The New Economics as a Blueprint for Economic Fascism

The new economics provided an elaboration of the theoretical framework of Keynesian economics into the rhetoric of comprehensive economic planning adapted to American political conditions. As Makin and Ornstein astutely note, “the young liberal economists around Kennedy were interested not just in avoiding depression and unemployment. They began to see Keynes’s ideas as the basis for a magic formula that could be used to create growth and prosperity by government fiat.”[33] Actually, it was not Keynes himself but extreme postwar Keynesians such as Alvin Hansen and Abba Lerner who were the direct forebears of the new economists.[34] It was these economists who developed the doctrine of “functional finance” (Lerner’s term), according to which the overriding purpose of the federal budget was to regulate the rate of total spending in the economy in the interest of economic stabilization.

The doctrinal development of the new economics began in earnest in the waning years of the second Eisenhower administration, when younger American Keynesians associated with the left wing of the Democratic Party produced a stream of academic and popular articles that delineated the political-economic principles they were to help implement as government advisers and policymakers in the 1960s. These writings were in part a response to what the new economists saw as the policy inaction of the Eisenhower administration in the face of the recessions of 1958 and 1960, the mediocre growth performance of the United States relative to the Soviet Union during the 1950s, and the bogus missile and technology gaps that were alleged to yawn between the two mega-states at the end of that decade.[35] A few of these articles also attempted to grapple with the intellectual problem presented by the failure of prices to fall during the recession of 1958, a phenomenon that was fundamentally inconsistent with Keynesian theory.[36] Finally, to some degree, the development of this new political economy reflected the partisan sympathies of its Democratic liberal architects, since it served to undermine the widespread perception among the lay public that economic performance under Eisenhower was satisfactory.[37] Thus it was that when the new economists attained positions of influence within the Kennedy administration, they came fully armed with a set of ready-made doctrines that could be put at the service of presidential power to revolutionize the American economy and drive it toward economic planning. The programmatic statement of the new economics appeared in 1962 in the first economic report of the Kennedy administration.[38]

Unlike Keynesian theory, the fundamental concepts and principles of which were esoteric and inaccessible to noneconomists as well as economists trained in pre-Keynesian traditions, the basic doctrine of the new economics was—and was intended to be—straightforward. The new economists saw the molding of public opinion as an important part of the role of economic adviser. In Heller’s words, the main task of the economist as presidential adviser is “economic education of, by and for presidents.”[39] In other words, the new economics was to be taught to the president and then, through both the properly instructed president and his economic advisers directly to the public.

The key concept of the new economics is “potential output,” which refers to the total quantity of goods and services or “real GNP” that would be produced by the economy when labor and other resources are fully employed. During the 1950s and early 1960s, the U.S. economy was considered by the new economists to be operating at full employment and, therefore, performing up to its full potential when the unemployment rate among labor was equal to 4 percent. At this rate of unemployment, the only workers without jobs were either those who were voluntarily unemployed because they were in the process of searching for better jobs that existed or those whose skills currently did not match the requirements of existing jobs. In either case, Keynesian macroeconomic demand management policies could not improve the situation. However, if the unemployment rate rose above 4 percent, then the dread “GNP gap” would emerge, as the economy’s actual output declined below its potential output. This gap measuring the excess of potential over actual output at the same time measures the real social costs of unemployment in terms of lost output and also indicates the extent to which “aggregate demand” or total spending must be increased by expansionary government policies to reestablish full employment.[40]

According to the new economists, the cumulative real GNP gap for the decade of the 1950s totaled $175 billion (in 1961 dollars). Even more troubling to them was their perception that the GNP gap had endured without interruption from the end of 1955 to the accession of the Kennedy administration to power in 1961. The gap persisted throughout the entire recovery from the 1958 recession and reached a high of 8 percent of GNP on an annualized basis in the recessionary first quarter of 1961. In light of this, the 1962 annual report of Kennedy’s CEA concluded: “We face a stubborn problem of chronic slack, and the road to full recovery is a long one.”[41]

Thus, the new economists forecast an era of chronic and extravagantly wasteful unemployment of resources for the American economy, unless the federal government under their tutelage intervened with demand management policies on a massive scale. The prescription of the new economists for the elimination of the pesky GNP gap and the “full recovery” of the U.S. economy was for the government to run deficits, deficits and more deficits. As Samuelson put it in 1961:

In principle, though, there is only one correct rule about budget balance—Smith’s Law (not from Adam Smith but Professor Warren Smith from the University of Michigan). It goes as follows:

Smith’s Law: There is only one rule about budget balancing, and it is that the budget should never be balanced.

