How the Economy Went Haywire

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

The President seemed somewhat receptive to the idea of the tax increase, but did not seem to share Ackley's sense of urgency. Ackley was telling the President he could not have three things: the war, the Great Society, and no inflation. If he wanted all three, then he would need a tax increase. But if this was obvious to Ackley, it was not so obvious to Lyndon Johnson. The President feared that if he went to the Congress for the tax increase he might lose control of this delicate series of maneuvers. The Congress, Johnson told friends, would give him the war, but not the Great Society. So the President, who had sliced everything so thin, decided he would slice this one, too: he would hold back on the real estimates of the cost of the war for a year. Perhaps major expenditures would not be necessary after all, perhaps Hanoi would fold. Meanwhile he would push very hard to get the Great Society legislation through by early 1966, and once it was, passed, he would concentrate on the war. Thus by the time the extent of the involvement in Vietnam was fully apparent, the Great Society would already be a fact.

"I don't know much about economics," he told friends, "but I do know the Congress. And I can get the Great Society through right now — this is a golden time. We've got a good Congress and I'm the right President and I can do it. But if I talk about the cost of the war, the Great Society won't go through and the tax bill won't go through. Old Wilbur Mills will sit down there and he'll thank me kindly and send me back my Great Society, and then he'll tell me that they'll be glad to spend whatever we need for the war."

The President knew he was cornered and he decided to negotiate what he wanted, piece by piece, as stealthily, as possible. Now there were three sets of players, each acting independently of each other: the military, who wanted major financing for what they had been told was a major war; Johnson's domestic aides, who were pushing for the Great Society and who knew relatively little about the extent of the military planning (they were encouraged by the President to know as little as possible); and Johnson's economic planners, who sensed the potential of the conflicts involved but did not know the extent to which decisions on military troop levels had already been made.

The key man in all this was Robert McNamara. The Great Society projections were relatively public, and the rest of the budget was stable. It was the military projections which were based on secret information and private decisions — secret, it turned out, even to the President's own economists. In December, 1965, McNamara began drawing up the plans for the military budget for fiscal 1967, a budget which would run from the middle of 1966 to the middle of 1967 and which would go to the Congress in January, 1966. By this time he had already consulted with Westmoreland and had his darkest fears confirmed — Hanoi was reinforcing at a faster rate than we were; it would be a large war, and quite likely a long one. Westmoreland's July, 1965, estimates that we would need only 300,000 troops by the end of 1966 had been discarded; the approved figure was now 400,000 Americans by the end of 1966, and a probable figure of 600,000 by the end of 1967. Yet in constructing the budget, McNamara made the arbitrary assumption that the war would be over by June 30, 1967. It was in direct contradiction to the estimates he was getting from Westmoreland (and in direct contradiction to his own private estimates for Johnson at the time), but it was a plausible assumption for planning. McNamara wanted the cutoff date left in because in Korea we had fought an open-ended war and consequently too much military equipment had been bought, and he wanted to avoid a repetition. McNamara was telling the President at this point that he could not guarantee the length of the war, but that it would be the most economically fought war in history. That he would guarantee — he would really ride herd on the military.

McNamara placed the cost of the war at $10 billion for the fiscal 1967 budget. Thus Johnson would be able to propose significant increases in Great Society programs, administer the war, and—thanks to the normally rising revenues natural to a growing economy—still show only a minor deficit. It looked like the work of a great magician-economist, but it was really only a shell game. A magician who lied. The economic experts and critics who sensed that there was a built-in dilemma looked at the budget searching for the hole and found to their surprise that the hole did not exist; it was all acceptable. The problem, they knew, was the war, but there was Bob McNamara promising to keep it at $10 billion, and he told the President, but he did not tell the public or the Congress, that he was putting the cost of the war between $15 billion and $17 billion.

For the first time, there were memos on the subject in the bureaucracy, though not for the public; they were private memos, of course, and they were sent over to the Council of Economic Advisers with the notation: "For internal use only." Since the Council was already becoming very skeptical about the whole thing, Arthur Okun, one of its members, noted in the margin: "But not to be swallowed." At this point the Council began meeting with McNamara, pushing him hard to get a more exact estimate of the cost of the war and to get him to move for a tax increase. But they found McNamara, usually so sure, usually so filled with certitudes, very reluctant to come down with a hard figure for the cost of the war, and he gave three figures: high, low, and medium. The high was $17 billion (or $7 billion over the original estimate), the medium was $15 billion, the low was $11 billion. Eventually the figure came to $21 billion, which meant that even his own private re-estimate for a medium increase was off more than 100 percent, and his estimate for the general public was off even more. McNamara was not, it turned out, quite so good a manager as he had claimed, nor was his machine quite so efficient, though this did not necessarily make him any more modest. Indeed, a few months later, in discussing the forthcoming budget, he said, "Never before has this country been able to field and support in combat so large a force in so short a time over so great a distance, without calling up the reserves, and without applying price, wage, and material controls to our civilian economy."

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