The Economic Consequences of The Vietnam War - Campagna, Anthony S - 1991 - New York - Praeger - 9780275933883 - Anna's Archive

The Economic Consequences
of the
Vietnam
War Anthony S. Campagna
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THE ECONOMIC CONSEQUENCES
OF THE
VIETNAM WAR
of the
Vietnam _
niacciibrary
500 COLLEGE DRIVE
MASON CITY, IOWA 50401
New York
Westport, Connecticut
London
^ 7 'b. 9'23’
V V
Library of Congress Cataloging-in-Publication Data
Campagna, Anthony S.
The economic consequences of the Vietnam war / Anthony S.
Campagna.
p. cm.
Includes bibliographical references and index.
ISBN 0-275-93816-6 (alk. paper). —ISBN 0-275-93388-1 (pbk.
alk. paper)
1. Vietnamese Conflict, 1961-1975—Economic aspects—Ûnited
States. 2. United States—Êconomic conditions—1961-1971.
3. United States—Economic conditions—1971-1981. I. Title.
HC106.6.C287 1991
973.923—dc20 90-45296
British Library Cataloguing in Publication Data is available.
Copyright © 1991 by Anthony S. Campagna
All rights reserved. No portion of this book may be

reproduced, by any process or technique, without the
express written consent of the publisher.
Library of Congress Catalog Card Number 90-45296

ISBN: 0-275-93816-6
0-275-93388-1 (pbk.)
First published in 1991
Praeger Publishers, One Madison Avenue, New York, NY 10010

An imprint of Greenwood Publishing Group, Inc.
Printed in the United States of America
The paper used in this book complies with the

Permanent Paper Standard issued by the National
Information Standards Organization (Z39.48-1984).
10987654321
For my father,
who knew some of the words,
and for my mother, who did not.
, ' Ik ,!* t
CONTENTS
Tables ix
Preface xi
f
Part I: Early Involvement in Southeast Asia
1 The Initial Years: The Eisenhower and Kennedy

Administrations 3
2 The Economy prior to FuU-Scale War 13
Part II: The War Years: The Economic Record
3 The Middle Years and the End of the Johnson

Administration, 1966-68 29
4 The Changing Economic Structure, 1966 51
5 Nixon’s War, 1969-73 79
Part III: The Economic and Societal Consequences

of the Vietnam War: A Final Accounting
6 Economic Costs and Benefits of the War 95

7 The Post-Vietnam Society 113
8 Summary and Conclusions 139
Select Bibliography 153

Index 157
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TABLES
1.1 Economic Aid for Vietnam 4

2.1 U.S. Defense Obligations and Expenditures 20
2.2 Impact of the Military Procurement Process 23
3.1 U.S. Military Personnel in Vietnam 30
3.2 Estimated and Actual Expenditures for the Vietnam War 33
3.3 Selected Economic Series, 1966-68 36
3.4 Estimated Impact of No Vietnam War on Selected
Economic Series 46
4.1 Inflation in the Vietnam War Period 53
4.2 Core, Shock, and Demand Inflation, 1965-70 57
4.3 Office of Economic Opportunity Budgets, 1965-68 61
4.4 Productivity in the Business Sector, 1947-85 65
5.1 Vietnam Troop Withdrawals 81
5.2 Estimates of Expenditures on Vietnam War 83
5.3 Selected Economic Series, 1969-74 88
6.1 Actual Budgetary Costs of the War 96
6.2 Future Budgetary Costs 99
6.3 Some Economic Costs of the War 102
6.4 Summary of Costs of Vietnam War 108
X Tables
6.5 Military Assistance Forces, 1964—70 110

7.1 Employment Status of Male Vietnam-Era Veterans Age 25
and Over, by Period of Service, Presence of Service-Connected
Disability, and Disability Rating, November 1987 130
7.2 Employed Male Vietnam-Era Veterans Age 25 and Over,
by Class of Worker and Disability Status, November 1987 132
7.3 Employed Male Vietnam-Era Veterans and Nonveterans
Age 25 and Over, by Occupation, November 1987 133
PREFACE
Analysis of the Vietnam War has really just begun—some 15 years after
the war’s ignoble end. Only now can we begin to attempt to measure the
impact of that tragic undertaking on the social, political, and economic
structures of the United States. That American society was disrupted in
every way seems scarcely debatable. The war, however, generated too
much heat for dispassionate analysis while it was being fought and was
far too controversial for calm reasoning to emerge for some time after it
was finished. Perhaps hindsight will afford us the perspective necessary
for less emotional investigations.
Much, of course, has already been written about both the societal
disruptions caused by the exodus of young men to Canada and the plight
of the returning vet to a society that could not honor his efforts. Families
were disrupted. Honest men learned how to lie to avoid combat. Colleges
were bulging with escapees while minorities learned once again that they
were expendable. Political careers were made or broken. Military men
found the avenue to advance their careers.
The effects upon us will be told again and again by creative people who
will write the novels and plays, produce the TV programs, or paint the
pictures to show us the pieces of horror that comprise a war. But they will
fail, as others before them have failed, to convince us of the futility of it
all. Each generation conveniently forgets the lessons and provides seem¬
ingly fresh rationales for setting caution and reason aside as it invents new
excuses, exaggerates threats, and supplies bogus explanations to cover
ulterior motives.
The war in Vietnam was no different. It had its own justification, its own
rationale, and its own internal logic to play out once it began. However, it
XII Preface
is not the purpose of this book to elaborate on these issues nor to discuss
the myriad social consequences that ensued once it ended. Others are better
equipped to handle that task. Nevertheless it will be impossible to avoid
some discussion, however summarily, of these issues in the course of
pursuing our main purpose.
The purpose of this book is comparatively modest: to examine the
economic impact of the Vietnam War on the U.S. economy. This might
appear to be a straightforward task, but that is not the case. In the first
place, the economic impact ought to include benefits as .well as costs. But
benefits are always more difficult to account for than costs, a problem
common to cost-benefit analysis. In the second place, some costs are
recorded and readily identified, while others are indirect or extend far into
the future. Even if one is successful in distinguishing costs and accounting
for benefits, a full accounting of them may never be possible for there are
too many that are immeasurable.
These difficulties require that the economic impact of the war be con¬
centrated more on the cost side and that the economic consequences of the
war be viewed from two perspectives: the short run and the long run. In the
short run, the costs of the war are considered in the light of how they affected
the performance of the U.S. economy. Additional spending on defense can
be expected to cause repercussions in the domestic economy. Inflation is the
partner of war, and economic policies must be designed to deal with the
problem. Other stresses and strains on an economic system are also caused
by wars, and these too require policy actions.
So the first task is to explain how the economy was affected by the
Vietnam War over time and to outline the short run economic policies
followed in response. This procedure allows for the interesting comparison
of the development of the war with that of the economy that was affected
by it. It is interesting also to witness the political dilemmas posed for
policymakers with an unpopular war amid domestic dissent and division.
Recording the history of policy-making would be valuable but not
sufficient. In response to the effects of the war on the economy, and to
public policy reactions, many adjustments were made by the economic
agents affected by them. As they sought to free or protect themselves from
the economic problems created, people began to change some of the basic
institutions in the economy. In fact many initial changes can be observed
at the outset of the Vietnam War buildup, around the year 1966. The very
structure of the U.S. economy began to change, and this is discussed in the
context of transforming the economy and influencing the effectiveness and
efficiency of macroeconomic policies thereafter.
Preface xiii
Finally the institutional transformation of the U.S. economy has longer-

run consequences that must be determined. Along the way some of the
short-term changes were discarded or were temporary. These changes must
be separated from those that can be expected to affect the operation of the
economy for years after the original change occurred. Thus some of the
long-run consequences of the war-induced adjustments are suggested.
In summary, the main thrust of this study is to identify some of the
immediate economic consequences of the war and to show how those
consequences led to adjustments in the economic system that were severe
enough to warrant the claim that the economic structure was transformed.
The postwar economy would never be the same as the prewar economy,
and furthermore, there would be no tendency to return to the earlier
economic structure. There are no internal mechanisms to steer the
economy back to its original path of development.
Given the main focus of the book, it seems logical to structure it in such
a way that it addresses costs and benefits in a sequential manner. Thus Part
I is concerned with the early involvement in the war up through the
Kennedy administration. The description of the state of the economy prior
to the war, in the early stages of the conflict, is a necessary preliminary
before addressing the war’s impact as it progressed. Part II focuses on the
military buildup as it occurred in the Johnson and Nixon administrations.
The war’s impact on the economy and the policy responses are discussed
in terms of how they were conducted by each administration. This
economic record of the war years is interrupted and supplemented by the
factors that caused changes in the economic structure. The transformed
economy begins to affect the policy-making in the latter half of the period,
and this is outlined. In Part HI, the costs and benefits of the war are
included, along with some of the longer-term economic consequences.
Finally a look at the post-Vietnam society is undertaken in order to provide
some insight into some of the longer-run repercussions on both the society
and the economy. The oil embargo, the Vietnam syndrome, and reactions
to them are shown as examples of seemingly unconnected threads from
the wartime economy.
It is difficult to be unbiased in an analysis of this kind. I was opposed
to the war from its very beginning, but that is not the reason for writing
this book, nor does that admission affect my analysis in a serious way.
Rather I find the reactions of an economy to such a socially disrupting
event to be intriguing; to discover in retrospect the changes in the economic
structure, the institutional innovations, the behavioral responses, and so
on that ensued from the war is the attraction for me. In the book I use the
XIV Preface
pebble in the water metaphor to describe the kinds of repercussions that

are possible when the economy is disturbed by significant events. The
economy, like the water, never returns to its original position. The U.S.
economy never did return to its former structure because significant
changes had been made that prevented it from doing so.
To describe all of these changes, even if we could identify them all,
would take a lifetime of study. I merely wished to identify some of the
major changes, and to suggest some of the others. There are no proofs here,
no technical virtuosity displayed to attempt rigorous exercises to support
all of the arguments and assertions made. Whenever the analysis gets too
technical or esoteric, the arguments are made in the notes to the chapter.
Had this book been written for the professional economist, it would have
been a far different one. My aim was to reach a wider audience, and to
avoid the jargon of the profession or its badges of sophistication. Indeed
most of the discussion is suggestive rather than scholarly and complete.
Most of the evidence supplied is not original, and many of the arguments
made are not either. Many people have written about various aspects of
the economic effects of the war, and their work is heavily utilized and
acknowledged. Without their work this book would not have been pos¬
sible, or if possible, not nearly as comprehensive.
What I wanted to achieve was to bring all the evidence together, and to
maintain that when one looks at the total picture, a different view emerges:
that the economy was fundamentally changed by the war in Southeast Asia,
and the repercussions were many and varied. Indeed many still have not
been identified.
I also should like to acknowledge and thank two reviewers, unknown
to me, who made valuable suggestions for improvements in the
manuscript. I followed many of their suggestions, and the book is a better
one for it. I may regret that I did not pursue all of their comments, but in
any case they are, of course, not responsible for any errors or omissions in
the book.
The war affected everyone in some manner, and I am no exception. Thus
on a personal level, I write with the anguish of one who was and still is
both angered and disturbed that such a foolhardy conflict could ever have
been undertaken: that people of reason could be beguiled into supporting
such an adventure and supplying the necessary justifications, even when
they had to fool themselves first. If this book does anything to prevent such
a recurrence, it will be justified on that score alone.
I Early Involvement in
Southeast Asia
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1 THE INITIAL YEARS
The Eisenhower and Kennedy
Administrations
U.S. involvement in Vietnam began when the Truman administration

