President Carter

by Stuart E. Eizenstat

  We did not appreciate, and as a noneconomist I certainly did not, the degree to which inflationary psychology had embedded itself into the American psyche and economy as prices kept creeping up and then exploding after the first OPEC oil shock in 1973. Companies reacted by raising prices to cover the sudden explosion of energy costs, while workers, particularly those in labor unions, responded by seeking higher wages in a spiral that continued unchecked. In theory this should not have happened. Almost a century of British statistics compiled by A. W. Phillips were supposed to demonstrate a trade-off between inflation and unemployment, so that fewer people at work would put a lid on prices, and higher levels of employment would lead to more inflation. In all recorded economic history, a stagnant economy or a recession would normally lead to falling prices.

  But in the 1970s, Professor Phillips’s famous curve was bent out of shape. The Kennedy and Johnson administrations first turned to persuasion through “incomes policies,” using voluntary wage and price guidelines that were supposed to temper inflation without the pain of workers losing their jobs and their purchasing power. It was not very effective.7 Carter’s instinctive concern with inflation from the earliest months of the administration was compromised not only by pressures from his party, but by his own central campaign promise to end “the Ford Recession.” And when he pivoted to give priority to fighting inflation, the policy tools he was handed by his economic experts were not up to the task.

  After running as a more conservative Democrat in the primaries, he turned to the left at the time of the Democratic Convention to unite the liberal wing behind him, emphasizing economic growth and job creation. In the campaign we created an Economic Advisory Task Force that I oversaw, including several leading economists who had served in Democratic administrations. It was headed by Lawrence Klein, who in Carter’s last year in office won a Nobel Prize for his mathematical models forecasting the behavior of the economy. The group proposed a stimulus program of public service jobs, tax cuts, and other measures. Klein declared that the federal government had an obligation to fund public employment for those the private sector would not hire, and to set a steady target for economic growth of 4 to 6 percent annually, an inflation rate of 4 percent or less by the end of his first term, and that unemployment should never be used as a tool to fight inflation. Carter embraced this policy prescription in the campaign.

  True to Democratic Party tradition, sound money was not a top priority. Carter asserted in the campaign that he would control inflation by reducing government regulation, encouraging competition in transportation and other industries, strictly enforcing the antitrust laws and protecting consumers, and keeping interest rates low. Mandatory wage and price controls, like those used by Nixon, were rejected in the campaign and throughout the administration. But the Council on Wage and Price Stability would be given subpoena power to examine excessive wage and price hikes. This was colloquially known as jawboning and was about as effective against raging inflation in the 1970s as the biblical weapon from which it was derived, “the jawbone of an ass.”8

  CONFLICTING ECONOMIC ADVICE

  After the election the president-elect tapped two people to be his top economic advisers, and they could not have been of more different temperaments or, as it turned out, taken more different approaches to the economy. Charles Schultze was named chairman of the Council of Economic Advisers, whose principal job was to help the president develop a macroeconomic policy, determine its economic consequences, and project how specific decisions would interact with the real economy. He was at the top of his game as a mainstream economist, and as former budget director under President Johnson, renowned for his knowledge of how government works. After he left the Carter administration, he became president of the American Economic Association.9 Throughout our White House years I worked as closely with Charlie as anyone in the administration and found him unfailingly congenial, self-effacing, and brilliant—in a word, a prince of a man, to me the nicest person in the entire administration and one of the most broad-gauged and able.

  The other senior economic adviser was Michael Blumenthal, Carter’s Treasury secretary. There had been five generations of Blumenthals in Germany, and Mike and his family had narrowly escaped death after the forced sale of the family business in Oranienburg, the Berlin suburb next to Sachsenhausen, the Nazis’ first concentration camp. They fled across Russia by train to Vladivostok, and then by boat to the free port of Shanghai, where they survived World War II in the impoverished Jewish ghetto. Afterward Blumenthal and his sister arrived penniless in America. Earning his doctorate in economics at Princeton, he became a top trade negotiator in the Kennedy administration, joined the Bendix Corporation, and within five years rose to become its CEO. As a rare Democrat at the top of the business world, this made him an ideal choice for the job.

  Mike had a strongly didactic and sometimes prickly personality and was used to giving orders to his corporate subordinates; working with equals was more difficult. But his differences with Charlie lay not just in personality. Schultze was at home in traditional Keynesian macroeconomics and fashioned his policy prescriptions through the lens of the models based on mountains of economic data. He concluded from the statistics that only 75 percent of our industrial capacity was being used, and with unemployment running above 7 percent, the U.S. economy not only needed a jolt to boost it out of the doldrums, but could absorb it without triggering higher inflation. Blumenthal agreed up to a point but was more concerned about runaway prices, as might be expected from someone formed in the shadow of the German hyperinflation that helped propel Hitler to power.

  However essential data might be, Blumenthal believed that another vital if not overriding factor was something that could not be neatly quantified: the psychology of businesspeople, workers and organized labor, and financial markets. Did they believe that inflation was under control? Upon their judgments the economy would react. And it was the job of the president to give a clear signal, particularly on inflation. Blumenthal’s views on inflation as a threat greater than unemployment ran counter to the ethos of the Democratic Party, as well as Mondale and me within the White House. Blumenthal saw its dangers earlier than any of us except the president.

