University of Virginia Library

THE ECONOMY

CEA Chairman Stein: Advising Nixon, Keeping Cool In The Crisis

When Herbert Stein came to Washington as a young Chicago
free-market economist in 1938, the nation was beginning to learn
how to manage (or mismanage) its economy as it pulled itself out
of the Great Depression. A great deal has changed since then, and
the presence of economists is felt in every sector of government
today, just as the presence of government is felt in every sector of
the economy.

Herbert Stein is still in Washington, having risen from an
economist at the Federal Deposit Insurance Corporation to
Chairman of the President's Council of Economic Advisers. As
soon as he completes his assignments on the Nixon team–helping
to guide the economy back to normalcy during the recently
unveiled Phase III– he will be joining the economists in Rouss
Hall as part of the University faculty.

Cavalier Daily editorial editor Walter Bardenwerper visited Mr.
Stein at his office in the Executive Office Building in Washington
on Jan. 18, and recorded the following interview.

Dr. Stein, your very visible role
in the Nixon Administration has
aroused a good deal of conversation
in Charlottesville in light of your
impending move there. When can we
expect you?

Well, I was originally
appointed with the
expectation that I would come
to Charlottesville in March of
1973. When the President
asked me to stay over into the
second term, the Department

extended my leave until the
fall of '73, but with some
recognition that I might not be
able to control my departure
time exactly and that I might
have to stay until a little later
than that.

So you don't have any idea as to
exactly when that will be?

Well, I– No, I don't know
exactly, but I expect that I will
be there within say a year or
14 months, in any case.

This is your first academic post,
if I am not mistaken. Do you have
an idea yet as to what you would
like to teach at the University?

That's correct. This will be
my first academic post. I will
spend my first three years at
the Center For Advanced
Studies, during which time I
will try to learn something to
teach, and gradually get into
the teaching business. But I
assume that I would try to
teach about public policy–
how economic policy is made
in the government. I would like
to teach fiscal policy,
economic stabilization; that's
the kind of thing that I have
worked on most of my life
And, well, then we'll see how I
fit into the schedule of the
Department.

What is it like working with the
President of the United States at
such a clos advisory level?

Of course it's very exciting.
You can't– at least I can't– get
over the thrill of being in the
Oval Office and participating in
a conversation with him. But
he is a man who makes
everybody who works with
him feel at ease– that is, he
does not stand on ceremony.
He is very considerate of
everyone who works with him.
He wants to hear everyone's
opinion regardless of his status
in the hierarchy. And one
thing that I've found especially
gratifying is that he
understands enough about
economics to be tolerant of
errors.

He described himself in an
interview recently as being "the
coolest man in the room" during a
crisis. Do you find him that cool
when the economy has a crisis?

Well, I certainly have found
him cool about our economic
problems, and I suppose he is
the coolest man in the room
although I haven't taken the
temperature of all the others. I
think he does tend to take a
long view of our economic
problems, and realize that
things that get worse will also
get better, and that we can't
expect to manage everything in
great detail.

I think the thing that makes
him cool about these things is
that he does not worry about
options that don't exist. He
doesn't wish that he had
options that he doesn't so that

he recognizes that he has to
make choices among the real
possibilities and he's prepared
to do that.

So I think he doesn't suffer
from anxiety– which is a kind
of fear of the unknown.

We all see and hear the final
decisions made in the White House,
but how do decisions involving the
economy come about? In other
words, how do you actually go
about advising the President?

Well, the advice for the
President on economic matters
comes to him through a kind
of machinery in which a
number of agencies are
involved. Every important
economic question that comes
to the President involves the
interests of a number of
agencies, and when these
problems come to him, he
wants to have the views of
those agencies that are affected
or that are presumed to have
some knowledge. Usually, on
the big issues– the issues that
are of Presidential importance–
we know what they are, and
we institute a process of
discussion among the agencies
to bring out what the options
are– what the views are– and
then usually present this to
him in writing in advance of an
oral discussion. After he's
digested that, he will call in a
few people to discuss the
options with– either to tell us
what his basic decision is, or to
make it there in discussion
with us.

And then after he's
made this decision which is
usually at a fairly high level–
you know, on some general
principles or strategy– he
expects us to go out and
develop the ways of
implementing it.

Did your work get more difficult
or time-consuming when you
moved up from membership on the
Council to Chairman?

I wouldn't say that. I think
that I was probably working as
hard as it was possible to work
before I became the Chairman.
We all worked full-tilt pretty
much all the time. I had, I
suppose, even more committee
work to do, even more work to
do in connection with other
agencies and the White House
and therefore less time to
spend with the Council staff or
doing writing of my own, even
though I still do quite a lot of
writing. Also I began to do
more public appearances since
I became the Chairman, but I
would suppose the main thing
is that I was involved in a
broader range of issues and
more at the level of discussing
them with others outside of
the Council and less at the level
of doing my own research and
writing.