promised to help the French continue their control in Indochina. Following
World War H, successive U.S. presidents maintained, in one form or
another, that the United States was responsible for order in the world. Part
of Truman’s foreign policy, evident in Southeast Asia, was the containment
of communism. In Asia, this meant the Chinese communists, who could
presumably control the Vietnamese, notwithstanding the fact that the
Chinese and the Vietnamese had been enemies for centuries.
The commitment to colonialism continued in the Eisenhower ad¬
ministrations with the direct support of the French in the form of weapons,
equipment, and technical help. Eisenhower considered the need to do more
than just aid the French in their struggle but was very reluctant to intervene
alone, and when the British rebuffed all attempts to get involved, he
abandoned this more direct route. After Korea, Eisenhower was not eager
to confront the Chinese again. ^ Still he predicted that were the communists
to win in Vietnam, other countries would “topple like a row of dominoes.”^
Charles E. Wilson, secretary of defense in Eisenhower’s first term,
stated in his Semiannual Report that:
In September 1953, $385 million were allocated to the direct support

of the French Union Forces and added to the $400 million previously
appropriated for this purpose in the budget for fiscal year 1954. These
amounts were in addition to the regular Indochinese military assis¬
tance program for weapons and equipment, the delivery of which
maintain in operational order the major weapons and equipment
supplied by the United States. During the emergency in May 1954,
4 Early Involvement in Southeast Asia
United States Air Force transports rushed troop reinforcements from

France to Indochina.^
Additional military assistance was provided under the Military Assis¬

tance Program, under the 1954 Agricultural Trade and Development Act
(Public Law 480)'*, and under the Mutual Security Appropriations Act for
1955 ($700 million). When Congress became more anxious over the
amounts being spent in Vietnam as it was considering the fiscal year 1966
budget, these funds were transferred from assistance programs to other
appropriations accounts. At that time, a full accounting of the amounts
spent was requested and revealed the data provided in Table 1.1.
Clearly the amounts involved, some $2.4 billion over a dozen fiscal
years, would not have been sufficient to affect the economy in a serious
way, and the impact could be expected to be minimal. To illustrate, even
at the peak of spending in Vietnam in these early years, the amounts
represent only 0.04 percent of the GNP and 0.53 percent of national
defense spending. (But note how much larger the amounts are when
compared to the Reagan administration’s “success” at getting Congress to
appropriate funds for the Contras in Nicaragua amounting to $100 million
out of a defense budget of $273 billion in 1986.)
Table 1.1
Economic Aid for Vietnam (in Miilions of Doilars)
Fiscal Agency for Public Total

Year International Law 480
Development and (all titles)
Other Agencies
1953-57 783.9 39.4 823.3

1958 179.1 9.7 188.8
1959 200.6 6.5 207.1
1960 169.0 11.5 180.5
1961 132.6 12.0 144.6
1962 110.7 32.5 143.2
1963 133.2 64.3 197.5
1964 159.3 71.0 230.3
1965 216.1 52.8 268.9
Total 2,084.5 299.7 2,384.2
Source: Leonard B. Taylor, Financial Management of the Vietnam Conflict, 1962-1972

(Washington, D.C.: Department of the Army, 1974), 23.
The Initial Years 5
It is apparent, however, that these data do not include the cost of military
personnel in Vietnam. In the early Eisenhower years, from 1954-60, an
average of650 troops was assigned to Vietnam but when he was leaving office
in 1961, the number had grown to 773; for fiscal year 1961, his last budget
year, the number had grown even further to over 1,000.^ Murray Weidenbaum
has estimated that at $23,000 per soldier, the cost to the U.S. was about $15
million per year during the 1954-60 period, rising to $ 18 million in fiscal year
1961.^ Weidenbaum does not reveal how he arrived at the cost per soldier of
$23,000, but it is close to the estimate given by the Assistant Secretary of
Defense Robert N. Anthony. In testimony before the Joint Economic Com¬
mittee on the effects of Vietnam spending, Anthony gave a “rough” estimate
of the cost per soldier of $25,000 to $30,000 per year in Vietnam.^ Over time
the cost of $25,000 became the accepted estimate.
Here, right at the outset, is the appearance of one of the major problems
in accounting for the costs of the Vietnam conflict. These personnel costs
were not included in the estimates of Table 1.1. As we will see in Chapter
6, many costs were either excluded in the final accounting of war costs, or
they were recorded in a misleading and confusing manner. Also the costs
were continuously underestimated when they were made public. In fact
official estimates of the costs of the Vietnam War do not even begin until
1965, although surely there were many expenditures prior to that time.
Accounting for the costs of the war will occupy us in Chapter 6, and so it
is best to postpone further discussion of costs for the present.
In these early years, the actual amounts, including or excluding person¬
nel costs, were not large enough to alter the conclusion that they probably
would not have had a major impact on the U.S. economy. The economy
did experience a period of stagnation in the 1950s as three recessions in
the Eisenhower years reduced the economic growth rate to 2.4 percent, a
full percentage point below the preceding postwar period. There was also
much consternation over the fact that the Soviet Union was growing faster
economically and technically. When Sputnik I, the Soviet Union’s first
satellite, was launched in October 1957, there were charges brought of a
technology gap. Falling behind in the technological race was a national
embarrassment, and soon the educational establishment was blamed for
its failures in mathematics and science. The National Defense Education
Act was passed quickly to improve teaching in these areas, and later the
National Aeronautics and Space Administration (NASA) was formed to
close the technology gap in space exploration.
The stable economy of the 1950s was growing slowly, interrupted by
three mild recessions, but regardless of the state of the economy, military
spending to fend off the encroaching communists in Southeast Asia would

not have presented any funding problems, especially in the cold war
atmosphere generated by Senator Joseph McCarthy, Sputnik, the Suez
Canal crisis, and the whole foreign policy of containment of communism.
Interestingly the first recession of 1953-54 was in large part caused by a
reduction in defense spending on the order of $11 billion, a fact
downplayed by the administration. The recession of 1957-58 was due lo
the turnaround in investment spending on capital goods following the
boom in investment in 1955-56. The recovery was not robust, and the
economy stagnated into thfe 1960s with another downturn in 1960-61.
As might be expected, national defense spending rose following the
national hysteria over the alleged technological lead of the Soviet Union.
From the low of $39 billion in 1955 (9.8 percent of the GNP) national
defense purchases rose to $49 billion in 1961 (9.4 percent of the GNP), or
in other terms back to where it was before the Eisenhower cuts in 1953.
These increases no doubt helped the economy stabilize and might have
encouraged growth, but in other areas of fiscal and monetary policy, the
Eisenhower administrations were overly conservative, and these increases
were offset by reductions in other areas of the budget. Indeed discretionary
fiscal policy took a holiday in the Eisenhower years, and only the highway
program was initiated. Even here, the program was justified in the name
of national defense requirements.
In summary, the assistance given to the French in their colonial war in
Indochina did not affect the economy in a significant manner. The amounts
were small in relation to the national output and relative to total national
defense spending. The willingness to support the French was clearly
evident, and most actions, particularly financial, would not have been
questioned by the American public, now thoroughly imbued with cold war
rhetoric and fearful of communism’s expansion and of the Soviet Union’s
technological advances.
THE KENNEDY ADMINISTRATION

The slowdown in the economy in 1960 helped to elect John F. Kennedy
(over Richard Nixon) who capitalized on economic stagnation and “gaps”
in economic growth, technology, and missiles. Nixon blamed economic
conditions particularly for his defeat as his advice to stimulate the economy
prior to the election went unheeded by Eisenhower. One of the means
suggested to encourage economic activity was increased spending on
national defense.
The Initial Years 7
But it was the Kennedy administration that would follow that advice.
Soon after taking office, Kennedy began one of the most rapid military
buildups in peacetime and planned increased spending on the Polaris and
Minuteman missiles to reduce the alleged missile gap. The gap did not
exist but the spending continued anyway, some $17 billion over five years.
This exercise in military Keynesianism did not perturb the New
Economists who were enticed into public service with their Keynesian
views and growth-oriented prescriptions for the economy. However, as is
the case for most of national defense budgets, the timing of their effects
on the economy is difficult to gauge.
Congressional appropriations for additional defense spending do not
indicate any immediate effect on the economy; the funds must first be
obligated and spent before they begin to affect the economy. The funds are
obligated by the Department of Defense (DOD) when it assigns the funds
to areas of expenditure that were authorized by Congress. Here is where
the trouble begins; some of these funds are converted to contracts and
quickly spent, say on food for the military, but other obligated funds
involve equipment or weapons that may take some time to produce and
deliver. Only when defense contractors begin to produce the weapon or
service and actually pay out wages, rents, interest, and profit is the
economy affected. These payments for incomplete goods end up in busi¬
ness inventories, at which time they are properly recognized in the GNP
accounts as current production. At this time the economy is affected as
wages, interest costs, rents, and profits are paid out and respent, saved, etc.
When the final goods are delivered to the government and finally
recorded as government purchases, the economic impact has already been
felt, and GNP is not affected. (The government purchases are offset by the
reduction in inventories.) Yet the state of the economy, and hence economic
policy-making, is formed largely by the data in the GNP accounts. In
addition to this problem of timing are the problems of progress payments,
government provision of facilities, and special arrangements with defense
contractors, and the actual timing of the economic impact of defense
programs is nearly impossible to determine.®
In any event, defense expenditures began to creep upward and govern¬
ment purchases in the national income accounts rose to $52 billion in 1963
or 9.1 percent of the GNP. Kennedy was ambivalent about Vietnam,
rejecting large scale U.S. intervention, but reluctant to pull out entirely,
supporting the anticommunist movement in Southeast Asia, but rejecting
neutrality for South Vietnam. Richard Goodwin writing about this period
reminds us that
admittedly the line between participation and assistance became