Never? Well, hardly ever. Economic conditions will generally call for either a surplus or a deficit. Only in the transition as the budget is passing from the black to the red (or from the red to the black) should the budget be fleetingly in balance.[42]

Despite Samuelson’s purely formal admission that a surplus might be required under certain conditions, Smith’s Law in conjunction with the new economists’ diagnosis of “chronic slack,” implied a sea of red ink on the long road to “full recovery.” But Samuelson and his fellow new economists recognized the formidable political obstacle to the implementation of their remedy: the American public’s deep-seated ideological commitment to balanced budgets.[43] In an effort to camouflage and divert attention from their emphasis on deficit spending, the new economists devised the concept of the “full-employment surplus.” As Herbert Stein, a right-wing Keynesian and a critic of the new economics has pointed out, in the early postwar period the orthodox Keynesians rejected the concept of a full-employment budget.[44] This concept had been developed by the more conservative economists associated with the Committee on Economic Development as a benchmark for the “automatic stabilization” policies they favored, but the left-wing Keynesian economists of the early postwar years summarily rejected it on the grounds that there was no compelling reason for the budget to be balanced or in surplus at full employment. However, according to Stein, “The Kennedy team recognized that there might be some people out there who cared about balancing the budget, and for them they offered the comfort that the budget would be balanced at full employment.”[45]

According to the new economists, a full-employment budget surplus may exist even when the actual budget is in deficit, if the current situation involves unemployment. The reason is that, as aggregate demand increases and the economy begins to recover, the increased employment and production will generate additional income. Thus, without any change in the tax structure, the rising economic activity and prosperity will cause the federal government to realize a progressive increase in its tax revenues, while enabling it to also restrict its expenditures on unemployment benefits and welfare programs. Once the recovering economy has attained the level of income consistent with full employment and potential output, revenues may very well exceed expenditures so that the budget is now in surplus. This analysis allowed the new economists to disguise their persistent advocacy of pumping up aggregate demand by expanding the actual budget deficit as merely a call for trimming back a full-employment budget surplus that proved too large to sustain full employment. This also allowed the new economists to argue that an actual budget deficit of a given size may, under certain circumstances, prove restrictive rather than stimulative of economic activity, and this certainly suited their purposes in the recession year of 1961.

The rhetorical value of the concept of the full-employment surplus is emphasized in the sympathetic retrospective assessment of the new economics by Keynesian macroeconomists Rudiger Dornbusch and Stanley Fischer:

The New Economists planned to use fiscal policy as the instrument with which to close the GNP gap. It was important to get across to Congress and the public the idea of the full-employment surplus because the unemployment rate was high in 1961, and the federal budget was in an actual deficit. Any proposals to increase spending or cut taxes would certainly imply a larger deficit if GNP were to remain unchanged. Members of Congress could be relied upon to look with great suspicion on any policy that might increase the budget deficit. By focusing attention on the full-employment budget, the New Economists appropriately succeeded in shifting attention away from the state of the actual budget to concern with how the budget would look at full employment—which had the side benefit of focusing attention on the full employment issue itself.[46]

Unfortunately for the new economists, Congress didn’t fully absorb the lesson on deficits they sought to teach. This fact is evinced in a hilarious exchange during a Joint Economic Committee meeting in 1965 between a bewildered and increasingly frustrated Senator William Proxmire and an embarrassed and equivocating Gardner Ackley, by then a member of the Johnson administration’s CEA:

Senator Proxmire. I notice that the national accounts budget has been in deficit. . . until the first quarter of this year. Therefore it is stimulating at this level of unemployment; is that correct?

Mr. Ackley. That is correct in the sense that efforts to reduce this deficit by raising taxes or reducing expenditures would have created even more unemployment. . . .

Senator Proxmire. I take it that this means that during this entire period the contribution of the Federal Government has been stimulative.

Mr. Ackley. I think the best measure of the impact of the budget is not the actual figure, which reflects a lot of things, but rather the full-employment budget, and that is why we focus on it.

Senator Proxmire. You can take 3 percent [unemployment], 2 percent, 1 percent, but why not take what is going on right now? . . . Right now it is 4.7 percent. If the national accounts budget is in deficit, is it not clear that the contribution of the Federal Government at this level tends to be stimulative?