In his book Nixonomics Leonard
Silk parodies Mr. Nixon's penchant
for superlatives, saying that the
Nixon economic program is "the
most comprehensive economics in
the history of the world." How
would you describe it?

Well I think he is parodying
me; that as I said in a speech
early in 1972 that we had the
most comprehensive, forceful,
pragmatic, attack upon the
nation's economic problem– I
didn't say "in the history of
the world"– I said that any
administration had ever had.
That is, I was thinking then of
the fact that we had put
together a stimulative budget
policy acting on both the tax
side and the expenditure side,
with price and wage controls,
with devaluation of the dollar,
and with steps to bring about
reform of the international
monetary system and
international trading system.
So I thought that was pretty
powerful.

You and Dr. Schultz [now
Secretary of the Treasury] had long
been outspoken opponents of
wage-price controls. Once they
were adopted, however, you
became administration spokesmen
for them. What led to the change of
heart?

I wouldn't say that I
became spokesman for them.
When we had them I tried to
explain them and I tried to
make them work as well as I
could. I think that I came to
the view (probably later than
most other people– probably
later than anybody else around
here) that we had to do this
because we were in an
international monetary crisis,
we had great skepticism around
the world about the future
stability of the U.S. dollar; we
had a great deal of anxiety
almost amounting to hysteria in
the United States about
inflation; and strong measures
seemed necessary just to
correct these public attitudes
at home and abroad.

Richard Selden, Chairman of the
University's Economics
Department was quoted the other
day as saying that the "benefits (of
controls) were negligible." Now
that Phase III has begun, how would
you assess the controls of Phases I
and II?

Yea, well you don't want to
put me in a controversy with
my Chairman. We will soon put
out our Economic Report and
try to assess what the controls
did. I think– our conclusion is
that the controls probably had
some effect on reducing the
rate of inflation but we don't
know how much and we can't
be sure that there was any.
More important– or more
clearly– I think that the
controls had an effect on
reducing the fear of inflation
and the expectation of
inflation and that itself was
very important.

Even if we had had the
actual decline in the rate of
inflation that we had without
the controls, I think we would
have gone through a period of
eighteen months of continuous
worry about it; and this worry
was restraining, frightening
businessmen, keeping them
from investing, keeping
consumers from spending, was
making the rest of of the world
unwilling to hold dollars, and
so on. So it had a number of
adverse consequences. It was
also frightening the
government itself in a way. So,
I think to have corrected
this fear was important.

Do you agree with most
forecasters that 1973 will be a good
year for the American economy?

Oh, yes, we think the
outlook is very good. We keep
saying that there are problems,
but we think there will be a
strong expansion, that the
unemployment rate will
decline, output will rise about
as much this year as last year
(from year to year, at any rate
– not from the beginning to
the end of the year) and the
big question mark is about the
rate of inflation. There is
where we are going to have to
struggle.

What about the money supply?
Walter Heller, one of your
predecessors, says he expects the
Federal Reserve to "put on the
monetary brakes" this year after
the 8 per cent growth in the money
supply last year. Can we expect this
contraction, and was the latest rise
in the discount rate a step in this
direction?

Well, I don't think that the
Federal Reserve will continue
to aim at 8% rate of monetary
growth per annum. I doubt
that they were aiming at that
for 1972. Their ability to
control is not very precise, but
I would expect that we would
have a somewhat lower rate of
monetary growth in 1973 than
we had in 1972. I think that
the rise in the discount rate
was a small step consistent
with that idea, but itself not
very powerful.

Speaking of the Federal Reserve,
it has been conjectured in the press
that Chairman Arthur Burns and the
President no longer see eye-to-eye
as they once did. In fact, Mr. Nixon
was reported to have Joked that,
"Arthur Burns, like the Boston
Cabots, answers only to God." Are
they cooperating or not?

Dr. Burns' relations with the
government are excellent. The
joke doesn't indicate that
they're not – there are
no problems between us.

Ronald Ziegler said of the
December wholesale food price rise
that "further steps" will be taken
by the government to keep prices
down. Could you specify some of
those steps?

Well, since he said that, we
have taken several steps. We
have eliminated the mandatory
restrictions on the acreage that
could be planted to the
production of wheat. We have
taken steps to clean out the
government-owned stocks of
grain, except for a tiny
emergency reserve. We have
taken steps to get farmers to
reduce the stocks of grain that
they own so that more will be
put on the market. We are
permitting farmers to graze
cattle on land that is set aside
for production.

We have eliminated the
remaining export subsidies on
foods and we have (maybe the
most important thing) said that
the Department of Agriculture,
in administering its policies,
should clear with the Cost of

Living Council which will take
account of the effect of their
actions on prices.

