Growth without Inflation: Kennedy' Forgotten Prescription
by Charles Hammer Growth without Inflation: Kenndy' Forgotten Prescription That economic policy alternative they say the Democrats don’t have-could the blueprint lie not in some hazy future but...
...Republicans said Kennedy’s dispatch of the FBI agents was “Gestapo tactics...
...Steel official snapped off the set and said: “Well, I thought he would have viewed the situation more in sorrow than in anged’ Anger there was, but there was also much of the hard, calculating thought Kennedy is remembered for...
...Walter Heller passed on to Lyndon Johnson in December 1963 a memo observing that the AFG CIO felt their members “have been good boys long enough...
...interview with a newsman who had covered the stockholders’ meeting...
...For the first few years of the Johnson administration, the guideposts worked fairly well...
...Consumer prices had risen just 1.3 percent a year from 1960 to 1965...
...ten days earlier-on March 31-the union leadership signed for a 2.5 percent package composed solely of fringe benefits...
...How was it done...
...The president read and reread Blough’s statement, then told him, “I think you have made a terrible mistake...
...For it was President John Kennedy, a Democrat, who discovered-or rather stumbled across-the one thing our economy needs most: a tool to control inflation without causing recession...
...Crossing steel The centerpiece of the Kennedy-Johnson strategy was a set of Wage and Price Guideposts aimed directly at the business and labor leaders who influence price decisions...
...Kennedy also knew something his predecessors often forgot-you can’t enlist labor in the fight against inflation unless you convince workers that they won’t be suckers when they make sacrifices...
...In Kansas City I read about those “Gestapo tactics:’ and I envied the newsman who had been awakened at 4 a.m...
...The night of April 11 he went on national television to denounce the willful men who had displayed “irresponsible defiance” of the public interest...
...That day they had lost the guideposts battle with the Machinists union, though they were yet to discover how bad the defeat had been...
...Forget the wish that Kennedy had not been murdered or that Vietnam had never happened...
...The economy was expanding faster than it had since World War 11, and inflation was almost nil...
...And hearing the rage against Kennedy, it occurred to me that the president had broken no law...
...Prices of an industry’s goods should fall if its productivity increased faster than the national average...
...U.S...
...He was a leader in a metals industry that, despite slackening demand and idle machines during the 1950s, had managed to raise its prices three times faster than other manufacturers...
...Between lhesday and Saturday, Kennedy had won the first battle of its kind in American history-and almost the last...
...Sometime, somewhere, we will have to find a way to convince the unions that they cannot continually push wage costs up, and to convince business that profit margins cannot continually rise...
...The economic growth rate had averaged 4.5 percent, nearly double that of the previous five years...
...that labor’s share of income has been slipping while the corporations have been racking up unwarranted price increases!’ Heller also said that Walter Reuther, head of the United Auto Workers, felt that the recent declaration by General Motors of extra stockholders’ dividends equivalent to a 73-cents-an-hour wage hike was seriously compromising his own position within the labor movement...
...What if he had used the power of government contracts to roll back, or at least halve, increases for Hoffa’s Teamsters and the building trades...
...Today,.across the Atlantic and around the world, one hears again of the ‘American economic miracle: We have again shown the world what free men and a free economy can achieve!’ Needless to say, nobody’s talking these days about an American economic miracle...
...Wholesale prices had risen only 2 percent in the entire fiveyear period, “a record no other industrial nation can match:’ Heller said...
...The guideposts suggested this was the answer, as did Reuther...
...Someone, however, should have noticed the extraordinary nosedive of the line of the graphs that depicted standard unit labor costs...
...A major reason is that many Americans accept without argument his explanation that he can do no better because of the mistakes of his Democratic predecessors...
...Bethlehem, the nation’s largest ship steel producer, missed out...
...The President’s Council of Economic Advisors certainly thought it had something in January 1965 when it trumpeted: “These four years of expansion have demonstrated that the American economy is capable of sustained balanced growth in peacetime...
...Perhaps naively, Ackley wrote that inflation was not a problem to be solved in the next six...
...In 1966, Gardner Ackley, chairman of Johnson’s Council of Economic Advisors, wrote the president that Reuther was complaining again...
