The Pragmatic Professor

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In the intricate workings of cause and effect, there come moments in every life when great consequences hang in shaky balance, to be tipped by a tiny mischance, a trivial decision. A man misses a train by half a minute, wanders into a bookstore while waiting for the next train, and picks up a book that might alter his life forever. Another, taking a walk in the country, comes to a fork in the lane, hesitates, chooses the left turn rather than the right, and meets the girl he will marry. Afterward, men often look back upon such events and call them inevitable.

During last autumn's presidential campaign, friends invited Walter Wolfgang Heller, chairman of the University of Minnesota's economics department to attend a Democratic dinner in honor of Candidate John F. Kennedy. Heller decided to stay home. "I wasn't feeling very well," explains Heller's wife Emily, "and we were both tired. We don't mix in politics anyway." But to Emily's surprise, Heller decided after dinner to go out after all and take a look at the man who might be the next President of the U.S. As Heller approached the cluster of people gathered around Kennedy, Minnesota's Senator Hubert H. Humphrey, who knew Heller as a longtime economic consultant to Minnesota politicians, beckoned him and introduced him to the candidate. Other people in the cluster stepped back a bit, as if they thought Kennedy and Heller might have some important matters to talk about. Keeping TV cameramen waiting impatiently for him, Kennedy talked with Heller for about ten minutes.

When Heller got home that night he sat down at his dictating machine and composed a memo to Kennedy elaborating on some points that had come up during their talk. Heller never met Kennedy again during the campaign, heard nothing from him until a week before Christmas, when, to Heller's astonishment, the President-elect telephoned him from Palm Beach and asked him to join the new Administration as chairman of the Council of Economic Advisers.

The Ear of the President. Economist Heller is an impressive man, of a type that especially impresses John Kennedy: the present-minded professor who tempers earnestness with cordiality and intellect with a touch of ambitious worldliness. In looking around for a top economist to chair the Council of Economic Advisers, Kennedy asked several economists to furnish him with lists of prospects, and Heller's name stood high on most lists, but what tipped the decision to Heller was probably that almost-never-was encounter in Minneapolis. Since the ramifications of the Federal Government's economic policies reach into every home and office in the nation, Walter Heller's hesitant decision to go and take a look at Candidate Kennedy may well affect not only his own life, but to a degree the life of every U.S. citizen.

In protocol status, Walter Heller, 45, ranks way down the list of Kennedy appointments, but in potential influence on the course of Administration policies, and on the Administration's success or failure in living up to its promises, he ranks close to the top. The chairman of the CEA wields no policymaking powers. His authority extends no further than the drab CEA offices on the third floor of Washington's ornately ugly Executive Office Building. But he has the ear of the President of the U.S. on public issues as momentous as any the nation is likely to face in the early 1960s, aside from the vital decisions of defense and foreign policy.

Sweeping Shift. Kennedy made economic issues--the recession, rising unemployment, the lagging growth rate--a central theme in his campaign for the presidency. Economic policy is the heart of his New Frontier program, the core of his oft-repeated campaign promise to "get this country moving again." The Administration is relying on speeded-up economic growth to reduce unemployment, to provide extra funds for national defense, and to pay for new and expanded education and welfare programs. The most drastic change that the New Frontier has brought to Washington is a sweeping shift of economic goals and approaches.

Dwight Eisenhower believed passionately in Abraham Lincoln's credo that the legitimate object of government is "to do for the people what needs to be done, but which they can not, by individual effort, do at all, or do so well, by themselves." Even in recession he warned of the dangers of inflation, crusaded for a balanced budget with homilies about a well-run household and the future freedom of his grandchildren. In practice, Eisenhower budgets got bigger and taxes stayed high, but that was in spite of the Administration's ideals, not because of them.

The economic planners of the new Administration believe that much has been lost because government has not done some basic things that the people, unless acting together in government, cannot do for themselves. During the campaign, Jack Kennedy told a Labor Day audience in Detroit that each working man had been cheated of $7,000 in the past eight years because the U.S. growth rate had been allowed to lag. Kennedy's economists hold the Federal Government responsible because it did not act with sufficient vigor to get the U.S. out of the 1958 recession. In the long run they would run the risks of mild inflation--and, if necessary, even impose controls intended to keep it mild--to guarantee continued growth and full employment. But, more important, their theories range to the level of ethical national choices. They hold that the quality of American life--the level of education, the extent of unemployment and poverty--is a prime responsibility of government. Thus they see taxes and budgets not as evil or good in themselves, but as instruments for doing the things that they think government ought to do.

