic advisers, recalls. Truman was asked, when is unemployment too high . He said it depends on whether or not youre unemployed. This wasnt a wisecrack. This showed that he had a fundamental understanding of the game. He realized that you had to talk about people and what was happening to them and where the hardships were. As a senator, harry truman had worked hard to push a full employment bill. As president , he signed the employment act of 1946, a law that changed greatly during congressional debate. It no longer referred to full employment, instructing the government instead to promote maximum employment, production, and purchasing power. What was lost from the original idea . [gross] what was really lost was the right, the right to a job, the right to work, the right to an opportunity for paid employment at good wages. And what was gained . [keyserling] the government had what might be called policies and programs, but it never had a policy or program. The secretary of the treasury proposed one thing, the secretary of agriculture, another, the director of the budget, other things, etc. These were policies and programs. Most of them were needed. Most of them did some good. But it was a confused, disorganized army. The employment act of 1946 made it necessary that each of these programs be evaluated in terms of the whole. When this act became law, the war was over. The economy erupted into prosperity. Dire predictions of hard times vanished in the explosion of pentup consumer demand. The law that was supposed to prevent another Great Depression became the continuing justification for fiscal policy. The wars end signaled the beginning of a long, uninterrupted period of continuing prosperity. Passage of the 1946 employment act marked the governments commitment to use its considerable power to ensure that prosperity continued. We asked economic analyst richard gill the rationale for using fiscal policy to maintain economic stability. The rationale was very much influenced by the ideas of john maynard keynes, whose major work was published in 1936. Keynes thought total private spending might be insufficient to sustain National Income at the full Employment Level. The solution . Increase Government Spending to fill the gap. We can illustrate this idea with a simple diagram. Lets measure total spending by consumers, businessmen, and the government on this vertical axis, and National Income, gnp, along this horizontal axis. In 1946, full employment gnp, when everybody who wanted jobs was able to find them, was probably around here at 300 billion in terms of 1946 dollars. This vertical line is equal to 300 billion. This line will tell us how much spending wed need to sustain National Income. Keynes said private spending on consumers goods, c, and business investment, i, might not be large enough to keep gnp at this level. He thought private spending would increase with income. The curve slopes up as gnp increases. It might end up here with this 50 billion gap between total private spending and full employment gnp. He said we could fill this gap with public or Government Spending, g. The government steps in with 50 billion, and we can simply add this g onto total private spending. Look at what happens. The gap has disappeared. Total spending, private plus public spending, is now sufficient to maintain full employment gnp at 300 billion. Even the most rabid keynesians would have admitted that there could be snags in this simple analysis. Nevertheless, the basic idea seemed quite convincing, that the government should and could keep the economy up at full Employment Level or pretty near it. Many economists had this in mind when they supported the employment act of 1946. I like ike. Millions of voices echoed the cry. It swept Dwight Eisenhower to victory in 1952, the first republican president since herbert hoover. Like hoover, eisenhower inherited a prosperous economy and was forced to watch as that economy slid into a recession. Hoover responded with a huge tax increase that deepened the depression. What would ike do . Would he repudiate 20 years of modern economics . When eisenhower took office in 1953, he inherited a prosperity that was bubbling along since the postwar boom. Factories worked at capacity to fill the demand, then worked overtime to build the machinery needed to fight the korean war. Ike promised to end the war, and in july 1953, he did. There wasnt time for rejoicing. By august, the economy had stalled. War orders were halted. There was no explosion of consumer demand to help. Where would ike turn for advice . Arthur burns chaired the council of economic advisers. George humphrey was secretary of the treasury. They didnt always agree. He used to say when arthur burns came, here comes arthur with his kit of tools. He meant his tools for dealing with the recession. At various times he got out of line. Humphrey got out of eisenhowers line by saying, increasing expenditures in a recession is really a terrible thing. He was more in the hoover image. He quickly got back into line. Ikes forecast showed unemployment climbing past 6 during the winter of 1954, the highest level since the depression. Millions of workers were idle. Eisenhower went to the people to urge confidence. He predicted the economy would improve. He promised spending programs if it didnt. He was ready to take action, but didnt have to. If you keep tax rates stable, then the revenue will fall when the economy falls because people have less income. The revenue will rise when the economy rises because people will have more income. That stabilizes the economy. Some expenditures will rise in a recession, unemployment compensation, for example. We at the committee for Economic Development coined that term, stabilizing budget policy, and meant it to describe one in which, except in extraordinary circumstances, you rely on these automatic stabilizers. During the 1954 recession, these automatic stabilizers left an additional 10 billion in American Consumers pockets, dollars that would go to the treasury as taxes in a healthy economy. 