How the Economy Went Haywire

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

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."

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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