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Article Excerpt
I. Introduction
Leon Hirsch Keyserling was born in Beaufort, South Carolina, 1908. He later attended Columbia University (New York) and did extensive work under the Institutionalist Rexford Guy Tugwell as an undergraduate major in Economics, graduating in 1928. He later attended Harvard for his degree in Law (1931) before returning to Columbia for Doctoral work in Economics. Upon the election of President Roosevelt (1932), he was taken to Washington, D.C. by Tugwell who was closely connected to Senator Robert Wagner (D., New York), the latter a close associate of Franklin Roosevelt, the newly elected President.
Keyserling was first associated with the Department of Agriculture and co-authored many bills concerning both agriculture and housing, the latter a major employment policy interest of Keyserling (Brazelton, 2001). He was also greatly instrumental in co-authorship of the National Industrial Recovery Act (1935); the National Labor Relations Act (1935)--the so-called Wagner Act; the Employment Act of 1946; and later the Full Employment and Balanced Growth Act of 1978 (The Humphrey-Hawkins Act)--all of which he considered more important than the dissertation which he had not completed. He was the first vice chair of the First Council of Economic Advisors; and second chair of the Council (CEA) after the resignation of Edwin Nourse; and, as such, he became a major economic policy adviser to President Truman. His major economic analysis and policy implications were for growth--growth for full employment; mass consumption for high investment; and for social and economic justice (Brazelton and Wehmeyer, 1989; Brazelton, 1997, 2001, 2003).
In the paper that follows, (1) several selected major parts of Keyserling's analytical and policy prescriptions will be discussed; and (2) these analytical policy prescriptions will be demonstrated to continue to appear in later, selected correspondence of Keyserling with national, political figures--including Presidents--before Keyserling's death in 1987.
II. Economic Growth and Keyserling
To Keyserling, constant economic growth was a major necessity and goal for economic policy (Brazelton, 1997, 2001, esp. 157-59; Keyserling, 1954, 1957, 1962). However, unlike many advocates of "counter-cyclical" economic policy, to Keyserling, growth meant constant growth. The economic policies should always be aimed at full employment--full employment demand and full employment supply. It was, to Keyserling, demand which drove supply; and, thus, consumption which brought forth both investment and productivity. Thus, consumption was the key. It was, of course, wages which were the basic source of aggregate demand. Thus, to Keyserling, national income was a function of consumption, but consumption was derived from real wages. Thus, national income was a function of real wages and the consumption derived there-from stimulated investment and productivity (Brazelton, 2001) (Keyserling, 1957, 1958). This was a demand side orientation which never floundered as a major belief of Keyserling.
Keyserling's belief in constant economic growth for full employment led him to believe in economic growth as a policy prescription for both anti-recessionary and anti-inflationary economic policy. Obviously, in a recession, the fiscal authorities should stimulate the economy and the monetary authorities should stand ready to facilitate the fiscal deficits and the recovery from the recession. This is an orthodox policy prescription. However, to Keyserling, growth should also be maintained in inflation.
To Keyserling, inflation was generally caused by inadequate supply, not excess demand. The inflation was caused by administered pricing of oligopoly; possible restrictions of output in order to maintain said prices; and bottlenecks in the economy. Thus, a supply-type shortage, not excess demand, was the problem. The correct policy was, therefore, to stimulate supply. This could be done not by restricting demand in an inflation (demand was not the problem), but by increasing supply via selected controls over administered pricing, if necessary; and by selected tax or other incentives to stimulate investment and, thus, supply. An increase in supply would decrease the upward price pressures. Keyserling argued that to decrease output in inflation harmed all; whereas a selected program could be aimed at the specific offenders and the specific sectors where there were administered pricing, supply shortages, or bottlenecks. Keyserling believed in the proportional growth of supply and demand on both the micro and the macro levels, a point to which we will return to later herein.
Keyserling also believed that orthodox anti-inflationary policy of restricting demand was, in fact, inflationary and would, thus, increase inflation, not decrease it. If orthodox anti-inflationary economic policy cut back on aggregate demand to attempt to reduce upward price pressures, it would mean that the firm would produce less than before as demand fell. Theoretically, this would reduce prices as the "excess demand" was decreased. But, to Keyserling, given the average cost schedule of the firm, this would mean that the firm would have to cut back on its output. This would push its output towards the left of the lowest average costs per unit of output and, as a result, per unit cost would rise. As per unit costs rose, prices would tend to rise, especially in a world of administered pricing. Thus, the policy to reduce aggregate demand to end inflation could be counter-productive--it would, instead, increase inflation. The more correct policy would be to stimulate supply to meet the consumption needs of the economy with policies aimed at the lagging sectors of the economy where administered pricing and/or bottlenecks had brought about a supply side shortage--the real cause of inflation (Brazelton, 1997, 2001; Keyserling, 1959, 1964b, pp. 557).
There was another reason why "orthodox" anti-inflationary economic policy was counter-productive. Such a policy calls for higher interest rates initiated by the policies of the Federal Reserve. Higher interest rates would decrease investment and consumer borrowing to decrease aggregate demand back towards the level of aggregate supply--the diminishment of so called "excess demand" But, to increase interest rates would also increase costs which may be passed on to the consumer and, thus, may be inflationary. Also, and to Keyserling with his emphasis upon growth, it would mean that the economy was not growing at its full employment potential. This would decrease employment, decrease growth (both micro and macro), and lead to less than full employment growth in a counterproductive attempt to end inflation--an inflation whose primary cause was inadequate supply, administered pricing, and bottlenecks, not primarily, to Keyserling, by excess demand (Brazelton, 1997, 2001; Keyserling, 1959, 1960, 1962, 1964b, 1970). Lastly, the lost output from the restrictive anti-inflationary policy rather than a supply-growth orientated incentive policy to meet demand would decrease output in that period of time which would be lost forever as it cannot be made up for in the future due to the full employment ceiling of output. Thus, the output and its benefits to the economy and its citizens would be lost forever.
The above analysis concerning monetary theory and high interest rates as a curative to inflation which, to Keyserling, was a policy error, meant that he was an advocate of low interest rates to stimulate high investment and high growth. This was not a view held by only a few economists in the Post War II period, especially before 1950-51. Many economists believed that the Post World War II era would return to the depressionary conditions preceding the War, the 1930s (Brazelton, 1989, 2001). This, of course, did not happen due to the forced savings built up in the American economy during World War II due to domestic rationing of consumer products for the War effort (housing, rubber, gasoline, automobiles, certain agricultural items, etc.); the post War advent of the Cold War and the resultant continuation of military expenditures and the rebuilding of Western Europe, etc; and the general expansionary policies of the Truman era itself. However, the latter policies generally were accomplished during a period of low interest rates domestically.
The low interest rates of the period were largely due to the Federal Reserve's policy of being the buyer of last resort of government bonds at the prevailing, low rate of interest--a pegging of interest rates. This was generally expansionary...
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