thinner, more obscure, as the magnitude of our effort increased. But
Kennedy was always careful to draw it. At the end of 1961, Maxwell
Taylor, returning from a visit to Viemam, urged the president to send
combat troops—eight thousand at once, and more “if needed,” to be
accompanied by American bombing of North Vietnam.... Mc¬
Namara enthusiastically supported the Taylor report with the caveat
that eight thousand troops would not be enough, but that we could
“safely assume the maximum U.S. forces required on the ground will
not exceed six divisions or about 250,000 men.” (His estimate is an
illustration of the wondrously alluring technique of giving a numeri¬
cal value to a guess derived from speculation informed by ignorance
and fueled by desire.) [Parenthesis in the original]^
Once more heeding the advice of his friend. General Maxwell Taylor,
along with advisors such as W. W. Rostow, Kennedy allowed the troop
buildup to continue, and by the end of 1963, U.S. military personnel in
Vietnam totaled 16,575. At a cost of approximately $25,000 per soldier,
this meant an annual cost of $414 million.
Again these costs are not reflected in the ojficial Vietnam War costs, and
in fact the troop buildup was even hidden from Congress and of course the
American public because it violated the Geneva agreement between
France and the Democratic Republic of Vietnam (DRVN) limiting the
number of new troops permitted in the area. President Kennedy, attempting
to forestall an even greater military presence, said with an uncanny
prescience, “The troops will march in, the bands will play, the crowds will
cheer, and in four days everyone will have forgotten. Then we will be told
we have to send in more troops. It’s like taking a drink. The effect wears
off, and you have to take another.”^*
The defense buildup in the Kennedy years began to affect the national
economy. There was, however, still a great deal of slack in the economy
that was just emerging from the recession of 1960-61. In the upswing of
the previous recession, 1958-60, the Eisenhower administration failed to
stimulate the economy by an active discretionary fiscal policy and let the
automatic stabilizers work unhindered. In an upswing, the automatic
stabilizers act to restrain the economy and create what is called “fiscal
drag.” When incomes are rising in an upswing, people pay higher taxes
on their incomes, unemployment insurance payments fall as people find
jobs, welfare payments are reduced, and so on. These effects restrain
private spending and take place automatically, without any actions of
The Initial Years 9
Congress. Unless the restraining effects, the fiscal drag, are offset by
increased government expenditures or reductions in taxes, the federal
budget becomes more and more restrictive over time and can prevent the
attainment of full employment.
Thus in 1961, there was a large gap between potential and actual output.
One way to measure the extent of the problem is to calculate what the
potential output would be at full employment with current tax rates and
expenditure policies. This procedure eliminates the automatic stabilizers
from working (the economy is at full employment). Now it is possible to
measure the government’s effect on the economy: if the “full employment
budget,” as it was called at that time, showed a surplus, the government
was actually restraining the economy and preventing it from reaching full
employment; if the full employment budget showed a deficit, the govern¬
ment was stimulating the economy and pushing it toward full utilization
of its resources.
The full employment budget also provided the proper fiscal policy to
follow to reach or maintain full employment. For example, the situation
facing the Kennedy administration was a full employment surplus of $13
billion (1958 prices) and an unemployment rate of 6.8 percent.^^ Fiscal
policy thus called for an increase in expenditures or a reduction of taxes
to stimulate the economy, eliminate fiscal drag, and move the economy
toward full employment.
Budget outlays for national defense did increase over $3.6 billion in
fiscal year 1962, by over $1 billion in the next two years, and combined
with increases in outlays on welfare and Social Security provided tem¬
porary stimulus to the economy. The full employment surplus fell to $9
billion, and the gap between potential and actual output fell by $15 billion
(1958 prices).
This government stimulus was not sufficient as the private sector failed
to respond with increased spending, and the output gap rose again to the
$25-30 billion range (1958 prices). Long-run tax initiatives, the invest¬
ment tax credit, and accelerated depreciation allowances designed to
encourage private spending on capital goods enacted in 1962 did not affect
the immediate simation. The Kennedy administration began to advocate
another tax reduction, but was unable to convince Congress as to its
necessity. That task was left to the Johnson administration.
No doubt the military spending stimulus helped to reduce the slack in
the economy. Moreover this conclusion is based on a rather narrow
definition of defense spending. If other areas of expenditure that are
connected to national defense, such as space and technology, international
affairs, veterans’ payments, atomic energy research, and interest costs, are
added to the defense bill, the economic impact is enlarged substantially.
For example, federal government purchases of national defense items
as a percentage of all of its purchases on goods and services is one widely
used measure of the impact of defense spending on the economy. In the
years 1961, 1962, and 1963, these percentages were 83.3, 81.4, and 79.1
respectively. These amounts do not include the portion bn military affairs
that can be alloted to spending on atomic energy or space research and
development. By any standard, defense spending was an important in¬
gredient in eliminating the slack in the economy in this period. Finally the
costs of the defense buildup do not include funds spent by the CIA in
pursuit of its objectives. As always the amounts spent by the CIA are not
made public, and this usually results in an understatement of defense
spending.
But the impetus for national defense spending was not the Vietnam
problem but the result of the policy designed to close the alleged missile
gap between the Soviet Union and the United States. The amounts spent
in Viemam up to 1965 of less then $700 million, excluding foreign aid,
are not likely to have played a significant role in affecting the U.S.
economy. By themselves, expenditures on Vietnam were just too small at
this stage.
Perhaps as important as the actual defense outlays was the prepara¬
tion by the Kennedy administration for additional defense outlays in
the future. Aside from the buildup in missiles to close a nonexistent
gap, there were other incidents that prepared the public for more
defense spending: the response to the Russian threat to deny Western
access to East Berlin; the Bay of Pigs operation, the invasion of Cuba
by CIA directed forces; the Russian construction of missile sites in
Cuba; the space program that promised to land men on the moon by
the end of the decade; and of course, the whole Southeast Asia problem,
including the problems in Laos. All of these episodes created an
atmosphere of distrust and hostility and consequently created the fear
necessary to justify the expenditures on defense. The cold war con¬
tinued, in short, and soon a hot one would emerge.
Whether the course of history would have been significantly altered had
Kennedy lived is problematic; his private ambivalence about U.S. involve¬
ment was matched by his public belligerence. This is understandable given
the muddled reports and forecasts he was receiving, but whether he would
have withdrawn from Southeast Asia, as he indicated he would if he got a
second term, is far from certain.
The Initial Years 11
NOTES
1. Stanley Kamow, Vietnam: A History (New York: Viking Press, 1983), 197-98.
This is an excellent source for the history and development of U.S. involvement in
Southeast Asia. See also Neil Sheehan, A Bright Shining Lie (New York: Random House,
1988), for a detailed account of the early days of the military war and the Vietnamese
society and the subsequent military buildup and the society’s deterioration.
2. Ibid., 20.
3. Department of Defense, Semiannual Report of the Secretary of Defense, January
1 to June 30,1954 (Washington, D.C.: U.S. Government Printing Office, 1955), 56. Also
quoted in Major General Leonard B. Taylor, Financial Management of the Vietnam
Corflict, 1962-1972 (Washington, D.C: Department of the Army, 1974), 16.
4. This is better known as the Food for Peace program. It was designed to insure the
stability of American agriculture while at the same time improving the foreign relations
of the United States. Under the program, U.S. food was sold at easy credit terms, payable
in local currencies. Billed as a humanitarian program, the actual effects were often
perverse, as the sought after markets for U.S. food forced out local farmers when prices
fell, and altered food tastes in favor of U.S. crops and American eating habits.
5. U.S. House of Representatives, Committee on Appropriations, Department of
Defense Appropriations for 1967, Part 1,378. A complete table of armed forces involved
to 1966 can be found in Murray L. Weidenbaum, Economic Impact of the Vietnam War,
Center for Strategic Studies, Special Report Series No. 5 (Georgetown University,
Washington, D.C.: Renaissance Editions, 1967), 4.
6. Wiedenbaum, Economic Impact, 21.
7. U.S. Congress, Joint Economic Committee, Economic Ejfect of Vietnam Spending,
90th Congress, 1st session (1967), 1:26.
8. Murray Weidenbaum has been instrumental in calling attention to these problems.
For an example see his Economic Impact, 11-17. The timing of government spending on
national defense will be the subject of more importance in Chapter 2.
9. Richard N. Goodwin, Remembering America: A Voice from the Sixties (Boston:
Little, Brown, 1988), 372. The parenthesis in the quote is concluded by the damaging
comparison:
But military men, like economists, are easily seduced by the security of statistics
and, invariably, when the numbers don’t “work” (i.e., halt or defeat the enemy),
simply change their “quantitative estimates” without challenging the assumptions
on which error was built, a technique that may be useful in the war games room of
the Pentagon but is not so serviceable in a real war.
10. See Kamow, Vietnam: A History, for the record of gradual buildup in Vietnam and
James L. Clayton, The Economic Impact of the Cold War (New York: Harcourt, Brace &
World, 1970), 44, Table 13 for the estimated cost of personnel and their support.
11. Quoted in Kamow, Vietnam: A History, 253.
12. These estimates were taken from the Economic Report of the President, 1968,
65-66.
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2 THE ECONOMY PRIOR TO
FULL-SCALE WAR
Lyndon Baines Johnson was sworn in as president on the same day that
Kennedy was assassinated, November 22, 1963. A complex personality,
Johnson has been called the consummate politician, at times proud then
humble, manipulative then submissive, kind then vicious, and so on, but
no hst of adjectives could capture this larger than life Texan. From those
who knew him, any or all of these adjectives would fit this moody man:
kind, cruel, loud, gentle, coarse, bold, blunt, shrewd, intelligent, and feisty.
His critics however were quick to point out his relative ignorance about
foreign affairs. Whether or not the charge was tme need not concern us,
but that was the perception since his days as Majority Leader of the Senate.
However one example may serve to illustrate how this complex man
operated. Sent to Vietnam by Kennedy, Johnson repeated the domino theory
and in a rhetorical flourish compared South "Vietnam’s President Ngo Dinh
Diem to Winston Churchill only later to admit “Diem’s the only boy we got
out there.”^ Here political rhetoric is matched by pragmatism, but he never
condoned efforts to overthrow Diem who was later assassinated in a coup.
Now he was president and must make the crucial decisions in a
deteriorating situation in South Vietnam. Feeling vaguely illegitimate^ and
being untested, he turned to his secretary of defense, Robert McNamara
for counsel and eventually to the Joint Chiefs of Staff. The Chiefs advo¬
cated widening the war as the current antiguerrilla tactics were clearly not
working, and the war would have to be carried to the North.^ After Johnson
won the election of 1964, he was ready to commit U.S. troops and whatever
else was necessary to rescue the situation and prevent a communist
takeover of South Vietnam. Rejecting appeasement and fearing the right
wing reaction to the loss of South Vietnam to the communists, Johnson
was caught between a rock and a hard place, as his fellow Texans
would put it. In a much quoted admission made to Doris Kearns, he
put it bluntly:
If I left the woman I really loved—the Great Society—in order to get

involved with that bitch of a war on the other side of the world, then
I would lose everything at home. All my programs. All my hopes to
feed the hungry and shelter the homeless. All my dreams to provide
education and medical care to the browns and the blacks and the lame
and the poor. But if I left that war and let the communists take over
South Vietnam, then I would be seen as a coward and my nation would
be seen as an appeaser and we would both find it impossible to
accomplish anything for anybody anywhere on the entire globe.**
True these words were spoken in retrospect, but there is little doubt that
they reflect the anguish of the new president as he sanctioned the relentless
escalation of the Viemam conflict and U.S. involvement in it.
THE ECONOMIC SITUATION

