Download The “Orthodoxy” of Leon H. Keyserling: Advisor to the President.

The “Orthodoxy” of Leon H. Keyserling: Advisor to the
President.
W. Robert Brazelton, Phd.*
Abstract
The paper deals with selected, major views of Leon H. Keyserling, the major
economic advisor to President Harry S Truman; and second chairperson of the Council
of Economic Advisors to the President (CEA); and one of the major authors of the
Employment Act of 1946 which set up the CEA and the federal government’s role in
maintaining high employment and price stability. It was a major point of Keyserling to
maintain steady and constant growth through fiscal and monetary stimulus of the
economy for both full employment and socio-economic justice. Growth was the primary
focus of the economics of Keyserling which is demonstrated by his Presidential advice;
the Economic Reports of the President; his many years of testimony before Congressional
Committees; and his Conference on Economic Progress pamphlets, 1954-83.
Introduction
Leon Hirsch Keyserling was born in Beaufort, South Carolina in 1908. From
there he attended Columbia University (New York) for his undergraduate work in
Economics under the tutelage of Rexford Tugwell, an Institutionalist orientated
economist. Keyserling later received his Law Degree from Harvard University before
returning to Columbia for his Doctoral studies in Economics. He never finished his
dissertation because, upon the election of Franklin Roosevelt in 1932, he and Tugwell
were called to Washington by Senator Robert Wagner (D., NY) to work in the Roosevelt
Administration. Keyserling was first associated with agriculture, but later co-authored
many bills concerning agriculture, housing, and others including the National Industrial
Recovery Act, 1935; the National Labor Relations Act, 1935 (the Wagner Act); the
Employment Act of 1946; and, later, the Full Employment and Balanced Growth Act of
1978 ( the Humphrey-Hawkins Act)—all of which he considered more important than a
dissertation. In all of these major acts and, later, as Chairman of the CEA to President
Truman, his major emphasis was growth—growth for full employment; mass
consumption for high investment; and for social and economic justice (Brazelton and
Wehmeyer, 1989; Brazelton, 1997, 2001, 2003). In the paper that follows, several
specific, selected parts of Keyserling’s economic and policy analysis will be discussed
based upon his concept of constant growth for the benefit of all.
 Professor-Emeritus, Economics, University of Missouri-Kansas City
Economic Growth and Keyserling
To Keyserling, constant economic growth was a major necessity and goal for
economic policy (Brazelton, 2001, esp. 157-59)(Keyserling, 1954, 1957, 1962).
However, growth , unlike many advocates of “counter-cyclical economic policy, to
Keyserling meant constant growth. The economic policies should always be aimed at
full employment—full employment demand and full employment supply. It was, to
Keyserling, demand which drove supply; and , thus, consumption which drew out
investment and productivity. Thus, consumption was the key. It was, of course, wages
which were the source of aggregate demand. To Keyserling, national income was a
function of consumption, but consumption was derived from real wages. Thus, national
income was a function of real wages and the consumption derived therefrom to stimulate
investment and productivity (Brazelton, 2001)(Keyserling, 1957, 1958). This was a
demand side orientation which never floundered as a major belief of Keyserling.
Keyserling’s belief in constant economic growth for full employment led him to
believe in economic growth as a policy prescription for both anti-recessionary and antiinflationary economic policy. Obviously, in a recession, the fiscal authorities should
stimulate the economy and the monetary authorities should stand ready to facilitate the
fiscal deficits and the recovery from the recession. This is an orthodox policy
prescription. However, to Keyserling, growth should also be maintained in an inflation.
To Keyserling, an inflation was generally caused by inadequate supply, not excess
demand. The inflation was caused by administered pricing of oligopoly, possible
restrictions of output in order to maintain said prices, and bottlenecks in the economy.
Thus, a supply-type shortage, not excess demand. The correct policy was, therefore, to
stimulate supply. This could be done not by restricting demand in an inflation (which
was not the problem), but by increasing supply via selected controls over administered
pricing, if necessary; selected tax or other incentives to stimulate investment and, thus,
supply. An increase in supply would decrease the upward price pressures. Keyserling
argued that a to decrease output in an inflation harmed all; whereas a selected program
could be aimed at the specific offenders and the specific sectors where there were
administered pricing, supply shortages, or bottlenecks. Keyserling believed in the
proportional growth of supply and demand on both the micro and the macro levels, a
point to which we will return to later herein.
Keyserling also believed that orthodox anti-inflationary policy of restricting
demand was, in fact, inflationary and would, thus, increase inflation, not decrease it. If
anti-inflationary economic policy cut back on aggregate demand to attempt to reduce
upward price pressures, it would mean that the firm would produce less than before as
demand fell, Theoretically, this would reduce prices as the “excess demand” was
decreased. But, given the average cost schedule of the firm, this would mean that the
firm would have to cut back on its output. This would push its output towards the left of
the lowest average costs per unit of output and, as a result, per unit cost would rise. As
per unit costs rose, prices would tend to rise, especially in a world of administered
pricing. Thus, the policy to reduce aggregate demand to end an inflation could be
counter-productive –it would , instead, increase inflation. The more correct policy would
be to stimulate supply to meet the consumption needs of the economy with policies aimed
at the lagging sectors of the economy where administered pricing and/or bottlenecks had
brought about a supply side shortage—the real cause of inflation (Brazelton,
2001)(Keyserling, 1959, 1964).