...That did it for Roger Blough...
...Wages should increase at the same rate as the rise in national productivity...
...That’s why he was willing to go bare-knuckled against the toughest delinquent in the American industrial classroom, becoming the first president to make vigorous use of behavior modification in economics...
...Blough had reason that day to be satisfied with himself...
...He had succeeded...
...They had it in their hands-and then they let it slip away...
...Steel’s lead, a vice president of Bethlehem had declared at a stockholders’ meeting that his company would not be raising its steel prices...
...And like Big Steel, the auto companies and their workers fattened themselves for slaughter in the seventies by the leaner Japanese...
...At times, the president himself met with negotiators and appeared on TV with them to announce a result within the guideposts, which tied wage increases to the nation’s 3.2 percent annual increase in productivity...
...In 1965 he fought aluminum and copper price hikes by suggesting that if there was a shortage of these metals, he would sell government stockpiles on the open market...
...Robert Kennedy, the attorney general, announced there would be a grand jury probe for antitrust violations...
...Real compensation for all employees rose about 30 percent...
...But the auto industry said no, and the UAW went after its own piece...
...Or what if Johnson had worked hard to redistribute the productivity gains more fairly between wages and profits...
...The administration set out to divide the industry...
...Steel wage settlements had averaged 5.3 percent from 1953 to 1961...
...Corporate after-tax profits doubled during this period...
...by Charles Hammer Growth without Inflation: Kenndy' Forgotten Prescription That economic policy alternative they say the Democrats don’t have-could the blueprint lie not in some hazy future but in a forgotten glory of the past...
...Shortly thereafter, the Pentagon awarded a $5 million armor plate contract to the Lukens Steel Company, which had not raised prices...
...Workers in other industries will try to follow him, touching off a massive wage-price spiral...
...I’ Perilous profits The showdown with Big Steel illustrates how Kennedy’s Wage and Price Guideposts grew some teeth...
...After five years of success, the guideposts slowly came apart, not from lack of usefulness but from lack of use...
...And in histories by contemporary economists, even those who admired Kennedy, the steel episode often is mentioned in almost embarrassed tones...
...As a result, the years trickled past with what now seem like ridiculously tiny increases in the consumer price index: 1961, .7 percent...
...By early 1968 construction industry settlements were averaging 7.5 percent...
...Housing starts dropped off by nearly half...
...It will have to be approached head on:’ he told the president...
...Though milder than Kennedy’s blast at Big Steel, it drew similar criticism: The New York Times chastised Johnson for making it appear that aluminum was singled out unfairly...
...The Machinists union won a fat 4.9 percent settlement from five airlines who, with regulation, could easily pass the costs directly to passengers...
...Steel bandwagon...
...General Motors announced several months ago an increase in car prices of 2.5 percent, few voices protested that after the most disastrous years in the industry’s history, it would be more prudent to hold the line on prices (and wages) to regain the market lost to foreign competitors...
...Prices kept going up anyway: 3.4 percent in 1966, 3 percent in 1967, 4.7 percent in 1968...
...Rowen relates that, as the cameras showed Kennedy leaving the stage of the State Department auditorium, a US...
...Just two days before it announced it would follow US...
...In 1968 Congress passed a tax increase to cool demand even further...
...What if Johnson, like Kennedy, had finally said: “There is no sense raising hell and then not being successful...
...They wanted to know the Bethlehem official’s exact words...
...You have to name names and punish those who are causing the trouble...
...Blough had been clever enough to keep quiet while Kennedy was pressuring the steelworkers unions for a noninflationary settlement...
...No law of nature compels a freemarket economy to suffer from recessions and periodic inflation...
...1963, 1.6 percent...
...Instead, the deliriquent suffered a terrible humiliation, and the exemplary effect on the rest of the class continued for years afterwards...
...The Guideposts were based on a few simple principles...
...One year later President Lyndon Johnson, in his annual economic report, was able to crow: “A few years ago much was heard of the ‘European economic miracle...
...Today, of course, it’s a widespread belief that there is no economic justice, that greed pays ,off and is never punished...