The economic consequences of Johnson’s desire to protect his Great
Society programs while fending off communism were to be considerable
and were thought so at the time. Before outlining them, however, it is
necessary to take a closer look at the economy prior to the decisions to
escalate U.S. participation.
The economy recovered in the first year of the Kennedy administration
largely through the efforts of fiscal policy. Government purchases in¬
creased by 9 percent, and private investment rose by 30 percent. Prices
remained stable with the Consumer Price Index (CPI) increasing by only
1.1 percent in 1961. Unemployment, however, remained high, at 6.1
percent in December. The administration, unhappy with so high a rate, set
a target rate of 4 percent for its definition of full employment.
Although the gap between potential and actual GNP was closing, the
administration economists, led by Walter Heller as chairman of the
Council of Economic Advisors, began to worry over the problem of
fiscal drag; the problem that occurs when tax receipts rise in a recovery
period, which if not spent, would hinder the growth of the economy
and prevent it from reaching its potential. So Walter Heller began
urging a tax cut to alleviate the problem and keep the economy
growing.^ This Keynesian fiscal policy was revolutionary in its time
The Economy prior to Full-Scale War 15
since conventional wisdom held that cutting taxes when the budget was
already in deficit was fiscally irresponsible.
In fact, Heller did have considerable difficulty in explaining the ration¬
ale for this fiscal policy and in convincing the president of its efficacy.
Eventually he succeeded, and when the economy faltered in mid-1962 and
a recession appeared likely, tax cut proposals were initiated. Kennedy
hesitated at first and settled for a mini tax bill that permitted firms to
accelerate depreciation deductions and take an investment tax credit of 7
percent on new capital goods purchases. In January 1963, all doubts gone
and the conversion to Keynesian economics complete, he submitted the
tax measure favored by his Council of Economic Advisors.
The tax bill proposed reductions in both individual and corporate tax
rates; individual rates would fall in stages from the range of 20-91 percent
to 14—65 percent and reduce tax liabilities by $6 billion in 1963 with further
reductions to come in 1964 and 1965; corporate rates would also fall in
stages from 52 to 47 percent and reduce tax liabilities by $13.5 billion,
when fully operational in 1965. The tax plan met with considerable
resistance, however, and was not passed in Kennedy’s last year in office.
The economy was not responding, and as the year 1963 was coming to an
end, the unemployment rate still hovered around 5.6 percent, and real GNP
was growing at a 3.8 percent rate, down from the 6.1 percent rate of a year
earlier. Prices remained stable signifying the amount of slack in the
economy, and hence the Council was looking forward to action on the tax
bill in 1964 to reduce the $30 billion gap between potential and actual GNP.
Here is where Johnson’s skill as a politician became evident. Using his
famous pressure techniques combined with the sympathy generated by
Kennedy’s assassination, he was able to get quick action on the stalled tax
bill. In February the Revenue Act of 1964, the largest tax cut in history to
that date, was signed into law. It provided for cuts in tax rates over two
years leading to eventual reductions of tax liabilities of $11 billion for
individuals as it lowered tax rates to the range of 14-70 percent, and $3
billion in reductions for corporations as their rates were reduced to 48
percent from 52 percent. The effects on the economy were quickly felt:
withholding rates on wages and salaries were reduced immediately rather
than in stages, and household disposable incomes were thus immediately
available for spending. As these incomes were spent, and respent in
working their way through the economy, the actual effect would be greater
than the tax reductions. This “multiplier” effect meant that incomes
increased by $9 billion in 1964 alone, with further increases to be expected
in 1965 and beyond.^ Hailed as a revolutionary fiscal policy by many
and condemned by others, this Act has remained controversial ever since
its passage.
One question that made it controversial was, and still is, did this fiscal
policy work or did monetary policy really do the job?^ The question,
though intriguing, cannot be pursued here, and putting aside the debate, it
is evident that one or both policies worked to stimulate the economy.
Economic growth revived as real GNP grew by 5.5'percent in 1964, and
by 6.3 percent in 1965; unemployment fell to 5.4 percent in December
1964, and to 4.4 percent in December of 1965, close to the target rate of
4 percent; prices were stable in 1964 with the GNP price index rising by
1.6 percent and the CPI by 1.3 percent; in 1965 prices began to rise midway
through the year, and for the entire year there were increases of 2.2 percent
for the GNP index and 1.7 percent for the CPI. The price increases were
dismissed as not critical in 1965 as economists were delighted with the
success of the Keynesian experiment. The tax cut eliminated the fiscal drag
problem, and the economy performed exactly as predicted. “Thus the
rationale of the 1964 tax-cut proposal came straight out of the country’s
postwar textbooks,” wrote Heller.*
Yet the above numbers do not isolate the effects of the tax cut and do
not prove that the tax cut actually was responsible for the improvements
in the economy. What would have happened to the economy had the tax
cut not been enacted? Such questions are always difficult to answer since
it is impossible to hold the world constant while examining a particular
policy. However with large-scale econometric models that attempt to
replicate the structure of the economy and given suitable assumptions
about the path of the economy without the policy being considered, it is
possible to simulate how the economy might have behaved. Then the actual
history of the economy can be compared to the simulated “neutral” world
with neutral fiscal and monetary policies.
Two such studies were conducted for the Joint Economic Committee by
the Data Resources Inc. (DRI) and the Wharton Econometric Forecasting
Associates (WEFA). Their conclusions on the effectiveness of the 1964 tax
cut are similar: it increased real GNP by 0.8 percent in 1964 and between
1.3 and 1.6 percent in 1965 and 1966; it had virtually no effect on the GNP
price index in 1964 and then raised it to .03 to .05 percent in 1965 and 1966;
finally it reduced the unemployment rate by a range of 0.2 to 0.4 percent in
1964 and an additional 0.2 to 0.5 percent in 1966.^ The numbers, of course,
are merely estimates and their methodology open to criticism. Still if they are
at all indicative of the real impact of the 1964 tax cut, they indicate the
effectiveness of that policy and of fiscal policy in general.
THE INTRUDING WAR
Johnson had wanted desperately to win the presidency in his own name
and devoted a great deal of his attention to that end. But the war in Asia
would not go away and about all he could do publicly was to promise that
American troops would not be fighting for Asian boys in their war.
Conveniently Barry Goldwater, the Republican nominee for the presiden¬
cy, agreed not to make Vietnam an issue in the campaign.*®
Behind the scenes, however, the decisions on the future of U.S. involve¬
ment were being made in secret. The extent of the current involvement in
Vietnam was also not publicized. U.S. military “advisors” were sent to
Vietnam even before the French withdrawal. Their numbers grew slowly
at first averaging approximately 700 up to 1960. After Kennedy took
office, these advisors doubled to 1376 by December 1961, rose to 9865 by
December 1962 and to 16,575 by December 1963. By December 1964,
23,300 advisors were in South Vietnam.
These military advisors were expected to train the South Vietnamese
armed forces but not get involved themselves with the actual fighting.
Gradually this prohibition broke down, as the South Vietnamese proved
to be reluctant to take advice and even more to fight. As a result, U.S.
military personnel became more and more involved in the actual conduct
of the war. These actions were often concealed from high ranking U.S.
military personnel, and from visiting officials who were checking on the
progress of the South Vietnamese development. Meanwhile, the CIA was
busy manipulating the political structure of the South Vietnamese govern¬
ment to make it conform to U.S. interests. In short, the United States was
heavily involved in the internal affairs of the South Vietnamese govern¬
ment and was slowly taking over the military operations as well. The air
force was busy bombing suspected “communist” hamlets in South Viet¬
nam, thus creating potential converts to the Vietcong, while the CIA was
busy forging a government more to U.S. liking.**
Over the years, officials in Washington, including the presidents, were
supplied false reports, erroneous accounts of conditions on and off the
battlefield, conflicting forecasts of military and political successes, con¬
trasting views on how to proceed, and misconceptions of all kinds about
the people of Southeast Asia. After much vacillation over how and when
to proceed, some determination of the South Vietnamese problem had to
be made. It came following McNamara’s visit to Vietnam in the spring of
1964; the decision was made to increase support to the South Vietnamese.
There were plans to bomb the strategic targets in the North and to blockade
the harbor at Haiphong. But these acts would require a declaration of war,
and lacking congressional support, that had to be avoided. A congressional
“resolution”, authorizing the president to act as if there were a war would
do just as well, and such a resolution, which had been suggested by W. W.
Rostow of the State Department, was drafted in May by William Bundy,
also in the State Department.
All that was needed now was an excuse to invoke such a resolution for
Congress would surely act if U.S. ships or troops were in peril. The incident
that precipitated the adoption of such a resolution finally did occur in the
Tonkin Gulf and gave the resolution its name. In early August two U.S.
destroyers were acting as bait in searching out newly installed radar
installations in the gulf just eight miles from North Viemamese shores.
They were probably in violation of North Vietnamese territorial waters
when they were allegedly attacked. There were two alleged attacks by the
North Vietnamese: in the first instance, there was such confusion aboard
the U.S. ships that what actually happened in the clashes between the
North’s torpedo boats and the U.S. Navy’s- destroyers was suspect; in the
second case, there probably never was an attack at all, but Johnson ordered
reprisals against the North and eagerly used the incidents to get congres¬
sional approval for the Tonkin Gulf Resolution that gave the president wide
powers to “take all necessary measures”... “to prevent further aggres¬
sion,” etc. The House approved the resolution unanimously and only two
senators, Wayne Morse (R.-Oreg.) and Earnest Gruening (D.-Alaska) voted
nay on August 6,1964. The constraints on U.S. actions were now removed,
and without the need for subterfuge the escalation proceeded in earnest.
By December 31, 1964, the number of troops in South Vietnam had
risen to 23,300 and by June 30, 1965 to 103,000; the increases continued
until by December 31, 1965, the number had grown to 184,000 and by
June 30, 1966, to 322,000. (See Table 3.1.) The numbers of troops attest
to one form of escalation, but in addition the United States began bombing
North Vietnam in February 1965, and the war was clearly becoming more
obvious to the general public.
ECONOMIC DEVELOPMENTS
The war would have been less remote and generated more discussion
had the costs been made clear, or the effects had been quickly felt in a
decline in economic well-being. As it was, no such painful effects were
felt in the early stages of the war, and in fact while the military buildup
was proceeding, the Great Society was flowering. Some of the Great
Society programs enacted or expanded in this period included: Federal aid

to Appalachia, federal grants to education, and manpower programs were
extended and expanded; Medicare was passed, providing medical care
insurance to the aged, and at the same time Social Security benefits were
increased while Social Security taxes were raised; health-center grants to
states were enacted, and community health services were extended; a
housing program for low-income families was passed; grants were made
for water and sewage facilities, for water and air pollution programs, and
for medical school construction; scholarships and libraries were
authorized, and loan guarantees for needy students were established. Thus
billions of dollars were being spent or authorized at the same time that the
military buildup was occurring.
Meanwhile a reduction in excise taxes was passed in June 1965 that would
have reduced taxes by $1.75 billion at annual rates (the measure was reversed
in March 1966), and the first supplemental budget increase for fiscal year 1965
of $700 million for the Vietnam war was passed in May 1965. Together with
the Great Society spending and the increased military expenditures, these
measures should have called for some modifications of the forecasts for the
economy in the latter half of 1965 and beyond.
The trouble was that economists did not see the military buildup in the
data they normally examine to chart the course of the economy. As
mentioned earlier, there are lags between the time that military orders are
placed and when they are delivered and paid for. After military orders are
placed, or obligated in technical terms, private defense contractors begin
to produce the goods or services, and their payments for wages, rents,
interests, and profits, begin to affect the economy directly and are recorded
in the GNP. When these goods are later delivered to the government, the
economic impact has already been felt in the economy—too late to register
the true timing of the economic effects.If the lags between orders and
delivery are long (and they surely are variable depending on the type of
good or service) the economic impact of military spending may be mis¬
judged by considerable periods.
According to Weidenbaum the military buildup in 1965 was one such
period when the impact was missed.*^ Defense expenditures on a fiscal
year basis show a decline of $4.1 billion from 1964 to 1965 and then
show an increase to fiscal year 1966 of $7.5 billion. Thus it would appear
that defense expenditures affected the economy in fiscal year 1966.
However, looking at quarterly data of defense expenditures on a calendar
year basis reveals that the increase occurred in the fourth quarter of 1965
by $3.8 billion.
Yet defense obligations, the orders for goods or contracts placed, show
the increase to have occurred in the second quarter of 1965, and as can be
seen in Table 2.1, such obligations are greater than actual expenditures in
the official accounts. Clearly the impact on the economy was felt earlier
than was recognized, and the buildup was stronger than realized at the
time. This point is made by Arthur Okun, who became the chairman of the
Council of Economic Advisors under Johnson, when he admitted that
economic forecasts were deficient because of the underestimation of
defense activity in this period.
Unfortunately the difficulty of measuring the impact of defense activity
is not confined to this period. Even after noting the differences between
obligations and expenditures, there remains the problem that spending out
of obligations is also not smooth or predictable. Obligations for a major
weapons system could be incurred in one period and actual economic activity
could occur in another, or partial payments could be made, or postponements
Table 2.1
U.S. Defense Obligations and Expenditures (Billions of Doilars at Annuai
Rates and Seasonaiiy Adjusted)
Calendar Defense Defense

