Walter Heller

Catapulted into the spotlight as chairman of the Council of Economic Advisors during the Kennedy-Johnson years, Walter Heller (1915-1987) became the chief spokesman and exemplar of the "New Economics" which attempted to maximize economic growth through "fine tuning."

Walter Heller's life and career was fairly conventional until he reached the age of 45. Born in Buffalo, New York, the son of German immigrants, he travelled with his family to Washington state and then to Wisconsin, where he attended public schools and entered Oberlin College in 1931.

After graduating in 1935 Heller went on to the University of Wisconsin for advanced work in economics, being awarded the Ph.D. in 1941. From there Heller took a post at the Department of the Treasury, where he served as senior analyst for tax research, an area in which he was to specialize. By 1945 Heller was assistant to the head of the division, and in that year he left government service for an associate professorship at the University of Minnesota.

Throughout this period Heller published a number of papers on taxation, winning a growing reputation in the field. Because of this he was asked to serve as chief of finance for the American military government in Germany, and in this capacity he helped devise the tax and banking programs which became the basis for the German economic recovery in the 1950s. Heller went to Washington during the Korean War to develop taxation programs, and later in the 1950s he helped reform Minnesota's tax system. The early 1960s found him in the Hashemite Kingdom of Jordan fashioning a graduated tax system for that country.

By then Heller's philosophy regarding the role of taxes in the economy was well established, and it turned out to be a blend of old conservative notions and newer liberal ones. Conservatives supported lower taxes in the belief that government should be limited, and so less by way of revenues would be required. They also thought it a matter of simple justice to take as little as possible from those who earned the money. In addition, they would cut taxes during economic turndowns to stimulate the economy. Heller, who considered himself a liberal, wanted to employ tax reductions when a gap developed between actual and potential performance of the economy and would do so even if this meant an increase in the deficit, which might stimulate inflation.

Inflation wasn't much of a concern at the time; from 1951 to 1960 the rate was generally below 3 percent, and in one year, 1954, prices actually declined. Moreover, Heller felt that a decline in the unemployment rate and an increase in gross national product was well worth a little inflation. Then too, over time increased tax revenues coming from an expanded economy would more than make up for any immediate shortfall. In addition, Heller believed in what later was known as "fine tuning," meaning that economists had progressed to the point where they could apply short term stimuli or dampen growth so as to assure smooth progress, unmarked by severe recession or inflation.

It was ideas like this which attracted the attention of Democratic presidential candidate John F. Kennedy, who after his election selected Heller to head the Council of Economic Advisors. Little happened during Kennedy's first year in office, as the economy turned upward after the 1960 recession. But as growth slowed down Kennedy sought ideas regarding stimulative measures.

In the summer of 1962 Heller created and Kennedy accepted a draft bill to reduce taxes. Heller's hand could be seen in the budget message sent to Congress early in 1963. In it Kennedy predicted a slight surplus for the coming year, but "to plan a deficit under such circumstances (through a tax cut) would be to increase the risk of inflationary pressures." He went on to say that "on the other hand, we are still short of full capacity use of plant and manpower. To plan a large surplus would risk choking off economic recovery."

This was followed by a statement that was straight out of Heller: "Faster economic growth in the United States requires, above all, an expansion of demand, to take up existing slack and to match future increases in capacity." Although he was somewhat vague, clearly the president was coming out in favor of a tax cut.

Kennedy continued to discuss tax cuts throughout the spring and summer of 1963, and increasingly became convinced it was the best way to stimulate the economy. Yet he was unable to push a bill embodying these ideas through Congress.

Kennedy's successor, Lyndon Johnson, had better fortune. Upon taking office he said: "No act of ours could more fittingly continue the work of President Kennedy than the early passage of the tax bill for which he fought all this long year." The measure was signed into law on February 26, 1964, and it provided for a cut of $14 billion in 1964 and $11 billion in 1965. Heller considered this his most important accomplishment. Later on he wrote that the willingness of Kennedy and Johnson "to use, for the first time, the full range of modern economic tools, underlies the unbroken U.S. expansion since early 1961."

In 1964 Heller spoke of the "fiscal dividend" which would result from the tax cut. "Our federal tax system is so powerful that--even after reducing our income taxes by about 12 percent--on the average, each year, it generated about $5 billion more revenues than it did the year before." Some claim that Johnson took this to mean that he could conduct a war in Vietnam and one against poverty at the same time, without raising taxes. Indeed, Heller indicated that Johnson would have to accelerate his domestic spending programs if peace came to Vietnam.

Heller resigned his post in November 1964 to return to his academic duties in Minnesota. Inflationary pressures developed the following year, by which time Heller was considering a shift in position. By 1966 he was calling for either an end to the Vietnam War or an increase in taxes to combat growing inflationary pressures.

Heller continued to speak out on economic issues through a regular column in The Wall Street Journal and as a member of TIME's editorial board. But his ideas seemed discredited by the combination of inflation and stagnation ("stagflation") which developed in the early 1970s.

In the 1980s Heller was deemed a respected member of the old liberalism, while his new economics was rarely discussed by his compatriots. Ironically, the use of tax cuts to stimulate economic growth was taken up by the "supply side economists" who supported President Ronald Reagan, while Heller and other liberal economists of the Kennedy-Johnson era talked of the need for balanced budgets. In the 1984 presidential campaign the Republicans praised Heller's 1960s approach, even while he supported Democratic nominee Walter Mondale, who sounded much like a fiscal conservative of the 1960s. Heller died of a heart attack in 1987.

Further Reading

• Although there is no full-scale biography of Walter Heller, a discussion and analysis of his life and works may be found in Robert Sobel, The Worldly Economists (1980); Edward Flash, Jr., Economic Advice and Presidential Leadership (1965); William Breit and Roger Ransom, The Academic Scribblers (1971); and Herbert Stein, The Fiscal Revolution in America (1969). For his career in the Kennedy-Johnson years see J. Ronnie Davis, The New Economics and the Old Economists (1971). Among Heller's books, the most useful are New Dimensions of Political Economy (1966), The Economy: Old Myths and New Realities (1976), and Perspectives on Economic Growth (1968).