There was another reason why “orthodox” anti-inflationary economic policy was
counter-productive . Such a policy calls for higher interest rates initiated by the policies
of the Federal Reserve. Higher interest rates would decrease investment and consumer
borrowing to decrease investment aggregate demand back towards the level of
aggregate supply—the diminishment of so called “excess demand”. But, to increase
interest rates would also increase costs which may be passed on to the consumer and,
thus, may be inflationary. Also, and to Keyserling with his emphasis upon growth, it
would mean that the economy was not growing at its full employment potential. This
would decrease employment, decrease growth (both micro and macro), and lead to less
than full employment growth in a counter-productive attempt to end inflation—an
inflation whose primary cause was inadequate supply, administered pricing, and
bottlenecks, not primarily by excess demand (Brazelton, 1997, 2001)(Keyserling,
1959,1960, 1962,1964, 1970). Lastly, the lost output from the restrictive antiinflationary policy rather than a supply-growth orientated incentive policy would
decrease output in that period of time which would be lost forever as it cannot be made
up for in the future due to the full employment ceiling of output. Thus, the output and its
benefits to the economy and its citizens would be lost forever.
The above analysis concerning monetary theory and high interest rates as a
curative to inflation which, to Keyserling, was a policy error, meant that he was an
advocate of low interest rates to stimulate high investment and high growth. This was not
a view held by only a few economists in the Post War II period, especially before 195051. Many economists believed that the Post World War II era would return to the
depressionary conditions preceding the War, the 1930s (Brazelton, 1961, 1989, 2001).
This, of course, did not happen due to the forced savings built up in the American
economy during the War due to domestic rationing of consumer products for the War
effort ( housing, rubber, gasoline, automobiles, certain agricultural items, etc.); the post
War advent of the Cold War and the resultant continuation of military expenditures and
the rebuilding of Western Europe, etc; and the general expansionary policies of the
Truman era itself. However, the latter policies generally were accomplished during a
period of low interest rates domestically.
The low interest rates of the period were largely due to the Federal Reserve’s
policy of being the buyer of last resort of government bonds at the prevailing, low rate
of interest—a pegging of interest rates. This was generally expansionary as the fiscal
authorities could expand the deficit without fear of rising interest rates which would
decrease the expansionary effect of the budget deficit (the later so called “crowding
out”). However, in 1951, the Treasury and the Federal Reserve reached an “Accord” in
which the Federal Reserve would no longer be the buyer of last resort at the low,
pegged interest rates, but at the market rate. This policy change was due to some
inflationary pressures in the economy and to the military build-up caused by the Korean
War. As a result, interest rates rose. To Keyserling, this was the greatest economic
mistake of the Truman era(Brazelton, 2001)(Keyserling, 1960,1964,1970, 1980). In the
long run, to Keyserling, it has led to higher interest rates, and less than full employment
growth and a mismanagement of economic policy (Brazelton,1997,)(Keyserling,
1960,1964,1970, 1979, 1980).
But, given the above, what should be the economic policy of the federal
government? It should be growth-orientated, but what more specifically should it be?
Keyserling attacked this problem under the guise of the “Nation’s Economic Budget”, or
the “Freedom Budget”, etc., in numerous publications , including the reports of the CEA
itself(Brazelton, 1997, 2001)(Keyserling, 1996, 1983).
The “Freedom Budget” or the “Nation’s Economic Budget” was a fiscal policy
concept that can be found in Keyserling’s economic reports, Congressional testimonies,
pamphlets, and other publications by means of charts, diagrams, and tables (Brazelton,
1997, 2001)(Keyserling, 1996). These indicated that to maintain full employment , the
federal budget should be balanced at full employment. If it were balanced before full
employment, unemployment would exist and actual economic growth would be short of
potential economic growth. Herein, Keyserling was aware of the growth analysis of
Evsey Domar and Sir Roy Harrod, but he considered them to be too theoretical
(Brazelton, 2001). If, on the otherhand, the federal budget should be balanced beyond
the point of full employment, there would be inflation. Thus, the federal budget should
be balanced at full employment for the economy to grow at a rate where actual growth
was equal to potential growth (full employment growth)—a policy which also
emphasizes price stability and socio-economic justice. To the reader, the above may
sound like the “Full Employment Budget Concept” inaugurated by Walter Heller as
chairman of the CEA under the later Administrations of Presidents Kennedy and
Johnson. The two analyses were largely the same. In fact, in a later statement by Walter
Heller, he state that “The concept of full-employment potential and gap closing were not
brand new; they were traced back to the bold and innovative Truman Council under the
leadership of Leon Keyserling”(Brazelton, 2003)(Pechman and Simler, 1982, pp. 237-8).