Year Obligations Expenditures
(GNP basis)
1964 I 55.2 51.2

II 54.8 50.9
III 53.3 50.3
IV 53.3 49.4
Total 54.2 50.4
1965 I 51.0 48.6

II 55.0 49.7
III 59.0 50.9
IV 62.1 54.7
Total 56.8 51.0
1966 I 64.6 56.8

II 75.9 60.1
III 75.2 64.4
IV 72.9 66.8
Total 72.0 62.0
Source: For obligations, Murray L. Weidenbaum, Economic Impact of the Vietnam War, Center for
Strategic Studies (Georgetown University, Washington, D.C.: Renaissance Editions,
1967), 23; for expenditures. Department of Commerce, Bureau of Economic Analysis, The
National Income and Product Accounts of the United States, 1929-82 (Washington, D.C.:
U.S. Government Printing Office, 1986), Table 3.2.
could follow, or outright cancellations could be made. Thus the detailed data
necessary to attempt an impact analysis are not available, or if available
would require an enormous amount of study to reveal the actual impact.
The gain in accuracy may be worth the effort in some cases, but in the
general type of historical overview undertaken here, the loss in correctly
identifying the precise period when defense spending affected the economy is
not that critical. It would be most important to those who are responsible for
formulating current economic policy for it would be critical to know how the
economy will be affected in the near future for timely actions to be taken.
Since we are examining the past, there is no sense of urgency in learning
the exact timing pattern of defense activity.Nevertheless, an attempt was
made to analyze the problem in order to understand how serious the
problem really was and whether or not it had a serious effect on the
formation of policy in the period under investigation. A cursory examina¬
tion does reveal the existence of a lag of one to two quarters from
obligations to expenditures, but the lag is not consistent nor uniform;
without further study it is impossible to state with any confidence either
the nature of the lag or its effect on policy formation.
In other areas of the economy, the voluntary wage-price guideposts,
inaugurated under the Kennedy administration, were challenged by the
steel producers in November 1965, and even more aggressively by
aluminum producers. The wage settlements in both of these key industries
were very important to the efforts toward price stabilization.
The guidepost program was designed to teach labor and management
(and the public) about the fundamental relationships among productivity,
costs, and prices. If wage increases matched productivity increases, costs
would be constant, and hence price increases (inflation) could be held
constant while the distribution of income between labor and other factors
of production would remain constant, thereby benefiting all sides and
eliminating the fighting over productivity gains. The guidepost program
was designed to combat inflation brought about by workers demanding
wage increases in excess of the growth of labor productivity, thus increas¬
ing unit labor costs and eventually prices. In areas characterized by market
power, where the guideposts were targeted, the increased labor costs could
be passed on in the form of higher prices. What was thought needed at the
time was an educational program that would inform both workers and
firms of the benefits of limiting their demands to what the growth of
productivity warranted. The Council of Economic Advisors noted that if
wages were to increase in line with the average growth in labor produc¬
tivity, at that time 3.2 percent, then both costs and prices need not increase.
In industries where the growth in labor productivity increased by more

than 3.2 percent, prices should have a tendency to fall, and the reverse
where the growth in labor productivity was less than 3.2 percent. (This
was a long-run program, where the changes in prices and behavior could
be smoothly accomplished; it is, however, often viewed as a year to year
guide to wage and price changes).
In both the aluminum and steel cases, producers had raised prices above
the noninflationary limits set by the voluntary guidelines. In the aluminum
case, the producers rescinded the increase (after the administration
threatened to sell aluminum from its stockpile), but in the steel case,
government purchases from lower priced steel producers only resulted in
limiting the price rise rather than halting it. These major challenges to the
voluntary guideposts would make them increasingly vulnerable until they
collapsed entirely in 1966.
In December 1965 the federal government began to experience
friction between monetary and fiscal policy makers. The Federal
Reserve, under Chairman William M. Martin, decided to increase the
discount rate to 4.5 percent from 4 percent in its effort to control
inflation. (In June, Chairman Martin made a speech that sent shivers
throughout the economy when he said that he found “disquieting
similarities” between the present state of the economy and that of the
1920s just prior to the depression.) The executive branch complained
and felt the raising of the discount rate was unwarranted at this time
and in any case, should have been undertaken only when properly
coordinated with fiscal policy, now being formulated. In retrospect the
Federal Reserve was correct to worry about inflation as was later
admitted by Arthur Okun: “ To administration economists, this [raising
of the discount rate] seemed debatable at the time the decision was
being made by the Fed; but once the plant and equipment survey was
in front of them, they recognized that the Fed was right on that score.”**
NOTES
1. The response is to the question by Stanley Kamow of whether he meant to make
such a comparison. See Stanley Kamow, Vietnam (New York; Viking Press, 1983), 214.
2. He told his biographer Doris Kearns, “I took the oath. I became President But for
millions of Americans I was still illegitimate, a naked man with no presidential covering,
a pretender to the throne, an illegal usurper.” See Doris Kearns, Lyndon Johnson and the
American Dream. (New York: Harper & Row, 1976), 170.
3. For another excellent history of the Vietnam involvement see, David Halberstam,
The Best and the Brightest (New York: Random House, 1972). Reprinted by Fawcett
Publications of Greenwich, Connecticut in 1973. Chapters 17 and 18 detail the events of

the early Johnson administration.
4. Kearns, Lyndon Johnson, 251-52.
5. Heller outlined the economic problem and the political problem of educating the
president on the need for a tax cut when the economy was already experiencing a deficit
in his highly readable book, Walter W. Heller, New Dimensions in Political Economy
(New York: W. W. Norton, 1967).
6. See the Economic Report of the President, 1965,65.
7. For more on the debate over the tax cut, see Milton Friedman and Walter W. Heller,
Monetary vs. Fiscal Policy (New York: Norton, 1969).
8. Heller, New Dimensions in Political Economy, 72.
9. U.S. House of Representatives, Committee on the Budget, Joint Economic Com¬
mittee, 95th Congress, 2nd session. Economic Stabilization Policies: The Historical
Record, 1962-76 (Washington, D.C.: U.S. Government Printing Office, 1978), 8. For
other studies that are consistent with the results of these studies see Arthur M. Okun,
“Measuring the Impact of the 1964 Tax Cut,” in Readings in Money, National Income,
and Stabilization Policy, edited by Warren L. Smith and Ronald L. Teigen, 345-58
(Homewood, Ill.: Richard D. Irwin, 1970); and Lawrence R. Klein, “Econometric
Analysis of the Tax Cut of 1964,” in The Brookings Model: Some Further Results, edited
by J. S. Duesenberry et al., 459-72 (Chicago: Rand McNally, 1969).
10. Barry M. Goldwater, With No Apologies (New York: Morrow, 1979), 75.
11. For a fascinating account of these early years of involvement, and for that matter
of the Vietnam experience in general, see Neil Sheehan, A Bright Shining Lie: John Paul
Vann and America in Vietnam (New York: Random House, 1988).
12. Perhaps a simple table would clarify the entire process. Murray Weidenbaum has
outlined the spending process in many studies, and Table 2.2 is adapted from one of these.
The table is overly simplified, of course, but the timing problem is clearly evident.
Table 2.2
Impact of the Military Procurement Process ($10 Billion Program)
Government Business
stage Purchases Inventories GNP
Appropriation -
Contract - - -
Production - + 10 + 10
Delivery + 10 -10 -
Source: Adapted from M. L. Weidenbaum, Economic Impact of the Vietnam War.