A recent Washington Post
editorial claimed that Mr. Nixon
may be willing to accept higher
food prices than most shoppers
would like in order to keep down
government farm subsidies. Is this
his policy?

That is a continuing conflict
of policy, because you have the
interests of some people in
getting the farmers' income up
and you have the interests of
some people in holding the
budget down. The way you can
do that is to hold farm output
down which gives the farmers
more income at a higher price,
but with less support from the
government. But now we are
trying to emphasize the
interests in prices and in the
consumer so that I think that
the criticism which was made
(which was not unjustified) will
be less justified in the future.

"Continuing Policy Conflict:"

Will Better Incomes On The Farm Always Require Rising Food Prices?

CD/Walter

"Continuing Policy Conflict:"

Will Better Incomes On The Farm Always Require Rising Food Prices?

Part of the New Economic
Policy was a devaluation of the
dollar in August, 1971. When do you
think we will feel the full effects of
the devaluation?

Well, that's very hard to say.
We always thought it would be
about two years, and maybe
we're going a little less rapidly
than we had expected. But we
are getting the effects, and I
would not want to guess when
we will get the end of them.

When do you expect the
President to sign major tax reform
legislation?

I think there is a possibility
that we will have tax reform
legislation enacted and signed
this year. Tax reform is always
a long, drawn-out process and
the Ways and Means
Committee is very busy, but
we are working on something
that we hope we can submit
not too late in this Congress –
and then, we'll see.

What do you personally think of
Professor Friedman's theoretical
flat-tax that could replace the
present progressive income tax and
still raise the same amount of
revenue?

Well, it's not quite
non-progressive, because I
guess he had some exemptions;
but this is a matter of taste and
values and I have a belief in the
progressivism of the tax system.
I think our tax system goes too
far in some respects. I don't
think the problem with our tax
system on the whole is that it
is too progressive, but that it is
too uneven as between people
with the same income.

An area of great controversy
within the Congress and the nation
has been government intervention
along the lines of the Lockheed and
Penn Central loans. What do you
see as the future of that sort of
government action?

I think that ought to be
kept on quite an exceptional
and emergency basis; that is, I
would not like to see us slide
into a system where whenever
any large company is in
difficulty, the government
balled it out. I think there has
to be some exceptional
urgency for such a thing. We
shouldn't make it a routine
matter.

You said in your book, The
Fiscal Revolution in America, that
there has been a revolution in the
way the government feels about
economists. How did you mean this
and how does the present
government feel about economists?

Well, it's obvious that
economists have come to play
a bigger and bigger role in
government, and I think that
this has been going on all
through the period that I
covered in my book and is still
going on in the Nixon
Administration. That is, we
have the Secretary of the
Treasury who is an economist.
I think he's the first Secretary
of the Treasury who has been
an economist and I think that
he probably has the highest
role in the government that an
economist ever had. We have
economists spread all over the
agencies and I think they are
very well utilized.

Whispers occasionally circulate
in the Economics Department at
Virginia that the University of
Chicago, where you took your Ph.
D., is merely a branch of the
"Virginia School" of economic
thought. Now that Professor
Friedman, whose name is almost
synonymous with Chicago, has
been interviewed in Playboy, not a
noted economic journal, how
strong do you think the influence
of the University of Chicago is now?

Well, I haven't read the
article in Playboy, so I don't
know what the influence of
Chicago may be. But I think
that the influence of Chicago is
very strong in the fact that
there are places like Virginia
and some others which are
becoming more influential. It's
a sign that Chicago is still very
important because these places
are derivatives of Chicago – at
least as compared with the
time when I was at the
University of Chicago which
was 35 years ago. The School
of free enterprise and classical
economics has spread very
much around the country.

How do you think the press has
treated Mr. Nixon's economic
policies?

Its very hard for me to
comment about the press. I
read a few newspapers: The
Washington Post, The New
York Times, The Wall Street
Journal, and I think that the
press that I read has generally
been rather unsympathetic
and, I have often felt,
inaccurate in reporting on what
was going on in describing our
policies. That's a very hard
question to ask a person who is
involved – I guess nobody can
be a judge in his own case –
nobody can be objective about
these things.

But I can report what my
own feeling is: that a good deal
of the more analytical type of
reporting in the newspapers
that I have mentioned has been
unfriendly and biased.

If you had the opportunity to
put any one of your economic
beliefs into practice–make it policy
overnight– what would you
do?

Well, I really can't answer
that question. I'd have to think
about it at some length. I think
that when you've been out,
you can come into the
administration with a blueprint
full of ideas of things that you
believe ought to be done.

After you've been here four
years you are more modest in
your ideas about
revolutionizing policy, and
you hare happy if you can say
that you got about as good a
combination as you can
realistically hope for. That's
what I think, so I won't set any
Utopian ideas – maybe when I
get down to Virginia I'll
recharge my battery of
Utopian ideas.