  After considerable infighting, we organized an Economic Policy Group (EPG) of the key departments to coordinate economic policy and avoid cabinet officers making end runs directly to the president, consisting of Treasury, OMB, and state, and me an ex-officio member, as the domestic-policy adviser, initially with three professionals housed at Treasury to help organize the economic decisions. Other departments such as Labor; Commerce; Health, Education, and Welfare; or Agriculture attended only when relevant to their issues; their desire for inclusion and the core group’s desire to limit participation was always a source of tension.10 Ten days after his inauguration we had our first EPG meeting, cochaired by Schultze and Blumenthal.11

  Soon Blumenthal chafed at sharing the chairmanship, telling me he should have been “more pushy,” on the ground that one person should be in charge; Blumenthal wanted it to be him; he was right, given his position.12 He was very bright, analytical, intellectually open-minded, and as progressive as a secretary of the Treasury could ever be, and I never had a day’s problem working with him. But his CEO mentality did not lend itself to forging a consensus to give the president clear options and recommendations. I called Schultze immediately. Charlie, a smart bureaucratic player as well as a gentleman, agreed to trade his cochairmanship, but for a price: a scheduled hour alone with the president every week to discuss the economy. The president readily agreed, and everyone was happy—or so it seemed.

  As the months rolled by there were constant increasingly bitter complaints from cabinet officers like Kreps at Commerce and Marshall at Labor, both eminent economists, that they were being frozen out of the group’s weekly meetings, even on key issues important to their constituencies.13 But there was a more profound problem: Carter had no economic coordinator in the White House, a task p
erformed admirably for Gerald Ford by William Seidman, an accountant and banking regulator. He kept matters on track by ensuring that after the meetings of their economic advisers, he would present Ford a summary, even including Democratic views, leading to a possible consensus.14

  By contrast, our EPG soon fell victim to the warring departments reflecting their own constituencies, with no one to synthesize and mediate differences before the issues went to the president for his decision. I urged Schultze on several occasions to assume this role, but he refused on the ground that trying to forge a consensus policy and advocating for it would undermine his position as Carter’s objective economic adviser and academic tutor.

  * * *

  While Carter had a bent for frugality and a determination to balance the budget, like most presidents he did not have a strong economics background or guiding philosophy. We therefore lacked a consistent, coherent policy and had no clear framework within which individual decisions could be made and explained to the public. Barry Bosworth, the chairman of the Council on Wage and Price stability, later put his finger on the problem: “You can afford to be wrong, as long as you have a consistent line of where you are trying to go and what your targets are, because the public is far more tolerant than politicians think. They understand you can’t control all these things, as long as you look like you are in charge and you know what you are doing.”15

  A dysfunctional process makes good decisions infinitely more difficult. Years later, when Bill Clinton was running for office, I recommended creating what became the White House National Economic Council, initially chaired by Robert Rubin, and which continues to this day. After the 2008 financial crash, President Obama pressed for government spending to restart the American economy, and he appointed Lawrence Summers to run the council. When Summers was asked by a reporter to explain his guiding policies for economic revival, he replied with one word: “Keynes.”

  We were unable to deliver such clarity because we faced the two-headed monster of stagflation, whose genesis and nature were never fully understood and thrashed out among us. We knew it had started under LBJ, and had come to full force with an explosion in oil prices after the 1973 OPEC oil embargo. But what followed did not fit any economic model. Stagflation simultaneously produced high inflation and rising unemployment, which theoretically were incompatible. But when we attacked it by pushing on one side of the problem, we only created more problems on the other.

  It was not a matter of ignoring inflation; that was impossible. Our experts estimated that recent OPEC price increases of about 10 percent were passed on in the form of higher prices, which at the same time took about $10 billion out of the pockets of Americans, as if it were a sharp tax increase, slowing growth. But unlike an ordinary tax increase, the money was not cycled back by the U.S. government in public spending, but deposited in the OPEC countries’ international banks. This was one major aspect of the dilemma of stagflation. The other was an inflationary push at home. Facing rising prices, several major union contracts—the Teamsters, Electrical Workers, and Rubber Workers—negotiated before Carter took office, averaged annual increases of about 10 percent.

  The settlements were additionally augmented by cost-of-living clauses that further escalated wages as the consumer price index increased. These COLAs—also known as escalator clauses—were a principal force behind the wage-price spiral and would bedevil our efforts to control rampaging inflation. More than one-fourth of private-sector workers were unionized in the 1970s (less than one-tenth in 2016). During 1977, Carter’s first full year in office, major union contracts were up for negotiation in steel, paper, coal, and construction. Union leaders and workers in those industries had every reason to try to match the 1976 packages. Our arsenal of weapons at this early stage did not match the challenge posed by stagflation. To my chagrin but on the advice of Schultze and Blumenthal during the transition,16 Carter never sought standby authority to control wages and prices because of the negative experience under Nixon, and thus did not have it ready when it might have been politically useful later in his administration.