Mr. Ackley. It tends to be more stimulative than if the deficit were smaller, or if there were a surplus.[47]

If the full-employment surplus doctrine was concocted to make budget deficits an acceptable tool of stabilization policy, the twin concepts of “fiscal drag” and “fiscal dividend” were invented to justify perennial deficits and continually increasing government expenditures as a permanent feature of a growing economy. Fiscal drag was the term the new economists used to denote the deflationary effect of the automatic increase in tax revenues that resulted when an economy’s potential output was growing at a normal rate. With a given tax structure and a constant level of government expenditure, growing incomes would engender additional tax payments, producing an unwarranted and contractionary rise in the full-employment budget surplus, and thereby dragging output and employment below their potential levels. The remedy for this phenomenon, according to the new economists, was for the government to declare a “fiscal dividend” and use the growth-induced increases in tax revenues to increase its expenditures or to reduce tax rates or to combine both policies.

Thus, the new economists raised the specter of the progressive growth in the full-employment budget surplus—which was as inexorable as the march of time itself—as a rationale to justify a perpetual stream of budget deficits stretching out into the indefinite future. Wrote Heller:

Bitter experience shows that there is nothing easier than letting the full employment surplus grow. Time, bringing with it ever increasing productivity and rapid additions of young new workers to the labor force . . . will rapidly raise the full-employment surplus unless deliberate and repeated steps are taken to prevent it. . . . Present programs [implemented from 1961 to 1965] have eliminated the full-employment surplus. But in the future it will again and again rear its ugly head in the form of a growing fiscal drag, or its lovely head in the form of recurring fiscal dividends.[48]

For Heller, the prospective “huge growth” in the “lovely” fiscal dividend would mainly be used to expand the size, scope, and power of the federal government via “support for vital new or expanded federal programs; well-timed tax cuts; more generous transfers of funds to hard-pressed state and local governments; perhaps even a helping hand to the social security system.”[49]

Heller and the new economists’ “new look in fiscal policy” also required an enormous augmentation in presidential power, especially over the tax system. This was necessary to render fiscal policy as flexible as possible in quickly responding to the rapid and unforeseen fluctuations in aggregate demand that are the putative cause of recession and inflation. Consequently, the new economists advocated policies designed “to shorten the period between fiscal decision and fiscal action, either by carefully hedged standby powers for the president or by streamlined congressional procedures, or by some combination of the two.”[50] An example of the first was embodied in the request by President Kennedy to Congress in 1962 for authority to make cuts of up to 5 percentage points in individual income tax rates as a means of fighting recession.[51]

A second effect of the rhetoric about the full-employment budget surplus was to obfuscate and suppress the all-important question of how the anticipated deficits in the real-world budget were to be financed. In other words, to be effective in closing the GNP gap and counteracting fiscal drag, must it be the case that such budget deficits are “monetized” by the Federal Reserve System? Answering this question openly in the affirmative would naturally open up the new economists to charges of hawking old wine in new bottles, advocating monetary inflation as a panacea for all economic ailments.[52] The new economists of the CEA gingerly addressed this issue in the Economic Report of the President of 1963:

How can the Federal Government raise the money to finance a budget deficit? At one logical extreme—which of course no one seriously contemplates—the Federal Reserve could buy Treasury securities and increase the quantity of bank reserves in an amount equal to the deficit. In this way the reserve base of the banking system would be increased by virtually the entire amount of the deficit, paving the way for a multiple expansion of bank deposits and bank credit. This is the most liquid and most expansionary way of increasing the debt of the Federal Government.

At the other extreme, the Government might finance a deficit while the Federal Reserve permitted no increase in bank reserves. This means that the Treasury would not be able to sell any of its securities, directly or indirectly, to the Federal Reserve Banks. The Treasury would have to sell them either to the public or to the commercial banks; and the banks would be able to buy them only to the extent that they in turn sold other securities to the public or denied loan accommodation to private borrowers.[53]