13. Murray L. Weidenbaum, Economic Impact of the Vietnam War, Center for
Strategic Studies (Georgetown University, Washington, D.C.: Renaissance Editions,
1967), 21-24. See also his background paper submitted to the Joint Economic Committee,
“Impact of Vietnam War on American Economy,” in Economic Effects of Vietnam
Spending, U.S. Congress, 90th Congress, 1st session (Washington, D.C.: U.S. Govern¬
ment Printing Office, 1967), 1:193-215. For a further discussion of this problem and of
the 1965 period in particular see Robert Warren Stevens, Vain Hopes, Grim Realities
(New York: New Viewpoints, 1976), 67-73.
14. Arthur M. Okun, The Political Economy of Prosperity (New York: Norton, 1970),
67-68.
15. For a good description of the whole problem and possible solutions see Murray L.
Weidenbaum, “The Economic Impact of the Government Spending Process,” Congress
of the United States, Joint Economic Committee, Economic Effects of Vietnam Spending,
90th Congress, 1st session (Washington, D.C.: U.S. Government Printing Office, 1967),
2:603-661.
16. Weidenbaum makes a similar lament, and also cites Arthur F. Bums and Paul W.
McCracken, both past chairmen of the Council of Economic Advisors, who worried about
the lack of data on the timely impact of government receipts and expenditures. See
Weidenbaum, Economic Impact, 17 and his analysis of military data in the appendix. In
another paper, “The Economic Impact of the Government Spending Process,” Weiden¬
baum complicates the simple model cited above and shows that consumers and firms may
react to the awarding of contracts before any production occurs. This so called “an¬
nouncement effect” could be important in the effects on the economy. He also gives
examples of the lag times between the letting of contracts and their delivery: firom Vi year
for military uniforms to 21/4 years for bombers and jet fighters. See the U.S. Congress,
Joint Economic Committee, Economic Effects of Vietnam Spending, 90th Congress, 1st
session (April 1967): 1:603-61. In the same source,EdwardGreenberg’spaper, “Employ¬
ment Impacts of Defense Expenditures and Obligations” (663-77), does indeed find the
lag in obligations to be important in explaining the changes in employment in aerospace
industries.
These studies show how complicated the entire matter is, and although their results
cannot be generalized and used in this book, they do verify the importance of lags in the
military procurement process and the problem caused thereby for macroeconomic policy
makers.
17. See the Economic Report of the President 1967, 120-127, for a review of the
guidepost program, and the worry over its effectiveness in the coming years. For those
confused by the arithmetic of the guideposts, here is the example given by the Council
of Economic Advisors: If a worker in a particular firm is paid $2 an hour—$80 a
week—and contributes to the production of 200 units a week, output per man-hour is 5
units (200 units divided by 40 hours), and unit labor cost is $.40 ($80 divided by 200
units). If, for whatever reason, output rises by 3 percent to 206 units a week—^with no
extra labor time required—output per man-hour is also up 3 percent, to 5.15 units (206
divided by 40 man-hours). If the wage rate also rises by 3 percent, to $2.06 an hour ($82.40
a week), unit labor costs will remain at $.40 ($82.40 divided by 206 units). If the price
of the product is unchanged, the margin between price and unit labor cost—available to
pay for others’ contributions to production—will be the same. But with 3 percent more
units sold, the total amount available to pay others, including owners, will also rise by 3
percent
18. Okun, The Political Economy of Prosperity, 69.
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II The War Years:
The Economic Record
3 THE MIDDLE YEARS AND
THE END OF THE JOHNSON
ADMINISTRATION, 1966-68
By 1965 President Johnson had taken the United States a long way away
from the pledge he had made much earlier, “We are not about to send
American boys nine or ten thousand miles away from home to do what
Asian boys ought to be doing for themselves.” Now the United States was
bombing North Vietnam and protecting our airfield at Danang with more
and more troops; then inevitably more troops were needed to maintain
logistical support, and so on, until by the end of 1965, nearly 200,000
troops were involved in South Vietnam. In the years to come, the same
story would be told by General >^^lliam Westmoreland, commander in
chief of the armed forces until 1968: send more military personnel, and
we can get the job done. The troop buildup in the middle years grew to
over 536,000. Table 3.1 shows the dramatic increase. Of course tons of
supplies, weapons, and materiel poured into South Vietnam as well to
support the troops in the field. By now the strategy to win the war was
divided into three components: the “search and destroy” operation
whereby U.S. troops, using their superior firepower, would wear down the
enemy; the bombing of the North; and the “pacification” program that was
to help control the civilian population through economic and social means.
Victory would be swift and relatively easy.
It did not work out that way. The search and destroy missions did not
go smoothly and required the destruction of many villages. This inane
policy is best illustrated by this ludicrous statement of an unnamed Army
major who declared, “It became necessary to destroy the town to save it.”
(The town was Bentre, South Vietnam, population 35,(X)0.) The bombing
and defoliation of South Vietnam created thousands of refugees and
worked counter to the stated pacification program. The bombing of the
30 The War Years: The Economic Record
Table 3.1
U.S. Military Personnel In Vietnam
Year Number
(at Dec. 31)
184,314 V -V
1965
1966 385,300
1967 485,600^
1968 536,100
1969 543,40o2
*
1. Data do not include 76,500 men in Thailand or off-shore in 1967 and 1968. See James L. Clayton,
ed.. The Economic Impact of the Cold War (New York: Harcourt, Brace & World, 1970), 45.
2. Peak strength as of April 30,1969.
Source: Department of Defense, Selected Manpower Statistics (Washington, D.C.: U.S. Govern¬
ment Printing Office, April 1971), 58.
North did not weaken the resolve of the North Vietnamese but in fact
reinforced their determination. Nevertheless it was possible to believe, as
did our military leaders, that the war of attrition would still be won, and
indeed the war settled down to a grinding, routine stmggle.
Dissent over the war was increasing every year as the escalation was
underway, but the promise of early victory gave many the justification for
reserving judgment. The domestic impact will be discussed later, but
everyone’s complacency was shattered when on January 31, 1968, the lunar
new year or Tet observed by the Vietnamese, the communists launched a major
offensive attacking 100 cities and towns, including Saigon the capital of South
Vietnam. The Tet offensive demolished all thoughts that this would be a short
war, easily won by superior U.S. forces that a backward country could hardly
resist for very long. The character of the war changed from skirmishes in the
jungles and rural villages to the urban streets and towns, the areas that were
seemingly protected from attack. While it is tme that Johnson’s popularity had
been declining prior to Tet, it was this reversal of U.S. plans, and this refutation
of U.S. pronouncements about the war that led Johnson to revise his percep¬
tions of the war and eventually helped to convince him to retire from political
life.^
THE DOMESTIC SCENE

The war had never been explained nor justified to the American people.
As a result whatever national unity existed beforehand quickly evaporated.
The Middle Years 31
and the nation quickly became sharply divided. No amount of falling

dominoes convinced those who felt the war was unjust and unwarranted
on the one side and on the other side, no amount of protests and dissent
were sufficient to alter the anticommunist sentiment. The foreign policy
in Southeast Asia became the major issue of the administration, and as it
did so the discussions over its efficacy and morality generated increasing
discussion, much of it rancorous, acrimonious, emotional, and harsh. The
war became a cancer, eating away at the tissue that held society together.
All this was fueled by daily broadcasts of the war on television, and
everyone, opponent and advocate alike, could watch the war in the fields
and listen to interviews with the troops while eating dinner or waiting for
more entertaining fare to begin. While the war was made immediate in our
homes, many continued to maintain that it was nevertheless remote and
unconnected to our own security; others reacted by insisting that even more
military might be exerted, even nuclear weapons if necessary, to win at all
costs. Reconciliation or even a reasoned dialogue between the two ex¬
tremes was, and perhaps still is, impossible.
A good part of the intellectual establishment began to abandon Johnson
and his war—the educational leaders, the college students, who were
exempt from the draft in a shrewd move by Johnson not to alienate the
middle class taxpayers, the clergy, and many business and community
leaders. The educational establishment was the most vocal with student
and faculty rallies, “teach-ins,” marches, and demonstrations of all kinds,
including the draft-card-buming rituals. By the end of 1967, positions had
hardened and many began to prepare to defeat the president at the polls
the next year.
The students rallied behind their antiwar hero. Democratic Senator
Eugene McCarthy of Minnesota, who managed, with their help, a surpris¬
ing showing in the New Hampshire primary in March. Encouraged by the
results, Robert Kennedy decided to enter the race as well. Having con¬
sidered the issue for some time. President Johnson announced a bombing
halt on March 31, 1968, and after acknowledging a divided America,
surprised everyone with this announcement, ‘îth America’s sons in the
fields far away, with America’s future under challenge right here at
home. .. I do not believe that I should devote an hour a day of my time to
any personal partisan causes.... Accordingly, I shall not seek, and will
not accept, the nomination of my party for another term as your President.”
America was indeed under challenge at home: Robert Kennedy was
assassinated as was Martin Luther King; college campuses were in turmoil;
blacks were rioting in the ghettoes of Watts, Newark, and Detroit in the
first signs of the clash between promises and reality as the other war, on
poverty, was also being lost. All these strands would coalesce at the
Democratic convention in Chicago as the nation witnessed the clash of
various elements of dissenting groups with the Chicago police in the streets
outside convention headquarters. The Democratic candidate. Vice Presi¬
dent Hubert Humphrey, unable or unwilling to disavow the war in Viet¬
nam, fell victim to this domestic turmoil and eventu'ally suffered at the
polls as Richard Nixon, the Republican nominee, won a very narrow
victory in November.
THE ECONOMY FOLLOWING THE BUILDUP

In his budget message accompanying the fiscal 1966 budget, Johnson
wrote, “It is a budget of both opportunity and sacrifice. It begins to grasp
the opportunities of the Great Society. It is restrained by the sacrifices we
must continue to make in order to keep our defenses strong and flexible.”
A year later, in the fiscal 1967 budget we find, “we are determined to press
confidently forward toward the- great Society—but we shall do so in an
orderly and responsible way, and at a pace which reflects the claims of our
commitments in Southeast Asia upon the Nation’s resources ... [for] it
would be folly to present a budget which inadequately provided for the
military and economic costs of sustaining our forces in Vietnam.” The shift
in emphasis is obvious as the Great Society had to be shortchanged as the
war escalated. In Johnson’s words again, “I was bound to be crucified
either way I moved.
Mr. Johnson’s dilemma was eventually resolved in favor of guns not
butter. There was no longer talk of providing both. In the 1966 budget,
Johnson seemed to imply that the United States would and could meet its
military needs to pursue its ends in Vietnam. However what was not stated
in the budget was an assumption made by Secretary of Defense Robert
McNamara that the war would be over by June 30, 1967. Thus requests
for funds for Southeast Asia were made on the unannounced assumption
that the conflict would require no additional funds for combat operations
after June 30,1967, and if that assumption were to prove false, supplemen¬
tary funds would be necessary. The reason McNamara gave for his actions
was to avoid the unnecessary production and stockpiling of military
equipment that was the experience at the conclusion of the Korean War.
Yet this rather arbitrary assumption was to have severe consequences
on the economy. The underestimation of expenditures necessary to con¬
tinue the war meant that no provision for additional military expenditures
The Middle Years 33
was made in the budget, and furthermore no alterations were made in planned
monetary or fiscal policies either. As a result there were no budgetary anticipa¬
tion of nor provisions for the subsequent increases in spending that the
prolongation of the war would require. Table 3.2 vividly illustrates the
problem. Table 3.2 includes the original estimate of defense spending in
Vietnam as well as the revised estimate of expenditures in a later budget; also
included are the actual expenditures made on two bases. The “full” expenditure
costs include all costs associated with the conflict in Vietnam. Full costs include
all personnel costs, support costs, equipment and supply costs, training and
maintenance costs, and so on. Incremental costs include only those costs that
can be assigned to the war exclusively. That is, some of the costs incurred in
South Vietnam would have been spent anyway in the normal course of defense
spending and are thus deducted from the full costs to arrive at incremental
costs. For example some of the ammunition spent might have been used in
training exercises, some of the soldiers were permanent members of the armed
forces, and some of the fuel for jet planes might have been used in training or
in other parts of the world, and so on. (Economists might refer to incremental
costs as marginal or extra costs incurred in Vietnam.) In other words, incremen¬
tal costs, once no longer incurred, could become available for spending on
peacetime activities.
Now the consequences of McNamara’s assumption of an early end to
the war can easily be seen. The expenditures for fiscal year 1967 were
Table 3.2
Estimated and Actual Expenditures for the Vietnam War (Billions of
Dollars)
Fiscal Expenditures
Year
Original Revised Actual
estimate estimate
Full Incremental
Costs Costs
1965 0.1 0.1 0.1 0.1

