Promoting Keynesian Liberalism: Walter W. Heller and US Economic Policy, 1933–1987 James Edward Ross Hillyer University College London (UCL) Thesis Submitted for the Degree of Doctor of Philosophy in US Political Economy 1 Declaration I, James Hillyer, confirm that the work presented in this thesis is my own. Where information has been derived from other sources, I confirm that this has been indicated in the thesis. 2 Abstract This thesis explores the economist Walter W. Heller’s career and maps the rise, ascendancy, and eclipse of Keynesian liberalism in the United States. Heller served as chairman of the Council of Economic Advisers to Presidents John F. Kennedy and Lyndon B. Johnson. He successfully persuaded both to deploy Keynesian policies to underwrite the liberal expansion of the 1960s. Consequently, Heller was one of the most significant and influential political economists in US history. However, historians have curiously overlooked him. This thesis reasserts Heller’s importance to the making of modern America. It shows that Heller was a more significant figure in the rise of Keynesianism than existing scholarship has appreciated and demonstrates how he educated two presidents in the merits of Keynesian ideas. It illuminates the role Heller played in the formulation of the Great Society and explores how he adapted his Keynesian views during the more conservative times of the 1970s and 1980s. Through examining Heller’s career, this thesis assesses how Keynesianism interacted with liberalism in the United States. It illustrates how both merged in the 1930s, demonstrates how liberals utilised Keynesian thinking during World War II, and shows how Keynesian ideas intersected with liberal policies during the post-war period. In doing so, this thesis adds to recent scholarship that argues liberalism was a much stronger force in post-war American politics than assumed, especially since the scholarly ‘rediscovery’ of conservatism in the 1990s. A positive appraisal of Heller emerges from this thesis. It also provides an overview of the rise and decline of Keynesianism in the United States, breaking new ground in explaining the significance of a presidential adviser who has not hitherto been the subject of specialist study. 3 Table of Contents Declaration 2 Abstract 3 Table of Contents 4 Acknowledgements 5 Introduction – Walter W. Heller: A Keynesian Liberal 7 Chapter One – The Keynesian Revolution in America, 1933–1955 31 Chapter Two – A Keynesian Economist in the Eisenhower Era 56 Chapter Three – A Keynesian Economist on the New Frontier 84 Chapter Four – The Year of Conversion 116 Chapter Five – “Mr Tax Cut” 152 Chapter Six – A Foot Soldier in the Great Society 187 Chapter Seven – Guns, Butter, and Milton Friedman 226 Chapter Eight – A Keynesian in the Wilderness 262 Conclusion 298 Bibliography 311 4 Acknowledgments I would like to thank several individuals and organisations whose support was invaluable as I completed this project. To my supervisor, Professor Iwan Morgan, I owe a tremendous amount of gratitude. Not only did Iwan inspire my passion for US economic policy, he encouraged me to pursue it at PhD level, where he offered exceptional advice. I am proud I completed this project under Iwan’s supervision, not least because the subject of this study is an individual whom Iwan spent the best part of twenty years encouraging someone to write about. To my second supervisor, Professor Jonathan Bell, I also owe thanks. Jonathan encouraged me to maintain a healthy work-life balance, gave me the opportunity to gain teaching experience, and provided me with excellent academic, professional, and personal advice. I would also like to thank Dr Tony McCulloch, Dr Nick Witham, and Dr Zoe Hyman, for their encouragement throughout this project. My thanks also go to Professor Mark White, who took an interest in my development as an undergraduate. I am grateful to the staff at all the archives I consulted, as well as to both Professor Eric Heller and Professor Louis Johnston, who took time out of their schedules to talk to me about Walter Heller. I would also like to thank the British Association for American Studies, the Economic History Society, the UCL Institute of the Americas, the UCL Faculty of Social and Historical Sciences, and the Institute of Historical Research, for helping fund my research. Several friends gave me plenty of encouragement as I completed this project. I would like to thank Ben Evangelou, Warren Valentine, Anthony Teitler, Nik Kyriacou, Barbel Frodermann, Josh Hollands, Jonathan Bartho, Morgan Baker, Chris Hoekstra, Max Hoell, Ivan Lobo Romero, María De Vecchi Gerli, Lupita Valdez, Jude Saverus, Caroline Walker, and 5 George Aldous. Lastly, I would like to thank my family, whose support was exceptional. My siblings each made inspiring steps in their lives whilst I worked on this project. My parents gave me nothing but encouragement, put a roof over my head, and always believed in me. In recognition of the gratitude I owe my family, I dedicate this thesis to them. 6 Introduction Walter W. Heller: A Keynesian Liberal “Few economists…influence significantly and positively the events and public policies of their time. Few academicians earn intellectual renown in their professions mainly by contributions incident to policy-making in government service. Walter Heller did both.”1 - James Tobin (CEA Member, 1961-62 and Nobel Laureate), 1996 “Walter Heller was a marvellous [CEA] chairman, the Stan Musial of CEA chairmen...