Note that the option of financing a budget deficit wholly through the issuance of public debt—that is, without recourse to monetary inflation—is here characterized as an “extreme” position. The unspoken implication, of course, is that the prerequisite for an effectively expansionary fiscal policy is continuing additions to the quantity of money. Indeed, when pressed on this point before the Joint Economic Committee in 1963 by a bemused Senator Paul Douglas, a former economics professor at the University of Chicago, Heller reluctantly and somewhat evasively conceded that an effective policy of deficit financing necessitated monetary inflation. Douglas posed the following question: “[I]f the Federal Reserve Board insisted that the deficit must be met out of the savings of individuals, would not this divert capital from industry and result in no net increase in monetary purchasing power, and, consequently, no net increase in demand?” Heller’s response to this query was, “If the policy were . . . to raise interest rates to a point where private spending, capital spending in particular, were depressed by as much as the tax cut expanded spending, surely it would be a self-defeating proposition.”[54] In effect, Heller was admitting that expansionary fiscal policy was impotent unless it was supplemented by monetary inflation.

The emphasis of the new economics, however, was not merely on the “short-run” concern of closing the gap between actual and potential GNP and ensuring full employment. It also stressed the importance of achieving and maintaining a high rate of growth of potential output. In Heller’s words, “The new economics has made a major shift in economic targetry. . . . Now, the policy focus is centered on the ever-rising potential of the economy, on gap-closing and growth.”[55] Makin and Ornstein perceptively characterize the underlying theoretical impetus, which first emerged in the 1950s, for this momentous policy innovation:

At the time, growth theory was an esoteric, highly mathematical branch of economics, but it was beginning to be seen as a dynamic extension of Keynesian principles. The idea was not just to dampen business cycles but perhaps to alter the trajectory—the growth path—of the economy That involved discovering ways to accelerate capital formation and thereby to increase growth, real wages, and income per capita. To many young economists of the era, it appears that Keynes had discovered the philosopher’s stone that could turn base metals into gold.[56]

Since Solow and Tobin were in the vanguard of these Keynesian growth theorists, naturally the goal of high growth strongly conditioned the program of monetary and fiscal policy advocated by the new economists as they assumed positions of influence and power in the Kennedy administration. The “optimal” combination of policies for promoting a stable economy and economic growth, according to the new economists, was one of loose money and tight budgets. Writing in 1961, Samuelson said that he had been preaching such “a two-step program for growth” for half a dozen years.[57] The first step of Samuelson’s program consisted of “militant monetary expansion” to drive down interest rates and cheapen credit to business borrowers in order to induce an increase in private investment. The second step involved “austere fiscal policies” in the form of an increase in tax rates relative to “needed government expenditure on current and capital goods and on welfare transfers.”[58] According to Samuelson, this fiscal program of chronic overtaxation, to use his term, was necessary to effect “the reduction in consumption needed to release the scarce resources in our postulated full-employment economy that are needed for the induced investment programs.”[59] In other words, Samuelsonian “austerity” applied only to the productive American families and businesses who would be forced to bear the burden of the increased taxes to pay for a federal budget surplus that would supposedly succeed in “supplementing private thrift by public thrift.” The bloated federal political establishment, in sharp contrast, would be free to continue and even expand the needed” spending programs that benefitted its subsidized military-industrial, agricultural, welfare, and foreign-aid clientele.

The tax-and-spend policies so beloved by politicians of both political parties were thus given a scientific justification in cutting-edge economic theory. But even more momentously, the new economists elaborated Keynesian growth theory into a blueprint for the comprehensive macroeconomic planning of the American economy. In his article entitled “Growth through Taxation,” originally published in the New Republic in July 1960, Tobin called for monetary and fiscal policies to be employed as instruments for centrally directing the allocation of resources to broad categories of use. Thus, he began his article with the declaration, “The overriding issue of political economy in the 1960s is how to allocate the national output.”[60] He went on to frankly suggest, “The question of accelerating economic growth brings the question of allocation to the fore.” Tobin posed the general case for a planning solution to this question in the form of two rhetorical questions:

Can we as a nation, by political decision and governmental action, increase our rate of growth? Or must the rate of growth be regarded fatalistically, the result of uncoordinated decisions and habits of millions of consumers, businessmen and governments, uncontrollable in our kind of society except by exhortation and prayer?[61]

Without any more argumentation than this, Tobin took the intellectual case for macroeconomic central planning as established and went on to present his proposal for its implementation.

Tobin introduced his proposal with the dictum, “To stimulate growth we must somehow engineer two shifts in the composition of actual and potential national output.”[62] The first shift was “from private consumption to the public sector.” In addition to the stimulus it would provide growth via public investment in education and basic research, this shift was also mandated by the “possibly equally urgent reasons” of “increased defense, increased foreign aid, increased public consumption.” The second shift involved a diversion of resources “from private consumption to private investment.”