...1 still recall vividly how Kennedy, in April 1962, went on national television to denounce a $6 per ton price increase by the nation’s largest steelmakers...
...The FBI agents gave him a better story than I got all that year...
...To Kennedy’s surprise, Blough handed him a press release that had already gone out, stating that it would raise prices by $6 a ton...
...Nothing better illustrates that than the drama that began to unfold at 5:45 the afternoon of April 10,1962, when Roger Blough, chairman of US...
...In a television interview in late 1962, Kennedy said: “If I had not attempted, after asking the unions to accept the noninflationary settlement, if I had not attempted to use my influence to hold their prices stable, I think the union could have rightfully felt that they had been misled...
...In the case of the economy, this means getting tough when it’s necessary with the people who have the power to raise wages and prices-namely, corporate officers and union leaders...
...But what were the results of the tough economic policies followed by Kennedy, and, for a few years, his successor, Lyndon Johnson...
...As of that April afternoon in 1962, steel had gone several years without a rise in price...
...There is no sense in raising hell and then not being successful...
...Steel’s insensitivity in raising prices...
...Like Gerald Ford’s and Jimmy Carter’s councils on wage and price stability, Kennedy’s guideposts had no legal teeth...
...Together they controlled 80 percent of the nation’s steel production...
...And though it’s often forgotten today, that era was full of similar fears that American business was losing its competitive edge in international markets, the threat then coming from the new factories and technologies, and not of the Japanese, but of the Europeans...
...Even in the midst of severe recession, price increases are greeted with indifference and swallowed whole...
...Steel caved in the same day, and the rest of the industry quickly followed...
...That view, however, is a perversion of history...
...From 1960 to 1963 those costs dropped nearly 4 percent, hinting that workers were becoming a smaller cost of production...
...The biggest blow to the guideposts came in July 1966...
...The roots of inflation With the Kennedy-Johnson era long gone, I’ve often wondered about the what-ifs and the mighthavebeens...
...They worked because Kennedy was willing to use his power and authority to punish those who broke them...
...As the breakup was starting, Gardner Ackley sat up after midnight on July 27, 1966, writing the president a discouraged memo...
...they’ve tried to control inflation largely through fiscal and monetary policies that have often depressed the entire economy...
...The gold mine was the miracle of industrial productivity, of which the auto industry was lucky enough to be the approximate middle...
...But history suggests that once they get worse, the job is twice as difficult!’ For me that autumnal frustration is doubled, because our politicians had already found that way...
...Imagine that, instead of ignoring this advice, Johnson had faced down the industry and got his price cut, putting pressure on the automakers through the thousands of cars purchased annually by the government, not to mention the growing flood of military orders...
...Meanwhile, during those years the gross national product increased $218 billion-or by one-third after inflation...
...Hobart Rowen, then a Newsweek correspondent, watched the broadcast in U.S...
...It would have endangered the whole bargaining between labor and management, would have made it impossible for us to exert any influence in the future...
...Or maybe things have to get worse before they get better...
...they would rise in those industries where productivity growth was slower than the national average...
...But they also have reason to recoil from the relentless use of power by the president...
...Walter Heller, the administration’s chief economist, outlined the results when he spoke at Harvard in 1966...
...Joseph Livingston, a columnist often friendly to Kennedy, wrote, “Persons who regard themselves as ‘liberals’ and even New Dealers had reason to resent U.S...
...1962, 1.2 percent...
...When the game was oved’ Heller would complain later in a memo, “steel prices had been raised 47 percent and wages 64 percent in just seven years...
...General Motors alone earned over $2 billion, or a 26 percent after-tax return on equity, a figure more reasonably associated with a newly opened gold mine...
...Steel’s corporate offices and detailed the story in his book, The Free Enterprisers, to which I owe much of this account...
...Should the gold be shared, say with schoolteachers, by means of a price cut...
...Suspecting antitrust violations, Kennedy aides sent FBI agents to a 4 a.m...
...Maybe it can’t be done...
...Seven million new jobs were created, cutting unemployment from nearly 7 percent to less than 4 percent...
...Class...
...the growth rate slowed from 6 percent in 1966 to 2.7 percent in 1967...