The Road Ahead. Among his fellow economists, Walter Heller is usually tagged as a "liberal," but he departs so often from what used to be liberal cliches that the identity tag is a bit blurred. A more descriptive label, one that he applies to himself, is "pragmatist." That is the vogue word among economists today, the term that most of them use to label themselves and one another. When economists call themselves pragmatists, they mean that they are the opposite of dogmatists, that they are wary of broad theories, that they lean to the cut-and-try approach to public problems, and that they believe it is possible to improve the functioning of the economy by tinkering with it.

Pragmatist Heller takes a rather cheerful tone about the economic road ahead. He considers the current recession "mild," thinks that the antirecession program that the President has submitted to Congress will be enough to get an upturn going, despite the complaints of labor leaders that the program is too skimpy. And, if necessary, the Administration will simply mix another batch of remedies, in keeping with the President's promise to "submit further proposals to the Congress within the next 75 days" if the recession deepens. Looking beyond the current recession to the goal of faster growth, Heller is "basically hopeful and optimistic about what can be accomplished," he says. "My awareness of the seriousness of the situation is balanced by a conviction that we can do something about it -- and without interference in the basic freedom of our capitalist system."

Heller sounds so cheerful at times that he gets accused of being overly optimistic. In a TV interview a couple of weeks ago, a questioner charged him with being an "onward and upward predictor," contradicting the "gloomy view" that Kennedy took during the campaign. Was he really so confident that the Administration's antirecession measures would work? Replied Heller: "Yes." That confident yes is characteristic of Heller, and of the new pragmatic economics.

Dreary, Desolate, Dismal. Cheerfulness about the prospects of tinkering successfully with the economy, and doing a lot more good than harm in the process, contrasts strikingly with the gloominess that tinged economics during much of its history. To the British writer Thomas Carlyle in the middle of the 19th century, the classical economics, with its stress on the iron inexorability of economic laws, seemed "dreary, desolate, and indeed quite abject and distressing . . . the dismal science."

In the 1930s, the Depression economics of Britain's John Maynard Keynes modified classical doctrines, but it still had a whiff of the "dismal science" about it: the internal dynamism of the capitalist economy was gone forever, as Keynes saw it, and permanent government manipulation would be needed to keep the economy from sinking into stagnation. Even after the splendid performance of the U.S. economy in World War II (in part because of planning, in part in spite of it), economists tended to take a melancholy view of what lay ahead, predicted massive transitional unemployment. It was against this somber background that Congress passed the Employment Act of 1946, making it a "responsibility" of the Federal Government "to promote maximum employment, production and purchasing power," and creating the Council of Economic Advisers.

Soap-Bubble Systems. Since 1946, U.S. economics has undergone some pervasive changes. The spiritual parent of these transformations was Columbia University's Professor Wesley Clair Mitchell (1874-1948), whose treatise, Business Cycles, is widely regarded as the most important of all U.S. contributions to economics. Mitchell was the "prophet of facts and figures." In his youth he studied economics and philosophy, and he noticed in both a common tendency to "spin speculations by the yard," build up "grand systems like soap bubbles." Mitchell insisted that what economics needed was more facts. To that end he founded, in 1920, New York's National Bureau of Economic Research (now presided over by Arthur Burns, sometime CEA chairman under President Eisenhower).

Perhaps the most important development in U.S. economics since 1946 has been the emergence of what Mitchell called for: a body of statistical information on how the economy actually behaves under various conditions and under the impact of various policies. Says Walter Heller: "We simply know a whole lot more about where we are than we ever did before." The accumulation of detailed economic data, plus the refinement of statistical techniques, has brought about what Stanford Economics Professor Kenneth Arrow calls the "professionalization" of economics. By broadening the areas of fact, the professionalization has narrowed the areas of theory, of disagreement, and blurred the old boundaries between liberals and conservatives.