10 billion helped to fuel american prosperity. By the summer of 1954, the first republican recession since the crash of 29 had come and gone, leaving a prosperous economy to continue growing. In the economic history of 20thcentury america, the recession of 1954 is just a wrinkle in the upward climb of postwar prosperity. It is significant because by the 1950s, most economists agreed that the government should use fiscal policy to minimize recessions. To eisenhower, that meant taking advantage of the automatic economic stabilizers. We asked richard gill how those stabilizers work. In 1954, when real gnp began to fall, federal tax revenues also began to fall simply because there was less taxable income. This meant more money for consumers. Private spending did not have to fall as much as one might have expected. In terms of our diagram, this private spending curve, instead of going down, was flatter like this. Instead of spiraling into a Great Depression, private spending was maintained at a relatively high level. The fall in National Income was cushioned. If these stabilizers are so wonderful and worked so nicely in 14, why didnt they stop the Great Depression of the 1930s . Because government was playing a much larger economic role than it had been 20 years earlier. This was what keynesians of the time were advocating. I, John Fitzgerald kennedy, do solemnly swear. That you will faithfully execute the office of president. That i will faithfullexecute. The bright promise of that day blinded many. John kennedy had managed only a razorthin margin of victory. He was taking over as leader of a country stalled in a recession and beset by problems. The new president promised to get the country moving, but he had no definite program. Over the years, John Kenneth Galbraith had provided john kennedy with economic answers. I went through several stages in my friendship with kennedy. In one, he would ask me what i thought he should do. This was when he was a senator. Later, he would ask for the economic reasoning. Then he acted on his own and didnt bother to call. Many predicted that galbraith would join the administration. Instead, he became the ambassador to india. Walter heller was appointed chairman of the council of economic advisers. He found the president receptive. He was interested in economics. Somebody who had known him for a long time, ken galbraith, came in to see me. He said, you should understand that kennedy has the capacity to read and understand. Dont be afraid to write him. Lyndon johnson wanted short memos. He said, write lengthy memos. Hell be interested. Just put in some humor. Kennedy took office as the country was beginning its recovery from the recession of 1960, but unemployment remained distressingly high. Kennedys advisers began to realize the recovery contained seeds of its own demise. The government soon took in more than it spent. That surplus would stop Economic Growth well short of full employment. That could be corrected in two ways by tax cuts or by increased expenditure. I felt our social programs, particularly those on behalf of the poor, were in need of more support, that we had a commitment to people in need and that was how the money should be used. [schoumacher] kennedys new economic adviser had different ideas. [heller] there wnt as much disagreement as its often made out to be. I wanted a tax cut, but as a package including spending increases. Kennedy went to the hill and got knocked down on the programs. To stimulate the economy, we had to have it primarily on the tax side. Throughout 1961, the economy continued to grow, but slowly. Unemployment was a problem, but not a crisis. Economist heller saw room for improvement, but politician kennedy held back. Then, in 1962, Walter Heller saw his chance. The economy sputtered in 62, and i pushed hard for a tax cut. The treasury resisted a big tax cut. I wanted a down payment in 62 to make sure we didnt fall into a recession and go ahead in 63. He didnt buy that. In 62, he bought the idea of an acrosstheboards tax cut. Every dollar released from taxation that is spent or invested will help create new jobs and new salaries. These can create other jobs and salaries and more customers and more growth for an expanding american economy. Although kennedy agreed with him, heller had galbraith to contend with. Every now and then, his shadow would fall across the white house when hed come home to report from india. The president would say, galbraiths been lobbying against your tax cut. I had access to the president and expressed myself with some vigor that if we passed tax cuts, they would become too popular with conservatives, and they would be taken up by conservatives at the cost to the expenditures that were needed on behalf of needy people. Despite ambassador galbraiths arguments, the president remained committed to his tax cut. The questions were when and how much . The treasury, keeper of the fiscal keys, was dubious about a big tax cut. I wanted a 12 billion cut. They wanted 3 or 4 billion to lubricate tax reform. After kennedy said in august of 62, were going to have a big tax cut. Im presenting it next january, kennedy asked, what now . I said, set up the Cabinet Committee on Economic Growth. He said, whats that for . I said, for me to get 12 billion. This is a simplified version of history, but we compromised on 12 billion. I liked that. If the economy wasnt prosperous, it wasnt depressed either. Throughout 1963, president kennedy tried to sell the 12 billion tax cut to a reluctant congress. Then, in november, tragedy struck. We meet in grief. John kennedys death commands what his life conveyed, that america must move forward. Congress passed the kennedy tax program. President Lyndon Johnson signed it into law on march 15, 1964, a monument to a martyred president. The economy took off in a burst of prosperity. Within 18 months, gnp was growing at a feverish 5 . Unemployment dropped to its lowest rate in 7 years. It seemed that, in president kennedys phrase, a rising tide really had lifted all boats. On december 31, 1965, the cover of Time Magazine featured john maynard keynes, 19 years dead, but once again a household word. For economists accustomed to obscurity, it was a Welcome Change to bask in the limelight. Just about everyone agreed that the tax cut was an unqualified success. By 1965, it appeared we had finally learned how to use fiscal policy to control the economy. We asked richard gill why the 1964 tax cut had seemed like such a rousing success. It did seem to get the country moving again. It seemed a proof of the keynesian theory, dominant among economists by the 1960s. In terms of our diagram, the tax cut gave consumers more disposable income. It shifted up this curve of private spending. The gap between spending and full employment income was eradicated. It could have been done, as professor galbraith urged, by increasing public spending and increasing g, like this. The apparent success of the 1964 tax cut was hailed by many as a vindication of keynesian ideas. This was the heyday of keynesian economics. But problems and theories change. Within a few years, perhaps because of the basic success of keynesianstyle policies, we entered a different economic world. The wisdom of using fiscal policy to stabilize the economy, and of the trend towards increasing government participation in the economy, was to come under sharp scrutiny. Its an issue that still divides economists. Its no wonder the economics profession was feeling pleased with itself by 1965. For two decades, the country had prospered. Severities of the Business Cycle had been sharply reduced. We thought that fiscal policy held the key to everincreasing growth and prosperity. Maybe an economist and not a poet wrote, pride goes before a fall. The fall was coming with a look at fiscal policys limits. Thats a subject for another edition of economics usa. This is david schoumacher. Captioning performed by the national captioning institute, inc. Captions copyright 1986 educational film center