I’ll never forget hearing that the 1980 Nobel Prize in Economics had been given to Yale economist James Tobin. I was staying at a little 15-family sheep farm some 14,800 feet above sea level near Cerro de Pasco, Peru.
Bleary eyed from lack of sleep due to altitude sickness and with my stomach churning from spicy food the night before, it was hard to answer my student. Clutching a small radio, he excitedly asked in Spanglish: “Who is James Tobin, he just received the Nobel Prize?”
Ruben thought I knew a lot more economics than I did.
Not wanting to lose face, I quickly ventured: “I think he was an economic adviser to President Kennedy and he did some work on portfolio theory and diversification.”
A quick save, but I was lucky. Tobin, who died last week at age 84, was a great economist. But until the end, he kept a much lower profile than contemporaries such as Paul Samuelson, Milton Friedman or even Minnesota’s own Walter Heller. Oddly enough, his most public accomplishment may cause some of us to question the validity of the policies he championed.
Thirty-five years after his service in Kennedy’s Council of Economic Advisors, Tobin stands out as one of the few, perhaps the only, person in the world to have successfully conducted Keynesian macroeconomic policies without causing adverse side effects.
A quick review is in order.
Over the 160 years from the publication of Adam Smith’s “The Wealth of Nations” in 1776 to the 1936 release of John Maynard Keynes’ “General Theory,” most economists believed that governments could not, and should not, do anything to end recessions or inflations.
Keynes tried to rebut that common wisdom. He argued that in times of recession, a government should cut taxes and/or increase spending to boost economic output. At the same time, the central bank should increase the money supply so as to lower interest rates.
When an economy faced inflation, Keynes argued, its government should raise taxes and lower spending while the central bank constricted the money supply so as to lower interest rates.
Because these policies were designed to buffer or offset the business cycle, what Keynes advocated came to be known as “counter-cyclical fiscal and monetary policies.”
Some of the news accounts of Dr. Tobin’s death have stated that the FDR’s New Deal was the first administration to apply Keynes’ theories. Wrong.
The General Theory wasn’t even published in Britain until Roosevelt’s first term was drawing to an end. Moreover, there’s no historical evidence that any of Roosevelt’s aides who helped shape the basic programs of the New Deal had any idea who Keynes was, or what he thought.
Roosevelt was a balance-the-budget fiscal conservative — like Ronald Reagan — until he was inaugurated. Then, again like Reagan, he suddenly changed his mind. But any deficit spending that Roosevelt’s administration undertook was strictly seat-of-the-pants flying and not a reaction to any economic theorist’s arguments.
Nor were Keynesian policies adopted quickly after World War II.
Democrat Harry Truman believed in balancing the budget as did his successor, Dwight Eisenhower. Even though academic economists called for Keynesian counter-cyclical policies, no U.S. administration through 1960 was willing to try them.
Kennedy was different.
His Harvard-based advisers sold him on Keynes and JFK appointed two important devotees of Keynes to run his Council of Economic Advisors. Walter Heller was the articulate, telegenic public face of the new Keynesian policies and Tobin was the behind-the-scenes brain of the operation.
Tobin was credited with engineering the 1963 “Kennedy” tax cut that apparently led to brisk recovery from a recession. The irony is that Kennedy and Heller hadn’t been able to convince Congress to pass the bill. It only passed because of the reaction of sorrow following Kennedy’s assassination late in the year.
In any case, the tax cut was widely heralded as a success of Keynesian policies, and, within the discipline of economics, Tobin was hailed as its architect. He did a lot of solid academic work, including his theorizing about portfolio diversity, and few carped that he didn’t deserve the Nobel when it was awarded.
But in the year when he got this award, the new rational expectations theories of Robert Lucas, Thomas Sergeant, Neil Wallace and others, were sweeping belief in Keynesian ideas from the minds of many young economists.
Tobin disagreed with these upstarts, and the vehement, bitter and often personal attacks he made on those who challenged his long-held beliefs were unfortunate.
And he had to live with the irony of a president, Reagan, who he opposed, citing his triumph, the 1963 tax cut, as justification for supply-side policies that were explicitly anti-Keynesian.
Moreover, he was frustrated when anti-globalization groups seized on his proposal to lightly tax international capital flows to reduce their destabilizing effects and twisted it into an attack on free trade, which he supported.
Tobin died being able to say that he had advised the Kennedy administration on successfully implementing Keynesian policies.
But the fact that no other government in the United States or Europe was able to copy his success without eventually increasing both inflation and unemployment should tell the rest of us that Tobin’s experience was the exception rather than the rule.
© 2002 Edward Lotterman
Chanarambie Consulting, Inc.