The concentration upon growth had a corollary aspect to it—balance. Thus,
growth must be balanced growth. This analysis of growth was both micro-orientated and
macro-orientated. On the micro-level, if there were an increase in the output of one
product, there must be an increase in the inputs or in complimentary products. If there is
not, such resultant bottlenecks might limit growth towards full employment and raise
prices where the shortages existed. Herein, selective incentives might be a solution
plus, if needed, anti-trust or related policies. On the macro-level, the growth in aggregate
supply must be absorbed by an increase in aggregate demand. After all, the purpose of
production is consumption and, via consumption, the profits necessary to further
investment, productivity and growth. Thus, growth must be accompanied by balance,
both in the micro-sector and the macro-sector. All was for the interrelated purpose of
continued full employment growth, price stability and social justice (Brazelton, 1007,
2001)(Keyserling, 1976, 1977, 1978, 1983).
Conclusion
A primary goal of Keyserling and his analysis and policy was growth; and the
balance between the micro and macro sectors of the economy. This was to be maintained
by an easy monetary and fiscal mix with the use of selective controls or incentives when
and where necessary or desirable. However, in terms of especially anti-inflationary
policy, Keyserling would prefer to use a well-aimed rifle to aim at specific sectors
where the problems were rather than a shot-gum approach which hits all sectors of the
economy—the guilty and the innocent. As we have seen above, this was a strong
argument in terms of his anti-inflationary policy and, when needed, the stimulation of
lagging sectors of the economy; and where administered pricing or bottlenecks were
present. Growth, balance, and social justice were not separate policy objectives; they
were all tied together and dependent upon one another. Growth, balance, the correct use
of demand and/or supply enhancement policies for continued full employment growth
are all consistently tied together in the long-run aim of socio-economic justice.
Appendix I
The following is a list of “book length” pamphlets (Keyserling’s words)
developed by Leon Keyserling and his economist wife, Mary Dublin Keyserling, during
the period 1954-83 under the auspices of the Conference on Economic Progress,
Washington, D.C. and are referred in the above; and are all deposited at the Truman
Memorial (Presidential) Library, Independence, Missouri, U.S.A.
References(see also Appendix I, above)
Brazelton, W. Robert and Wehmeyer, Willadee. LeonH. Keyserling
And Mary Dublin Keyserling, Growth and Equity: Over Fifty
Years of Economic Policy and Analysis From Roosevelt to Bush.
A study for the Truman Memorial Library, Independence, Missouri,
U.S.A.,1989a.
Brazelton, W. Robert. “Alvin Harvey Hansen: Economic Growth and a
More Perfect Society”, The American Journal of Economics and
Sociology, Vol. 48, October, 1989b, pp. 427-40.
__________________. “Retrospectives: The Economics of Leon H.
Keyserling”, Journal of Economic Perspectives, Volume 11(4), 1999,
pp. 187-97.
___________________. Designing US Economic Policy: An Analytical
Biography of Leon H. Keyserling,, London: Palgrave
Press, 2001.
___________________. “The Council of Economic Advisors and the Full
Employment Budget Concept, Keyserling Before Heller”, Journal
Of Economics, xxix, 2003, pp. 87-102.
Keyserling, Leon H.. Toward Full Employment and Full Production, Washington:
Conference on Economic Progress ( see Appendix I for this and below),
1954.
________________. Consumption—Key to Full Employment, Washington:
Conference on Economic Progress, 1957.
________________. Key Policies for Full Employment, Washington:
Conference on Economic Progress, 1962.
_________________. Inflation—Cause and Cure, Washington: Conference
on Economic Progress, 1958.
__________________. Tight Money and Rising Interest Rates, Washington:
Conference on Economic Progress, 1960.
____________________. The Toll of Rising Interest Rates, Washington:
Conference On Economic Progress, 1964.
______________. Growth with Less Inflation and More Inflation
Without Growth, Washington: Conference on Economic Progress,
1970.
__________________. Towards Full Employment Within Three Years,
Washington: Conference on Economic Progress, 1976.
___________________. The Full Employment Bill and Full Employment
Within Three Years, Washington: Conference on Economic Progress,
1978.
____________________. Liberal and Conservative Economic Policies and Their
Consequences, 1919-79, Washington: Conference on Economic Progress,
1979.
____________________. Money, Credit, and Interest Rates: Their Gross
Mismanagement by the Federal Reserve, Washington: Conference on
Economic Progress, 1980.
____________________. How to Cut Unemployment to Four Percent and End
Inflation and Deficits by 1987, 1983.
Pechman, Joseph and Simler, N.J. Economics in the Public Interest: Papers
In Honor of Walter W. Heller, New York: Norton Press, 1982.