Confidence Restored. Those boundaries have been further blurred since 1946 by a growth of confidence in the vitality of the U.S.'s "mixed" economy--capitalism modified by Government involvement. Here, again, Wesley Mitchell was something of a prophet. He took an "optimistic view of the future," he wrote in 1923. "For since the money economy is a complex of human institutions, it is subject to amendment. What we have to do is find out just how the rules of our own making thwart our wishes, and to change them."

The performance of the U.S. economy after 1946--avoiding both deep recessions and severe inflation, reaching unprecedented peaks of national affluence--restored Depression-shattered confidence in the market economy, and reconciled conservatives to Government intervention to combat unemployment and help out the weak with welfare programs.

One result has been a waning of controversy among economists. Today, says Kenneth Arrow, "you have to find a real crackpot to get an economist who doesn't accept the principle of Government intervention in the business cycle."

Walter Heller exemplifies the softening of past liberal-conservative conflicts. Items:

P: A decade ago economists identifiable as liberals were automatically prolabor, rejected the idea that wage increases could be economically harmful. Today Heller, like most other economists, holds that "excessively generous wage bargains'' between unions and management can lead to "cost-push" price upcreep.

P: Preservation of the 4 1/2% interest rate ceiling on long-term U.S. Government bonds is still an article of faith among liberal Democrats in Congress, but Heller calls the ceiling a "nostalgic" relic, wants Congress to abolish it so as to give the Treasury more flexibility in managing the national debt.

P: Heller advocates a radical program of tax reform, but conservatives could well support it. He wants to lower the federal income tax rates from the present range of 20%-91% to 14%-60% and abolish virtually all loopholes and preferential deductions. Heller considers the present income tax structure not only inequitable, but uneconomic too: it impedes economic efficiency by distorting economic decisions. Thorough tax reform, he believes, would improve the U.S. economy's overall efficiency.

The Jugular Area. Born in Buffalo and raised in Milwaukee, Walter Heller early decided on the shape of his career: "I wanted to combine the academic background with public service." He acquired a respect for learning and for public service from his German-born father, a civil engineer whom Heller recalls as an ''immensely wide reader. As a child I took for granted a range of parental information that as a parent I have never been able to live up to myself. My father knew the answer to every damn question a kid could think of."

Heller's decision to become an economist was a direct result of the Great Depression. "The Depression," he says, "attracted some of the best young minds into economics. Those of us who were growing up then saw the economy flat on its back. To explain why, and to try to do something about it, seemed a high calling. At the same time, we saw the first great influx of economists onto the Washington scene. Economics had become the exciting, the important profession."

After getting his A.B. from Ohio's Oberlin College, Heller went to the University of Wisconsin for graduate study, there married a fellow student, a professor's daughter named Emily Johnson. Three years later, they got their Ph.D. degrees (hers in physiology) on the same day, "about seven seconds apart." Heller observes that their first child (they have three) was not born until after they won their degrees. "That proves how essentially conservative I am," he says.

As his graduate specialty Heller chose finance and taxation. "It seemed to me the critical area, the jugular area, of Government economic policy." Heller has remained a "policy-oriented" economist. His career has been a shuttling back and forth between the university campus and Government bureaus.

Kept out of military service by dim eyesight (20/100 in one eye, 20/200 in the other). Heller spent the war years in the Treasury Department in Washington, working on the massive wartime increases in taxes. After the war, he joined the faculty at the University of Minnesota. But he sallied out at various times to serve as a financial adviser to U.S. Military Governor Lucius Clay in occupied Germany (1947-48), financial adviser to the U.N., a member of the Treasury team that worked out Korean war tax increases, fiscal adviser to Minnesota's Governor Orville Freeman (Secretary of Agriculture in the new Administration), consultant to the state tax department and, last summer, tax-reform adviser to the government of Jordan.

Behind a rather placid-seeming, professorial surface, Walter Heller seethes with drive and energy. In 1955, working on economic messages and policy papers for Governor Freeman atop a heavy academic load, Heller developed a stubborn case of rheumatic fever. Hospitalized for six months, he had a dictating machine set up beside his bed and kept right on working. He still takes a penicillin pill every morning to prevent a recurrence. For recreation back home in Minnesota, Heller used to go into the backyard and chop firewood for hours on end.