To accomplish these two shifts, Tobin prescribed the following “program for growth” designed to “stimulate the desired government and private expenditures” and “discourage consumption.”[63] First, federal, state, and local governments would increase expenditures on “education, basic and applied research, urban redevelopment, resource conservation and development, transportation and other public facilities.” Second, in order to stimulate private investment, the Federal Reserve and Treasury would cooperate in an “easy money” policy that would make credit cheap and plentiful, especially on long-term capital markets. Also, tax credits for new investment by business and more generous provisions for business income averaging and loss offsets would be incorporated into the corporate income tax code. These last two measures would obviate a reduction in the corporate income tax rate. Third, the requisite restriction of consumption to finance these increased expenditures by government and business would be accomplished by a number of additional tax measures. These included an across-the-board increase in personal income tax rates, increases in state and local taxes, and a limitation on “the privilege of deducting advertising and promotional expenses from corporate income subject to tax.” In attempting to reply in advance to the inevitable controversy that this last measure would elicit, Tobin completely ignored the issues of the free-speech rights of business owners and even of microeconomic efficiency. Instead, he sought to justify the restriction on advertising in terms of its efficiency in promoting his macroeconomic central plan, arguing, “From the economic point of view, it absorbs too large a share of the nation’s resources; at the same time it generates synthetic pressures for higher consumption.”

Tobin concluded his proposal with the emphatic declaration: “Increased taxation is the price of growth.” The macroeconomic policy techniques devised by the new economists will thus ensure growth by bringing “under public decision the broad allocation of national output.” Moreover, according to Tobin, this macroeconomic foray into central planning of economic activity could be accomplished without recourse to the heavy-handed direct controls of wartime. He gravely warned, however, that the absence of such direct controls put us at a disadvantage vis-à-vis “our communist competitors” in attempting to prevent the allocation of increases in per capita income to wasteful spending on personal consumption rather than to such socially beneficial uses as forced saving-investment and government spending on the military establishment. “Since they do not pay out such increases in output as personal incomes in the first place, they do not have the problem of recapturing them in taxes or saving,” he wrote.[64]

Routine budget deficits, chronic monetary inflation, confiscatory taxation, and centralized macroeconomic direction of resource allocation were not the only components of economic fascism that the new economists were eager to foist upon the American public. They also urged a vast and permanent increase in the level of spending on the military establishment and on civilian defense projects as a means of closing the alleged “missile gap” with the Soviet Union and both the domestic GNP gap.[65] In an article published in 1958,[66] Tobin criticized the cuts in the defense budget then being undertaken by the Eisenhower administration, arguing that “[t]he unfilled needs of defense are great and they are urgent.”[67] From Tobin’s Olympian vantage point as a macroeconomic planner, the likely alternative uses of these resources in the civilian sector were frivolous and wasteful. Queried Tobin:

For what more pressing purposes were these resources released? For research and development of new consumer luxuries, for new plants in which to produce more consumers’ goods, old and new, all to be marketed by the most advanced techniques of mass persuasion to a people who already enjoy the highest and most frivolous standard of living in history.[68]

These and many additional resources to be extracted from the private sector would be used to much greater advantage not only in repairing the missile gap and equipping U.S. forces to wage conventional wars against local communist aggression but also in constructing shelters against nuclear attack and undertaking a thoroughgoing deconcentration of U.S. industry and subterranean installation of vital industrial plants.

Tobin went on in his article to argue on the basis of Keynesian doctrine that there was nothing to fear from the economic consequences of the institutionalized regime of militarism that he prescribed. We should not shrink from the build-up in the national debt entailed by this program because, in Tobin’s words, “Since the debt is, so to speak, within the family, its size can and should be the servant of public policy, not the master.”[69] The adverse effect of high government budgets and taxes on American productivity was also nothing to be afraid of because, according to Tobin, from the point of view of national security, “most of our vast production is just thrown away,” i.e., on frivolous consumer goods. Furthermore, “the growth of our productive power requires expansion of government activities,” such as education, libraries, police protection, highways, etc., and the spending decisions of politicians and bureaucrats are no less rational and efficient than those in the private sector.[70] Finally, the inflationary consequences of inflation “should be avoided by resolute taxation.”