1966 4.4 5.8 5.8 5.8
1967 10.2 19.4 20.1 18.4
1968 21.9 24.5 26.5 20.0
1969 25.8 28.8 28.8 21.5
Source: The Budget of the United States Government (Washington, D.C.: U.S. Government Printing
Office, 1967), 73-75; 1968,77; 1969, 83; and U.S. Department of Defense, U.S. Assistant
Secretary of Defense (Comptroller), The Economics of Defense Spending: A Look at the
Realities (Washington, D.C.: U.S. Government Printing Office, 1972), 149.
originally estimated at $10.2 billion but actual expenditures were running

at twice that amount. Had there been a great deal of slack in the economy,
this infusion of demand might have been welcomed, but as we shall see,
the economy was growing nicely after the tax cut of 1964, and the increase
in demand simply threw the economy off course, causing it to overheat.
These general statements will be elaborated later, but it is possible to look
back with Walter Heller, ' '
One wistfully concludes that, were it not for Vietnam, early 1966
would have found us comfortably contemplating the form and size
of the fiscal dividend needed to keep us on the road to full employ¬
ment, rather than considering what further actions might be needed
to ease the strain on our productive capacity and deal with the vexing
and perplexing problem of inflation.^
Indeed the situation would grow worse in 1967 and in fact, the actual
expenditures for Vietnam were consistently underestimated throughout the
1960s; Heller and others correctly saw the need for some restraint although
in the early stages of the buildup, he hoped, again wistfully, that perhaps
the economy could roll with the punches of Vietnam spending.
The Council of Economic Advisors, under Chairman Gardner Ackley,
was not as sanguine as it advised Johnson on December 10, 1965, even
before the major underestimation of the war’s costs, that he could not have
the Great Society, the war, and price stability unless there was a tax
increase.'* Johnson, however, listened to political rather than economic
advice and rejected the Council’s warning. There apparently was no
sentiment for a tax increase in Congress, for it would have been labeled a
war tax, and would have opened the whole conduct of the war to congres¬
sional debate. Edwin Dale, of the New York Times charged Johnson and
members of his administration with acting irresponsibly when they real¬
ized that spending was running at rates much higher than provided for in
the budget and did nothing about it; he labeled it (in retrospect) “the
colossal inflation goof.”^
It would be easy to condemn the administration in retrospect, but at the
time there was much uncertainty over the duration and costs of the war. In
the words of Arthur Okun, then a member and later chairman of the Council
of Economic Advisors,
This political reality should be clear in retrospect, especially in view

of the antagonism to the surcharge in 1967-68. There was much less
The Middle Years 35
reason for higher taxes to get a sympathetic hearing at the beginning

of 1966. At that time, to the untrained eye, the economy seemed to
be doing remarkably well. Anybody who wanted to slow things down
was a killjoy.... All [the] unfavorable consequences of the boom
were still forecasts rather than facts.... The economists in the ad¬
ministration watched with pain and frustration as fiscal policy veered
off course. The new developments meant they were no longer calling
the shots in fiscal policy.^
ECONOMIC CONDITIONS
It is now time to look more closely at the economic consequences of the
war and the confusion over its costs. First it is necessary to recount the
actual data about the economy during the period 1966-68, the remaining
years of the Johnson administration. The data recorded in Table 3.3 are
those that were available at the time and not the subsequent revised ones
based on new definitions, new data, new procedures, and so on. The
original data are relevant if the concern is to understand the economic
responses to the economic conditions known at the time. (The revised data
were not significantly different anyway.)
The data for 1966 begin to show the results of the military buildup. The
economy was progressing nicely, according to the textbooks, wrote Walter
Heller, when the increase in national defense was added to the spending
stream without any offset in the way of restraint either from other expen¬
diture areas of the budget or from increases in taxes. The GNP spurted by
8.5 percent in nominal dollars from 1965 to 1966 and by 5.4 percent in
real terms or corrected for inflation. As might be expected, the unemploy¬
ment rate dipped below 4 percent for the first time since the early 1950s
as it fell to 3.9 percent for the year and to 3.8 percent in December. As
spending increased manufacturers began to utilize more of their plant and
equipment, and the rate of capacity usage rose to a relatively high 91
percent.
Thus the economy was utilizing more of its productive capacity with
unemployment falling to below the full employment definition of 4 percent
and with its plant and equipment reaching full capacity as well. Clearly
the gap between potential and actual productive capacity was closed in
1966; potential GNP was growing at approximately 4 percent (man-hours
were growing at 1.5 percent and labor productivity at 2.5 percent), and
actual GNP was growing at 5.4 percent. But just as clearly, the actual rate
of growth could not continue without running into labor shortages or
O'
C >1
•H
•H o o o o i-H cl 01 CO O H
O' Q <A®
M «3 rH f-H rH O in
00
r*» ^ ^ Tf
X 0) a 01 01 01 01 CO CO CO CO CO 00 00 CO 00
OCU OrtJ
o
O 0)
X H CJ>
0^ O II c 01 r-i 00 00 O in in 01 o 00 0l o Oi o
Z TJ CO <0
o c in O H O O n O O O r-l n P H O H
M 01 O
rH
I
<DCP
(A0) 1-4 ^
in C ^ in o <N O <N in H in n VO in in
04 I (N
u
•H in
x;u »H o H o
1 O o o o o
I
H o o o
u 01
Ck w
Source: Economic Rqxjits of the President, 1967-1969 (Washington, D.C.: Government Printing Office).
o
o
oi
oCP
in c
H 1 to f-t 01 CO CO CN o 01 o O CM CM H
OO4 in x;u O H O O (M OOHO
01 <H»
Selected Economic Series, 1966-68 (Quarterly Data at Annual Rates)
>1
0
1—1
a 01 CO 01 OI CO CO CO 01 O VO VO VO VO
e w •
0) x> r> n n n r> n n n n n CO CO fO (O
C (0
D Oi
CO in in 01 o CM p' o OI Tf CO
04 in •
Z W o n Oi OI o CM Oi VO CM CO CM Oi
o »H ’d* in VO VO VO P* o 01 o rH rH
VO VO VO VO VO VO VO VO VO VO p^ VO p^ P»
H
in o VO rH o in VO CM in n CO 01 CO o VO o
rH 0) •
(0 0) (A o fM in CM o CM r> CO VO OI OI O
C lA (d VO in in VO VO p* p» p- p* p- CO
0 C 42
•H 0) 0
4J Mh ^4
#—1 <0 0)?
04 rk Z Q 0<
O XI
in CM n rH rH n rH CM VO CM 01 o CO
• • • • • • • • • • • • •
04 o\ rH CM in OI in VO in rH o rH CM p'
2 r> (M n in CO VO p* 01 o VO O in p- CO
O p' r** p- P* P* CD CO CO CO 00 CO
Table 3.3
H H M
H H > M H > H H J>
0) H H M H H M H H H HI H H
• M u VO VO CO CO
^ n5 <0 VO VO VO VO VO VO
rO <U c9 ? 01 OI OI 01 Oi 01
U a rH rH rH rH rH rH
The Middle Years 37
bottlenecks. The increase in demand could be met as long as there were

idle resources, but now that full employment was being reached, the
economy could grow only by its potential, or by its growth in productive
capacity.^
As might be expected, the required growth could not take place in the
short run which put pressure on the existing resources and of course on
prices. Where the CPI was increasing at a rate of 1.6 percent in 1965, the
rate now rose to 2.9 percent in 1966; the Wholesale Price Index (WPI)
increased from a rate of 1.9 percent to 3.2 percent, and the GNP index
increased from a rate of 1.8 percent to 3.0 percent in the same period.
Inflation was an unwanted intruder in the economy, and the administration
had no ready plan to deal with it; a tax increase was not proposed, wage
and price controls were not considered, and the Great Society was still
being sought.
However the tight labor market almost assured that the price increases
would be reflected in wage demands, and wage demands would be
reflected in higher prices. Thus average hourly compensation in the private
nonfarm economy increased by 5.6 percent from 1965 to 1966 while labor
productivity rose by a rate of only 2.4 percent giving rise to an increase in
unit labor costs of 3.2 percent. Wage earners saw prices, especially of food
and medical services rising, and despite the decline in the rate of growth
of productivity, increased their demands for higher wages. One such
demand destroyed the only restraint on wages in existence—the
guideposts—that were introduced in the Kennedy administration whereby
wage increases were supposed to be related to the rate of increase in labor
productivity to avoid inflation. A midsummer strike by the airline
machinists was settled by a wage increase far in excess of the wage
guideposts still technically in existence in 1966. The rationale for the
voluntary wage restraint of labor and the adherence to the old standard was
disappearing now as prices (CPI) were rising at a rate of 3.3 percent while
average labor productivity was rising at a rate of 2.4 percent. According
to the “rules” prices should not be increasing, or if so by small amounts,
since productivity was rising by greater rates than the average in many key
industries. Hence profits were rising, and these were observed by or¬
ganized labor, no friend of the guideposts anyway. The rising prices and
profits furnished excuses, if they were needed, to press for higher wages.
But if wage increases are greater than labor productivity increases, unit
labor costs rise, giving an excuse for higher prices, etc. Since the
guideposts were becoming irksome to both labor and firms, many of whom
never were very cooperative, and since no particular sacrifice was
demanded of either, the guidepost program collapsed. ® Moral suasion has

its limits and jawboning by the administration for restraint went unheeded.
Fiscal policy in this period was clearly inappropriate. With no real
restraint on spending and no really effective tax increase, fiscal actions did
not alleviate the excess demand pressures that were building. True, excise
taxes on telephones and transportation were restored and withholding rates
were graduated to “put them on a pay-as-you-go” basis ^d possibly some
spending on nondefense was held down, but these actions were simply
insufficient to cope with the problem. In September, however, the ad¬
ministration asked for a suspension of the investment tax credit, and it was
granted in October. As a method of reducing the excess demand such a
move could not be totally effective in a boom period and may have worked
against the needed increase in productive capacity. If investment in capital
goods was curtailed as a result of the tax change, then the additional supply
of goods that the foregone investment might have produced would not be
forthcoming to help reduce excess demand and moderate the pressure on
prices.
The incorrect fiscal policy was quickly registered in the federal budgets.
The deficit in the fiscal year budget for 1966 rose to $3.8 from $0.6 billion
and the calendar year budget in the national income accounts rose to a
deficit of $0.2 billion from a surplus of $1.2 billion. Finally the high
employment budget also swung into a deficit of $3.6 billion from a surplus
of $ 1.0 billion. This is the measure used to gauge the impact of government
on the economy since it eliminates automatic government actions caused
by the state of the economy, e.g. unemployment compensation payments,
welfare payments, and so on. Clearly government was adding to the
pressures on the economy by providing fiscal stimulus when some measure
of restraint was required.
Lacking any real fiscal restraint, the burden of stabilization fell to the
monetary authorities. The Federal Reserve reacted by letting the money
supply. Ml (Demand deposits + currency outside banks), grow at less than
2 percent for the first half of the year, and then letting the rate fall to zero.
With the economy booming, and the demand for funds high, while the
supply of funds was restrained, something had to give. Banks scrambled
around for funds, inventing new negotiable instruments, increasing inter¬
est rates to attract funds, bringing funds home from abroad, and borrowing
funds from the Federal Reserve. Still the liquidity crisis continued with
investment houses stuck with unsold security issues, states and localities
unable to borrow to finance their activities, and thrift institutions losing
funds to commercial banks.
The Middle Years 39
The results were predictable. The housing market collapsed as its source
of funds, the thrifts, were losing deposits and as interest rates increased
dramatically. Mortgage interest rates were approaching 7 percent at year’s
end, a rate not seen in the post—World War n years. Of course housing
starts fell, to 0.9 million units from 1.4 million, and the uneven effects of
monetary policy were obvious to everyone. Meanwhile the Federal
Reserve kept its discount rate at 4.5 percent letting banks borrow at this
low rate and reloan at higher market rates. The rate on three month Treasury
Bills, for example, rose to 5.4 percent in October from 4.6 percent in
January before falling to 5.0 percent in December.
Apparently high interest rates did not deter investment spending in this
period as the boom created expectations of even better future conditions.^
Complaints against high interest rates were heard, but they were ignored in
the name of fighting inflation. In the words of Okun, “the Federal Reserve’s
independence proved to be a valuable national asset It permitted the President
and his administration to assume a passive role, tolerating an unpopular tight
money policy silently without explicitly approving or endorsing it”^®
In the last quarter of 1966, the demand for funds eased somewhat as
monetary policy showed its effectiveness. Some of the demand for funds
fell off, the mortgage market was aided by an infusion of funds from the
Federal National Mortgage Association, and the Federal Reserve aided the
thrifts by reducing the maximum interest rate that could be paid on time
deposits to 5 percent from 5.5 percent. Thus monetary policy proved
effective, but its power was concentrated in a few areas, the housing market
and small businesses. Moreover the effects of monetary policy on the
distribution of income and wealth were detrimental to principles of equity.
The incompatibility of an expansionary fiscal policy and a contractionary
monetary policy was demonstrated in this period, and the consequences
of their working at cross purposes were to have lasting effects on the
economic and social system. Indeed in the next chapter, the case is made
that the year 1966 was a pivotal one for the U.S. economy.
The credit crunch of 1966 frightened many people, and the administra¬
tion and the Federal Reserve quickly reached an agreement to pull back
from the stringent monetary policy. Toward the end of 1966 and throughout
1967, monetary policy moved toward ease with the money supply (Ml)
increasing about 6.5 percent over the year. Monetary policy became more
accommodating to fiscal policy, for it was evident that using only monetary
policy to control inflation had proved overly disrupting to financial and
housing markets. The howls of these groups brought about the retreat from
the tight monetary policy and the credit crunch.
Moreover the monetary policy of 1966, presumably designed to fight