  A MODEST STIMULUS

  During the postelection transition, Schultze was tapped by the president-elect to assemble the economic stimulus package that Carter had promised in the campaign. Even though the recession itself had abated, it left behind high unemployment. On December 1, 1976, only a few weeks after his election, we held a half-day policy seminar at Miss Lillian’s Pond House in Plains, built by her children in 1968 when she was away in the Peace Corps, with the best economic minds in the Democratic Party as well as Mondale, Lance, and me. Carter, dressed in his trademark Georgia work clothes, was serious and took copious notes. Schultze presented the case for a stimulus at a time of spare capacity and judged it likely that unemployment would be unchanged through the year unless consumers had more to spend, and that this would not happen by “spontaneous combustion.” Blumenthal’s very different views focused on increasing business investment, which, he argued, required predictability, stability, and consistency. Lance weighed in with the classic advice of the local banker that he was: “We can’t spend our way out [and] we need to get government out of competition with the private sector in the capital market.”17

  In this way the first of many fault lines were exposed as we moved from analysis to action. Carter himself believed that the nation’s economic imbalances would be righted by balancing the federal budget—a belief that was shared by many in America and which he stood by to the end. He proposed to achieve balance by the end of his first term through a “quick and effective stimulus” that would not tie his hands during the rest of his term.

  As we prepared to come into office, Schultze surveyed top Republican and Democratic economists, and all favored a modest stimulus as a firebreak against a slide into a recession toward the autumn of Carter’s first year in the White House.18

  The new president was the most cautious, as would often be the case throughout the administration. He said: “I am concerned with public confidence and not creating a sense of irresponsibility at the beginning of my administration.” Unfortunately, economists had a more exalted view of their forecasting capabilities than they do now. Paul Samuelson, the guru of mainstream American economic thought, wisely saw another dimension beyond mathematical models—unspoken political bias and electoral calculation. Recalling Nixon’s efforts to create the best economic conditions for his 1972 reelection, he said Carter had the option of trying to tackle inflation early in 1977 by pressing the Fed to raise interest rates and thus create a stronger economy for his 1980 reelection.

  But such Machiavellian management was not open to Carter because, as Samuelson also said, “It’s the duty of the Democrats to push for growth and encourage some risks on the inflation side.”19 Carter had run for the presidency against the “Ford recession” and would have been lacerated by his own party if he suddenly did a U-turn and focused solely on inflation rather than unemployment. Nor did any of his economic advisers recommend that he do so at this stage. On December 8, the president was given a briefing book projecting high unemployment, sluggish growth, and high deficits for the years ahead. He realized this was a sober economic outlook, but on the basis of reports from his pollster Pat Caddell, he maintained his optimism and declared: “There is a basic strength in the American economy, and I believe there is a willingness of the American people, whose basic intelligence I trust, to face these challenges.”20 I found it revealing and of some cold comfort that years later Alan Greenspan, who had served as Ford’s chief economic adviser, told me that he consoled Ford and his team after their defeat by his forecast that Carter would face stagflation over the next four years.21

  The next day Schultze delivered a modest recovery plan of $20 billion, with $15 billion of tax cuts and only $5 billion in new spending, representing only 1.1 percent of the American economy, smaller than President Kennedy’s 1.7 percent package to “get America moving again,” and even less than Ford’s stimulus program of 1.5 percent.
There would be a onetime $50 rebate of personal taxes paid in 1976 ($200 for a family of four) and a cash payment for low-income people who paid no taxes to get money quickly into the economy, without long-term budget impacts. A small-business tax credit was added as a sweetener to help attract corporate support. The leaders of the Business Roundtable, the chief executive officers of America’s leading companies, told Carter that this would boost business confidence, but their chairman, Reginald Jones of General Electric, said that if anything the package was too small.22 He was not the only one to think this, and the number would grow under pressure from Democratic congressional leaders.

  * * *

  On January 7, 1977, the president-elect met for the first time with the Democratic leadership of the House and Senate, who trooped down to Plains to discuss the stimulus package. To write up his plan for a quick, short-term economic boost, Schultze went to Bert Lance’s home in Atlanta the night before, worked until 1;00 a.m. at a police station nearby, and then handed his draft to the president-elect. Mondale had warned us that the leadership wanted more spending and fewer tax cuts. Ray Marshall, Carter’s choice for Labor secretary, pushed for more public service jobs for the unemployed. While Schultze replied that the government could not spend money quickly enough to stimulate the economy in the short term, he presented a revised plan with additional money for job training and a small amount for public works.23

  There were no conference tables at Miss Lillian’s Pond House, but soft chairs, couches, and some folding chairs to accommodate the crowd. Each side was warily sizing up the other. Carter’s down-home dress of checked shirt, khakis, and work boots presented a vivid contrast to the congressional uniform of coats, ties, and starched white shirts. I learned from these early meetings that Carter had an iron bladder and a steel-trap mind, going long hours without a bathroom break, without losing his focus, and an amazing capacity to absorb huge amounts of complex information. The battle lines on Capitol Hill were evident even at this early stage, forming a grid that overlaid our own, and would complicate policy making throughout the administration.