But the goal of the new economists to construct a massive welfare-warfare state strictly on the basis of macroeconomic policy hit a snag in the late 1950s. In the three consecutive years from 1958 to 1960, the U.S. price level, as measured by the CPI, rose at annual rates of 1.8 percent, 1.7 percent, and 1.4 percent, respectively. This occurred despite the fact that the corresponding unemployment rates for those years were stuck at recessionary levels of 6.8 percent, 5.5 percent, and 5.5 percent.[71] According to orthodox Keynesian theory, of course, the simultaneous coexistence of inflation and recession, of deficient and excess aggregate demand, was not possible. On the one hand, if aggregate demand were insufficient to maintain actual GNP at its potential level, the unemployment rate would rise to recessionary levels, and excess capacity would emerge, neutralizing any upward pull on the price level. If, on the other hand, aggregate demand exceeded potential GNP at the existing price level, prices would be pulled up to choke off the excess demand.

Recognizing that recent experience was patently inconsistent with the Keynesian “demand-pull” story of inflation, the new economists in the late 1950s formulated a “cost-push” theory of inflation that seemed to offer a more comfortable fit with the facts. According to this theory, the inflationary process might be initiated by a nonmonetary event, such as an increase in the price of an important input to the production process, like the price of steel or the wage rates of unionized labor. Since important industries in the economy were dominated, according to the new economists, by a few big oligopolistic firms that had the power to “administer” or set their prices irrespective of supply and demand conditions, these cost increases could be passed on to consumers despite the existence of economic slack. As the cost of living began to rise, however, workers, especially unionized workers, would respond by demands for higher wages to compensate for their loss of purchasing power, which would be granted by those firms possessing the power to administer their prices. But of course this would set off another round of increases in the cost of living and so on, resulting in a cost-push spiral of inflation throughout the price structure.

The new economists also incorporated the purely empirical relation depicted by the “Phillips curve” into their explanation of why inflation and underutilization of resources seemed to simultaneously afflict the U.S. economy. The Phillips curve, which the Australian economist A.W. Phillips originally fitted to data for the United Kingdom, postulates a rigid tradeoff between unemployment and inflation based purely on historical observation.[72] Thus a reduction of the rate of unemployment through Keynesian fiscal policy can only come at the cost of an increase in the inflation rate. The new economists Samuelson and Solow adapted the Phillips curve to American data and portrayed it as a menu of given policy choices for macroeconomic planners.[73] Thus the planners could choose, say, a 4 percent unemployment rate and a 2 percent annual rate of inflation for the American economy, or by utilizing a more expansionary fiscal policy, they could obtain a 3 percent unemployment rate combined with a 4.5 percent inflation rate.

These theoretical and empirical considerations allowed the new economists to assign blame to the unruly private sector of the economy for the inflationary consequences of their high-employment, high-growth macroeconomic policy. It was the decisions and actions of business executives and laborers that produced the intractable tradeoff between inflation and unemployment and that threatened at any time to precipitate a devastating inflationary wage-price spiral. As a means of taming and shaping up the recalcitrant and uncooperative private sector and rendering it amenable to macroeconomic planning, Kennedy’s CEA devised wage-price guideposts, which were unveiled in the 1962 Economic Report of the President.[74] According to the guideposts, compliance with which was supposed to be strictly voluntary, the annual increase in wage rates was to be restricted to no more than the yearly increase in the average rate of labor productivity for the economy, then estimated at about 3 percent per year. If the rate of growth in productivity in a particular industry equaled the average rate for the overall economy, then that industry was to keep its prices stable because its per unit labor costs would remain constant. Those industries whose productivity growth rate exceeded the economy’s average were instructed to cut their prices to reflect their declining labor costs, while those whose productivity growth rate fell short of the economy’s average were permitted to raise their prices in step with the rise in their labor costs. The CEA believed that widespread compliance with the guideposts would improve the Phillips curve tradeoff while neutralizing the threat of a cost-push inflation. This would permit the Kennedy administration to aggressively undertake expansionary policies that rapidly pushed actual GNP to its potential with very little increase in inflation. As we shall see below, this led to Kennedy’s confrontation with the steel industry, in which, in the words of a supporter of the new economics, “Kennedy deployed every weapon conceivable at that time.” These weapons went far beyond “moral suasion” to induce voluntary cooperation and included unleashing the awesome police powers of the federal government on a handful of private steel firms.