[He]knew just how to insinuate our ideas into the White House mill. That does not mean that we won all the battles…But we always felt we had a chance.”2 - Robert Solow, (CEA Staff Member, 1961-62 and Nobel Laureate), 1997 When Barack Obama took office in January 2009, he inherited the most severe economic crisis since the 1930s. In the final quarter of 2008, output contracted by 8.2 percent and unemployment stood at 7.3 percent.3 Although George W. Bush acted to revive the banking sector, the source of the crisis, the broader economy was on the brink of a depression when his successor took office. Obama enacted a Keynesian stimulus package to get America moving again. Known as the American Recovery and Reinvestment Act (ARRA), this pumped $787 billion into the economy over a three-year period. Around 60 percent of ARRA consisted of increased spending on public works, interstate highway improvements, school enhancements, and aid to the states. To secure Republican support for the measure, tax cuts formed the final 40 percent. “With this act,” Obama declared, “we begin the process of restoring the 1 James Tobin, Essays in Economics: National and International, Volume 4 (Cambridge, MA, 1996), 747. 2 Robert Solow, ‘It Ain’t the Things You Don’t Know That Hurt You, It’s the Things You Know That Ain’t So,’ American Economic Review 87:2 (May. 1997), 107. 3 Jared Bernstein, ‘The Economies Inherited by Obama and Trump are as Different as Night and Day,’ Washington Post-Blogs, 2 December 2016. Online at ProQuest Central [Henceforth PQC] 7 economy and making America a stronger and more prosperous nation.”4 However, not everyone supported the president’s plan, especially two of the nation’s most eminent Keynesian economists. In January 2009, Princeton’s Paul Krugman said he would “make the stimulus 50 percent larger…I’m not sure if the $800 billion stimulus plan is adequate to the problem. We’re facing one hell of a crisis and we’ll need more than a band-aid.”5 At best, Columbia’s Joseph Stiglitz added, ARRA might prevent the recession from deepening, but it would far from revive the economy.6 Not only did the size of ARRA dismay Krugman and Stiglitz, so did its composition and timing. With almost 40 percent set aside for tax cuts, both complained that debt-burdened consumers would save rather than spend such an increase in their disposable income.7 Each acknowledged that ARRA amounted to the largest job-creation bill in American history, but a sizeable proportion of its spending measures consisted of funds to extend unemployment benefits, sustain Medicaid, and offset a lack of revenues for the states. “Only a fairly small piece,” Krugman said, was “for the kind of spending – building and fixing roads, and so on – that we normally think of when we talk of stimulus.”8 Unsurprisingly, Stiglitz claimed in August 2009 that ARRA had “not been enough,” especially as only a quarter of its spending measures came into effect during its first year. “[W]hat is needed now, is another dose of fiscal stimulus. If that does not happen, we can look forward to an even longer period in which the economy operates below capacity, with high 4 Barack Obama, ‘Statement on Signing the American Recovery and Reinvestment Act,’ 17 February 2009. Online at the American Presidency Project Website [Henceforth APP] 5 Cited in No Name [Henceforth n.n.,], ‘Bailout Not Adequate,’ Targeted News Service, 30 January 2009. PQC. 6 Cited in n.n., ‘Can Obama Stimulus Plan Create Jobs?’ Weekend All Things Considered, 10 January 2009. PQC. 7 Ibid; Paul Krugman cited in n.n. ‘Economists Offer Two Takes on Obama Stimulus Plan,’ All Things Considered, 21 January 2009. PQC. 8 Krugman, End This Depression Now (New York, 2013), 109, 121. 8 unemployment.”9 Obama did implement a second stimulus. In 2010, the president agreed to extend tax cuts passed by Bush in both 2001 and 2003.10 Yet, the American economy continued to experience a sluggish recovery, leading Krugman and Stiglitz to call in vain for a more activist response to the Great Recession. “America is still an economy in depression,” Krugman said, “and the rules of depression economics still apply: what we need, above all, is more spending, to put unemployed workers and idle productive capacity back to work.”11 Krugman may have wished his influence was akin to that enjoyed by Keynesians almost half-a-century earlier.