The Larger Task. President-elect Kennedy's first choice to head up CEA was not Walter Heller but Massachusetts Institute of Technology's Paul Samuelson, most eminent and influential of all U.S. economists. Samuelson declined in the belief that he could have more influence on the outside, recommended Heller for the post. For the other two seats on CEA, Heller chose two university economists much like himself in age and outlook:

JAMES TOBIN, 42, professor of economics at Yale. U.S. economists are fond of making lists of the ten most brilliant U.S. economists, and Tobin always appears on them. A specialist in statistical analysis of economic forces, he is essentially a "scientific" economist with no strong political attachments. When Kennedy asked him to serve on CEA, Tobin said: "Mr. President, you must have the wrong man. I'm a sort of ivory-tower economist." Replied Kennedy: "That's all right. I'm a sort of ivory-tower President."

KERMIT GORDON, 45, Rhodes scholar, professor of economics at Williams College, lately on leave to the Ford Foundation. Less of an ivory-tower economist than Tobin, Gordon is a strong believer in softening economic conflicts by means of compromise.

Ideological differences among the three men are slight. Heller calls his two colleagues "twin rocks of Gibraltar." Says Tobin: "We are all pragmatists."

The pragmatic Kennedy economists regard the recession as something of an annoyance to be got out of the way as fast as possible so they can get the nation's economy growing at a faster rate.

Artificial Appetites. Growth is more than a political promise that now has to be kept: it has become the central preoccupation and challenge of U.S. economics. During the 1950s, it became inescapably evident to U.S. economists that several foreign economies were growing a lot faster than the U.S.'s. The cold war has drawn special attention to Russia's postwar growth rate of 6% or so,* but the economies of several free world countries, notably West Germany and Japan, have grown even faster. In a TV panel show last week, M.I.T.'s Paul Samuelson said that these rapid growth rates have been the most surprising economic phenomenon of the postwar years, a development that no economist "could possibly have predicted."

By comparison, the U.S.'s growth rate of about 3% a year seemed downright sluggish. To many economists it seems an urgent task to get the U.S. economy growing faster--partly because economic growth is an element of cold war competition with Communism, but also because the U.S. economy, for all its wealth, is not abundant enough to meet the growing demands of public expenditures. With federal, state and local governments already absorbing more than 25% of the national income, with taxes burdensomely heavy, the clamor rises nevertheless for more spending to meet public needs for national defense, education, urban renewal, etc.

In The Affluent Society, the most talked-about book on economics in many a year, Harvard's John Kenneth Galbraith offered his own special plan for allocating resources between the well-fed "private sector" and the hungry "public sector." Consumers, argued Galbraith, do not really need all those consumer goods, and would not even want them all if advertisers did not stir up artificial appetites. Accordingly, he proposed to levy sales taxes on consumer goods and use the funds raised in this way for such public needs as schools, playgrounds and air-pollution controls. But most economists, including Walter Heller, reject the Galbraith approach to "allocation." They do not believe that the private sector is so very affluent ("Consumer satiety is a myth," says Heller), and the liberals a among them, including Heller, consider sales taxes "regressive."

Look Ahead. Speeded-up U.S. economic growth offers a more amiable solution than Galbraith's. With faster growth, more funds would be available for the public sector and for consumers, too, with no increases in taxes. "One of the chief arguments for a more positive program for economic growth," says Walter Heller, "is that it is far easier to achieve many of our common goals by enlarging the size of our economic pie than by transferring income and wealth from one group to another." Faster economic growth would also ease another economic worry that has bothered economists in the last few years: lingering unemployment, even at times when the economy, by other yardsticks, was performing adequately.

The new Administration has not set any definite percentage figure as its growth-rate goal, but Heller, in a speech in October 1960, pointed to 4 1/2% a year as a rate he considered reachable "through good fortune and good management." By Heller's arithmetic, a 4 1/2% average growth rate during the decade of the '60s would mean a gross national product of $790 billion in 1970, as against the $680 billion G.N.P. that a 3% rate would bring. The $110 billion difference, a sum considerably bigger than the entire federal budget for 1961, would amount to roughly $500 for every man, woman and child in the U.S.