...Now it wanted one...
...If we can’t pull their prices down, Reuther will go after their profits in 1967 with a huge wage demand...
...They then turned their attention to Bethlehem Steel...
...months or two years but in the decade...
...It doesn’t help to say, “Class...
...This time, greedy behavior was not reinforced by the reward of a price‘ increase...
...Kennedy’s successors haven’t understood this...
...As a young reporter for the Kansas City Star I read with relish the subsequent wire service dispatches describing how Big Steel fought back but then relented...
...In a letter to his membership, the union’s president rejoiced that this victory “destroys all existing wage and price guidelines now in existence!’ As predicted, the UAW got 6 percent in its 1967 contract, nearly double the guideposts...
...The source of the problem is fantastic automobile profits:’ Ackley said...
...His aides soon talked one small steel firm, Inland, into announcing it would not join the increase...
...The Detroit-Toledo Building Trades union was demanding 30 percent a year...
...1964, 1.2 percent...
...Yet Kennedy, although he had no legal authority over prices, wasn’t going to accept what he considered a double-cross without afight...
...From many quarters, the criticism was fierce...
...The Federal Reserve responded with a credit crunch in 1966, forcing interest rates to rise...
...In 1958, for example, Reuther had told Congress that if the auto companies cut prices and derived their profits from increased sales, the UAW would curb its wage demands accordingly and seek sustenance in greater production and more jobs...
...But now, Heller observed, “He’s tired of remaining moderate while the irresponsibles in the labor movement like [Teamsters President Jimmy] Hoffa and the building trades are pushing inflationary wage increases with impunity...
...It was summer in Washington, but in his words there was the smell of falling leaves and lost opportunity-the lost chance to demonstrate that no law of nature compels us to suffer periodic inflation and the recessions that follow, with their armies of the unemployed...
...What if Johnson had acted on the 1964 finding of his cabinet-level task force that the guideposts justified an average cut of $60 in car prices...
...Steel, strode purposefully into John Kennedy’s Oval Office...
...Business thrived as well...
...By Friday, April 13, two other small firms had indicated they would not climb on the U.S...
...it was running at 6 percent when Heller spoke in 1966...
...Steel had been joined in the increase by its main competitors: Bethlehem (number two in the industry), Republic, Youngstown, and Jones and Laughlin...
...The steel industry and its union had played leapfrog with each other, both ending up with a bigger share of the American economic pie...
...Unlike them, they also happened to work...
...In 1965 the Big Four companies earned over $3 billion after taxes...
...In those years steel was the focal point for the inflation that largely created the balance of payments problem...
...In this serious hour in our nation’s historg’ he said, “with grave crises in Berlin and Southeast Asia...
...And as corporate profits continued to surge, labor began to notice...
...The last of the union locals ratified the noninflationarey contract just before Blough walked into Kennedy’s office...
...Since Johnson the economy has deteriorated to the point where, with 9 percent unemployment and 4 percent inflation, President Reagan can claim economic victory-and get away with it...
...When...
...the American people will find it hard, as I do, to accept a situation in which a tiny handful of steel executives, whose pursuit of private power and profit exceeds their sense of public responsibility, can show such utter contempt for the interest of 185 million Americans...
...I just think, looking back on it, that I would not change it at all...
...Kennedy also used fiscal and monetary policies, but he knew they were not enough, in part because they often left corporate officers and union members immune...
...It’s as if some strange mix of politics, psychology, and paternal rage had intruded into the orderly world of economics...
...Kennedy’s discovery was the same one every teacher makes when walking into a classroom where a few children are grabbing and fighting...
...Those for whom productivity increases were difficult to gaugeteachers, for example-should be compensated according to the overall growth in productivity...
...As James L. Cochrane, an economic historian, recounts in a recent essay on Johnson’s wage and price policies, the government sat in as more than a mediator at every major contract negotiation...
...1965, 1.9 percent...
...The next day, Bethlehem capitulated, its officers saying they would rescind the price increase to remain competitive...
...He had merely demonstrated that his government would not do business with inflation...
Vol. 15 • December 1983 • No. 9
