How the Economy Went Haywire

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

It was at this point, in March, 1966, under increasing pressure from the Council of Economic Advisers to move for a tax increase — a modest one, 3 or 4 percent — that the President took his first tentative step. Tentative is the word. He was still worried about his domestic programs, and he was wary of revealing what he was up to overall. Though he knew by now that the military costs were going to be greater than the estimates in the budget revealed, he kept them to himself. Instead, he summoned key businessmen and members of the House Ways and Means Committee in separate meetings and asked them if he should move for a tax increase. He did not (and this was crucial) tell them how much the war was going to cost. Thus they were asked to give estimates and projections on a step as important as a tax increase based on totally erroneous information. It was an extraordinary bit of manipulation; indeed, said Edwin Dale, the economic correspondent of the New York Times in Washington, it was the single most irresponsible act by an American President in the fifteen years that he had covered Washington.

Naturally, acting on this limited information, both the businessmen and the congressmen told Johnson not to move for the tax increase; this in turn permitted the President to go back to his economic advisers and tell them that he had discussed a tax increase with the congressional leaders and they were all totally opposed, he could get no votes for it. One part of the government was lying to another part. Thus was the fatal decision made not to move for a tax increase, a decision made in early 1966 which resulted in the subsequent runaway inflation.

 In the end, instead of being marginal, as predicted officially, the deficit for fiscal 1967 turned out to be a whopping $9.8 billion. Meanwhile, through early 1966, McNamara kept meeting with the Council of Economic Advisers, and the Council kept pressing him to go for a tax increase. McNamara, however, kept pleading that he did not want to — in fact, could not — go along. He did not have a firm figure on the war, he said, and they would have to trust him. In addition, he insisted the Congress would hang him if he went up there, hang him twice. They would hang him on the war, and hang him on the financing of it. Of course the real reason he did not want to go and testify, it soon became clear, was that open testimony on how deep we were in and how much deeper we were going would have been equivalent to a formal announcement on the size and duration of the war, Which was the last announcement the Administration wanted to make at that point.

So in the early months of 1966, when the planning and budgeting for the next year were in process, the Johnson Administration did not move for a tax increase. Nor did it admit that the projected cutoff date for the war of July 1, 1967, was an illusion. It did give up the idea within the Administration itself early in 1966. Much later, in November, 1966, McNamara admitted publicly that the idea of the cutoff date had been dropped and that since the war would continue to go on, the financing would have to be greatly increased. When McNamara did make the announcement, Edwin Dale of the Times wrote an analysis of the decision, and noted that doubling of spending on the war; the article naturally angered McNamara, who felt it cast doubt upon his reputation as a war manager. So he called Dale to say, with no small amount of irritation, that they had abandoned that assumption early on. Very early on, he said. And Dale answered, "Yes, sir, I know you did, and I know why you did, but you didn't tell us publicly until now." A minor point, of course.

As it became increasingly obvious that the war in the budget and the war in reality were two separate things, doubters and critics began to surface. In mid-1966 the economist Eliot Janeway, asked by senators to comment on the funding of the war, estimated that instead of the monthly drain of $800 million proclaimed by the Administration, the real drain was closer to $2 billion a month, and might go as high as $3 billion. This did not endear Janeway to the President, who set out to silence future critics of his arithmetic.

In May, 1967, Ralph Lazarus, president of the Federated Department Stores and vice-chairman of the Business Council, held a press conference and publicly criticized Johnson's war budget. He estimated that government spending on the war for the next fiscal year would be about $5 billion higher than the government estimate of $21.9 billion. He was immediately telephoned by no less an economic authority than Justice Abe Fortas, who asked Lazarus to tone down his estimates because they were inaccurate; indeed, Lazarus had upset the President very much with his erroneous projections. Unfortu­nately the war cost figure turned out to be $26.5 billion, which meant that Lazarus hit it almost on the nose. And the government's deficit was an almost parallel $23 billion.

In effect, the Johnson Administration went to war without really coming to terms with it, and paid for the war without announcing it or admitting it. They faked it. They barely got through the first year, but even the first year saw the start of the inflation, and it became more virulent month by month, finally almost a living part of the economy, and the political impact of the inflation became almost as serious a political issue in 1968 as the war itself. The Administration slipped by in fiscal 1966, but by fiscal 1967 things were getting worse, with the deficit almost $10 billion, but the deficit for fiscal 1968 was worse still. In late 1966 the Council of Economic Advisers continued to put pressure on Johnson for a tax increase, and by January, 1967, they found him far more amenable to their demand, largely because he already had pushed most of his Great Society legislation through Congress, and having less to lose, felt himself less vulnerable. In the January, 1967, budget message the President proposed an income-tax surcharge but with no date for congressional enactment, and in July the Council of Economic Advisers told him to go for it. In August he sent a message to the Congress. Chairman Wilbur Mills of the House Ways and Means Committee read it, made some suggestions, held some hearings, and took his time with it. By mid-1967 Johnson was no longer the awesome figure of 1965 who could force anything through the Congress as quickly as he wanted.

Now that Johnson was ready for the tax increase, the Congress was not. It took a great deal of negotiating between the Congress and the White House before the surcharge bill was passed in July of 1968. It was, of course, all too late: the deficit for fiscal 1968 was $27 billion. As managers of the economy, the Administration's top officials were turning out to be something less than their press clippings implied. The inflation was full-blown; the country was bitterly divided. Cities, hospitals, and schools found themselves caught in destructive, hopeless labor disputes growing out of the inflation. The irony of it all was that the cost of the war itself was not enough to destroy the economy; it never cost more than 3.5 percent of the gross national product, and there were never any real shortages. It was not the war which destroyed the economy, but the essentially dishonest way in which it was handled.

In late 1967 General Westmoreland made a request for additional troops. When it came in, the White House sent it to the Council of Economic Advisers for a reading on what its economic consequences would be. It was the first time Johnson had ever done this, and the Council was very pleased to render its quite negative findings, though there was a general feeling that it was all very late.

Similarly, in late 1967 Tom Wicker of the New York Times stopped in to interview Robert McNamara. When the subject of the miscalculation of the cost of the war came up, McNamara dismissed it in a casual way which shocked Wicker by its cynicism. "Do you really think that if I had estimated the cost of the war correctly, Congress would have given any more for schools and housing?" he asked. Implicit in what McNamara was saying, it seemed to Wicker, was that Congress would have given anything necessary for the war and very little for domestic legislation, so the Administration might just as well lie. Wicker left totally appalled by the conversation.

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