How the Economy Went Haywire

When the bill came due for the Vietnam War, someone had to pay it, and keep paying.

In 1954 General Matthew Ridgway, Army Chief of Staff, had carefully programmed exactly what would be needed to fight the Viet Minh and to help the French in Indochina. The cost for one year would be an estimated $3.5 billion. President Eisenhower thereupon called in his economic advisers and Secretary of the Treasury George Humphrey. "George, what would all this do to the budget?" he asked. Humphrey thought for a few moments and then gave a quick answer: "It'll mean a deficit, Mr. President." In a way, thought one man present at the meeting, any idea of intervening in Indochina died at that moment.

By 1965 war had not become any less costly, particularly a war whose principal architects felt it could all be accomplished by expensive technology and modern military machinery, a war part of whose purpose was to spare Western, if not Asian, lives, a war in which the most expensive new helicopters replaced tanks. So the cost of the war became one more public relations problem for President Lyndon Johnson. The full dimensions of the American commitment could be kept partially secret from the press and the Congress and the allies. But eventually someone had to pay for it, and in the very process of the payment, some of the plans, projections, and realities had to become public.

Early in 1965 the Joint Chiefs of Staff were pushing for special funding for the war, knowing that it would be expensive; and knowing that the more open the Johnson Administration was about funding the war, the more open it was likely to be in admitting to the nation that it was, in fact, at war. The Chiefs wanted a program which would include traditional wartime budgetary procedures  — invariably meaning higher taxes — and they lost that fight in July, 1965, when President Johnson decided to go ahead and make it open-ended, without announcing how open the end was. As a result, even at that point  — when one might have expected, by checking defense expenditure projections, to find an honest assessment of what the war would cost — the reverse was true. In his attempt to keep the planning for the war as secret as possible, Lyndon Johnson did not give accurate economic projections, did not ask for a necessary tax raise, and did in fact direct his own military planners to be less than candid with his own economic planners, a lack of candor so convincing that his economic advisers later felt that Defense Secretary Robert S. McNamara had seriously misled them about projections and estimates.

The reasons for Johnson's unwillingness to be straightforward about the financing were familiar. He was hoping that the worst would not come true, that it would remain a short war, and he feared that if the true economic cost of the war became publicly known, he would lose his Great Society programs. The result was that his economic planning was a living lie, and his Administration took us into economic chaos: the Great Society programs were passed but never funded on any large scale; the war itself ran into severe budgetary problems (the decision in 1968 to put a ceiling on the number of American troops in Vietnam was as much economic as political); and most important, the failure to finance the war honestly inspired a virulent inflationary spiral which helped defeat Johnson himself. Seven years after the commitment of combat troops, that inflation was still very much alive and was forcing the Nixon Administration into radical, desperate economic measures in order to restore some financial balance.

In the spring of 1965 the economy had already reached the point of overheating, and some of the President's economic advisers were worried about inflationary dangers, even without the prospect of a major war. After years of high unemployment, the level had dropped close to the target of 4 percent. Now, with a war in sight, the economic advisers were even more uneasy. Johnson and McNamara were implying that it would not be a big war, but there were already rumblings in the early fall of 1965 from people on Capitol Hill that it was likely to become a very big war. The rumbling came from men like Senator John Stennis (D., Mississippi) and Representative Mendel Rivers (D., South Carolina), who estimated that the cost for fiscal 1966, which ended in June, 1966, would be about $10 billion. The Administration was denying this, and at that time Johnson had fairly good credibility. He had claimed in the past year that he intended to cut back defense spending, and although Rivers and others contradicted him, lo and behold, the President had cut defense spending. Later it would turn out that Stennis and Rivers knew quite well what they were talking about, since they were privy to the most secret of the back-channel military messages through their close liaisons with General William Westmoreland and the Joint Chiefs of Staff. Thus they had a very good idea of what Westmoreland was asking for and what McNamara had promised him  — which made it a big war. Based on this, Stennis and Rivers were claiming that the war would cost about $10 billion by the year ending in July, 1966. That figure was of course far above the estimates coming from the White House (in his July messages Johnson had talked about a projected figure of only $2 billion above the estimated Defense Department budget).

 The projections coming from Capitol Hill upset Gardner Ackley, chairman of the Council of Economic Advisers. He did not really believe them, but he wanted guidance from the White House, and assurance that his own forecast was accurate. With his estimates projected at a maximum cost of $3 billion to $5 billion, Ackley wanted to say in a forthcoming speech that anyone using the figure of $10 billion was operating on a figment of his imagination. Encouraged by the Administration to answer these critics, Ackley decided to clear the speech with McNamara, who assured him that the cost would be relatively low, nowhere near $10 billion. So Ackley went ahead with his estimates. Unfortunately the final figure for the year was about $8 billion, far closer to the Stennis-Rivers estimates than to the McNamara estimates.

But that was a marginal miscalculation compared to what was in store. The Council of Economic Advisers became more and more uneasy about the direction of the war; they felt they had been looking quite good as economic advisers recently and they wanted to keep it that way. The economy was going full blast, everyone seemed to have more money than ever, prosperity was everywhere — even the very poor were about to be let into the mainstream of American life. Time magazine had just put John Maynard Keynes on its cover. So the Council was up and the members wanted to stay up; they thought the time had come to slow the economy down, to turn down, or turn off, the faucet, particularly because of the problem of rising costs at the Department of Defense. With an overheated economy already on hand, and a war and major domestic legislation just ahead, they thought it was time to move for a tax increase. On December 10, 1965, they sent a message to the President to that effect, basing their demand for more taxes on the growing needs for the war and the additional domestic requirements. In Ackley's opinion there was a sense of urgency at the time; he believed that this was the kind of situation which could easily get out of control. In addition, he felt that war estimates were always faulty, the needs always greater than the projections.

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