Easing the Pinch. Heller's recipe for speeding up economic growth calls for a sharp break with the Eisenhower Administration's "tight money" policy. As its main instrument for preventing inflation and achieving price stability, the Eisenhower Administration, with the cooperation of the Federal Reserve System, relied on a policy of keeping interest rates high, and pinching the overall supply of money and credit. At the same time, it labored to cut down public spending and achieve a balanced budget.

Heller argues that high interest rates and budget surpluses are incompatible; an Administration has to choose one or the other. Since both tend to hold down demand, tight money and budget surpluses acting together have a gravely depressing impact on the economy. Some economists believe that the U.S. moved so swiftly from the 1958 recession into the 1960 recession because the Eisenhower Administration combined high interest rates with a mighty drive for a balanced budget in fiscal 1960 (a considerable shock to the economy after the $12 billion deficit the previous year).

By easing the pinch of tight money, Heller believes, the Kennedy Administration will be able to do a lot better at balancing the budget than the Eisenhower Administration did. The proper course, Heller holds, lies between the too-high interest rates of the Eisenhower years and the toolow rates of the Truman years.

Removal of Ignorance. Next to dropping the tight money policy, Heller's most important prescription for faster economic growth is increased Government investment in "our most valuable resource, the human mind." In Heller's thinking, education has an enormous economic value. He points out that the chronically unemployed are largely the uneducated and unskilled--the economy has jobs waiting to be filled, but only for the educated and the skilled. He sees in education the explanation of the "paradox of persistent poverty amidst growing plenty"; substandard education, he says, "dwarfs any other cause of poverty."

Bubbling with excitement at the opening of a new frontier in economics. Heller points to a new concept, with "vast implications for public policy," that came into economics within the past two years: the idea that "human capital" (knowledge, skills, invention) contributes more to economic growth than "tangible capital" (factories, machinery). This notion might be suspect as a liberal rationalization for federal aid to education, except that the pioneering statistical studies on the economic value of human capital were carried out at conservative Arthur Burns's National Bureau of Economic Research and at the University of Chicago, the U.S.'s No. 1 stronghold of conservative economics. Says the University of Chicago's Milton Friedman, regarded as the most brilliant conservative economist in the U.S.: "We have begun to see that stressing only physical capacities does not pay off. We have begun to question just how much of economic growth is based on increases in the quantity of physical capital. In the final analysis, the answer is technology, and this means the removal of ignorance."

Frayed Hopes. Amid their plans for achieving faster growth, the new Administration's confident economists probably do not pause to reflect how the Eisenhower Administration's high hopes of cutting federal expenditures got badly frayed when they rubbed up against gritty realities. A gritty reality of another sort facing the new Administration is the prospect that Congress, especially the House, will be reluctant to give the New Frontier all the added funds its programs ask for. The House's wariness reflects a widespread public wariness toward the new economic goals. Aside from the unemployed, the public generally seems pretty satisfied with the economy's performance during the Eisenhower years--or at least seems more concerned about price upcreep than about growth rate. Dwight Eisenhower's sermons on economics got across to the American public--as Walter Heller knows. "There has been a metamorphosis in the Congress and the people," says he with a touch of bitterness in his voice. "The strain of fiscal conservatism has become strong, perhaps because it has been so well nurtured during the last eight years. There is a deep strain of conservative bias built into the congressional system."

At the Levers. It was no mean achievement to educate a democracy to the need for economic restraint, and Ike's short course came at a time when the realities of international competition and the gold drain would have made spiraling inflation a calamity. Ike's stress on community and individual responsibility, while it may have left some things undone, provided a reversal of a philosophy of centralization that had gone unbroken for a generation.

The Eisenhower heritage persuades Washington's new economists that they must re-educate the U.S. to make the most of its economy. As they sit down to the levers of control, they hold that it is their intent to make the free-market economy operate more freely. Many former skeptics, having taken the measure of the men and their motives, think they deserve a chance to try.

And indeed, if the Kennedy Administration can bring about faster economic growth without inflation and without price controls or other varieties of regimentation, it will deserve the nation's gratitude and congratulations. But it may well be that after a year or two of rubbing against realities, a little of that old dismal tone will be creeping back into the new, cheerful economics.

* The Russians claim a 10% rate, but Western experts consider that an exaggeration.

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