inflation, actually pushed the economy toward a recession and that even¬
tuality became the primary concern. Inventories increased by 43 percent
over 1965, business investment fell to zero growth from the previous 10
percent growth, and of course the housing market collapsed. According to
Okun, the administration welcomed the slowdown because it offered a
second chance to start over and remake the macroeconomic policy of
1966.” The Council of Economic Advisors was willing to accept the
slowdown in the first half of the year if it were followed by the resumption
of the expansion that began in 1961.
The economy did slow down in the first half of the year as the real rate
of growth fell to 3.3 percent for the year, down from 5.4 percent. (See Table
3.3.) The unemployment rate was not affected very much as firms decided
to retain or hoard their skilled workers even as their operating capacity fell
to 85 percent from 91 percent in 1966. The average workweek fell instead
as did the rate of growth of labor productivity, for the rate of growth of
output was falling while employment remained stable. The growth of
output per man-hour in nonfarm industries fell to 0.9 percent from 2.5
percent. Prices, however, continued to rise as the CPI and the GNP index
rose by about 3 percent for the year. The fiscal response of the administra¬
tion to these conditions was to ask for a reinstatement of the investment
tax credit when the decline in investment spending became evident. The
increase in idle productive capacity made this proposal seem insufficient
to stem the fall in investment purchases, but the administration wanted to
prevent a real collapse. Interestingly, the easy monetary policy did not
seriously affect the nominal long-term rates of interest upon which invest¬
ment plans might be influenced. In fact, interest rates began to rise slowly
throughout the year, and since prices were rising as well, real interest rates
(adjusted for inflation) were fairly constant. In April the Federal Reserve
reduced its discount rate to 4 percent from 4.5 percent as part of its move
toward monetary ease. Short-term interest rates fell by 1-t- percentage
points in the first half of the year but turned upward in the second half.
However heavy borrowing by all sectors continued, perhaps spurred on
by the fear of another credit crunch. The expectations of even higher future
interest rates may have stimulated borrowing, even in the face of rising
current interest rates. In any case the demand for funds was strong, and the
composition of that demand was confusing.
The other major fiscal policy move of the administration was the request
for a 6 percent surcharge on the tax liabilities of individuals and corpora¬
tions effective July 1,1967. With the economy in decline in the early part
The Middle Years 41
of 1967, the tax increase was not well received on Capitol Hill, Wilbur
Mills, chairman of the House Ways and Means Committee, was not
convinced of the need for a tax increase because there was no evidence of
demand pull inflation, but there was evidence of supply inflation; inflation
coming from the cost or supply side would not be affected by such a tax
increase designed to affect the demand or spending side. Administration
economists were not able to convince Congress or the American people of
the need to enact a tax increase based upon forecasts of future economic
conditions that might warrant such restraint. Unable or unwilling to
identify the tax increase with patriotism and the war effort, the administra¬
tion failed to get a tax bill passed in 1967.
The fall in interest rates did revitalize the housing market, and eventually
the buildup in inventories was worked off. The economy started on the
rebound in the latter half of the year. Finally in November, Great Britain
devalued the pound in response to pressure from the international com¬
munity. The United States was also under pressure to get its balance of
payments in order, and the Federal Reserve reacted in the only way it could
by increasing the discount rate back to 4.5 percent in order to protect the
exchange rate of the dollar. International bankers were growing increas¬
ingly nervous with the chronic deficits in the U.S. balance of payments,
and the shaky dollar, of which they had plenty, was forcing their hand.
They began calling for reforms in the International Monetary Fund’s rules.
Thus international concerns were also impinging on the ability of the
United States to conduct its monetary and fiscal policies.
Despite many forecasts to the contrary, the economic boom con¬
tinued in 1968. The slowdown in 1967 was shorter than anticipated,
and long-term expectations of prosperity soon overshadowed the short¬
term concern of a minor setback. Real GNP increased by 5.6 percent
from 3.3 percent with all sectors of demand contributing. Investment
spending rebounded, as did housing, and these increases took place
despite interest rate increases caused by the return of monetary policy
toward tightness. The behavior of investment spending in this period
remains confusing and can be explained only if long-run profit expec¬
tations are introduced to cancel the short-run deterrents to investment
demand. In other areas, the unemployment rate began to fall, and by
November the rate was 3.3 percent. Prices, however, continued their
inexorable rise as the CPI rose by 4.0 percent, the WPI by 2.5 percent
and the GNP index by 3.8 percent. (See Table 3.3.)
The major fiscal policy move in this period was the passage of the
temporary 10 percent tax surcharge in June 1968, made retroactive to April
for individuals and to January for corporations. The surcharge was

scheduled to end on June 30, 1969. Originally proposed in January 1967
as a 6 percent surcharge, it later increased to 10 percent and was finally
passed a year and a half later. Consequently many suggested that the tax
surcharge was too little and too late. Others suggested that it would not
dampen demand since it would be regarded as temporary and consumers
would continue their consumption plans since their'plans are based on
longer-run forecasts of their incomes. Since consumption did increase and
saving fall, the view that the tax surcharge was ineffective must be given
some credence. Others suggested that the increase in consumption would
have been even greater without the tax surcharge, and therefore the tax
was at least partially effective.
As part of a deal that produced the tax surcharge. Congress forced the
administration to cut back federal spending by $6 billion in nondefense
areas. The administration was granted its military requests, but Congress
exacted its price. The promise of guns and butter was broken. The restraint
came at the expense of social programs so that the disadvantaged in the
United States would help pay for weapons to attack the less fortunate in a
third world country. When the surcharge was enacted, all talk of tax reform
vanished, and again those who could not escape the tax surcharge would
be the ones who would pay the tax.
The fiscal restraint for 1968 did not materialize in the first part of the
year, and once enacted, did not work as effectively as hoped. Consequently
monetary policy moved toward restraint in the first half of the year. The
Federal Reserve raised the discount rate to a high of 5.5 percent in April
and allowed the highest rate to be paid on large deposits under Regulation
Q. The growth of the money supply slowed to 3.4 percent in the first half
of the year and to 3 percent in the second half. Interest rates rose and
surpassed those during the credit crunch of 1966. The demand for funds
still exceeded the supply so that borrowing continued even as interest rates
climbed. After the tax surcharge was passed, the Federal Reserve backed
off somewhat as it reduced the discount rate to 5.25 percent, but interest
rates still continued to rise until by the end of the year the three month
Treasury bill was 5.9 percent, long-term rates were approaching 6 percent,
and the Federal Housing Administration (FHA) mortgage rate was about
7.4 percent.
This very brief summary of the problems faced and the macroeconomic
policies followed in the period 1965-68 has been supplied to provide some
background of the economic conditions that were, at least in part, due to
the involvement in Southeast Asia. It is not a complete record nor can all
The Middle Years 43
the economic conditions described be attributed to the Vietnam War. What

emerges from the record is a rather confusing period for economists,
and the macroeconomic policies followed reflect that confusion.’^ The
record of both monetary and fiscal policy is not an exemplary one;
monetary or fiscal policy worked at cross purposes or simply did not
work at all. From the inappropriate fiscal policy as the war escalated
to the stop-and-go monetary policy, macroeconomic policy-making in
this period shows not only the political element in budget-making but
also the confusion in prescribing for an economy that was overheating.
It is not the purpose of this analysis to critique the macropolicies of the
period, and these comments are made only in passing for now. Later
their longer-term effects on the economic structure of the United States
will be assessed.
Putting aside the evaluations of policy-making as the war intensified, it
might be useful to pause and examine the changes in the economic
structure that occurred in this period and specifically around the year 1966,
i.e., at the start of the Vietnam escalation. These changes would affect the
economy and the society for years after the conflict ended and are the
overlooked economic consequences of the war in Southeast Asia.
WHAT IF THERE HAD BEEN NO WAR?

Before turning to these structural changes, however, it would be instruc¬
tive to ask these questions: What if there had been no war? What would
have happened to the U.S. economy?
These important questions have no simple answer, of course, but if
they could be answered, we would gain some insight into the economic
effects of the Vietnam War. If we could determine what would have
happened in the economy in the absence of the war, then it would be a
straightforward matter to compare this historical record with what
actually happened and impute the difference. The trick is to determine
what would have happened to an economic system that is constantly
changing and recording reactions to events as they occur. How does
one isolate the effects of one change in this world? How is it possible
to distinguish between what would have happened anyway by virtue
of the economy operating in its usual way, from what happened as a
result of actions taken, deliberately or not, that disturbed the economic
system? Any attempt to do so would require a large econometric model
that could capture the workings of the economy so as to be able to
reconstruct history and be designed to answer the “what if’ questions
by making suitable assumptions about how various segments of the

model would have behaved if some event had not occurred. This
methodology has been criticized for its simplistic assumptions of how
a complicated economy actually operates, but despite the problems ac¬
knowledged by everyone, the simulation technique remains the only way
to ask the intriguing questions of what would have happened if..., or
what was the actual effect of this policy or that. ' '
For example, if one wanted to know the effects of a tax cut, one could
just assume that the tax cut was never passed, make some assumptions
about the path of other variables in the system, and then compare this
economic world with the actual one; the difference between the two worlds
would then be attributed to the effects of the tax cut. As imprecise and
problematic as this exercise might be, at least some estimates could be
ventured over a short-mn period. But what of a longer-run period when
reactions and responses to the initial change can be made that affect other
changes in an endless chain? We are examining the economic effects of a
war that was spread out over years, and the reactions to it were uncertain
at first, mixed later, and confused throughout.
All this is by way of warning about the interpretation of results of such
simulation studies and is an introduction to one such attempt. Economists at
the Wharton School, quite aware of the problems involved, made an attempt
to examine the economic effects of the Vietnam War, at least for the early years
of 1966-69. In this section, some of their results are presented.
The appropriate variables to be controlled in the case of the economic
impact of the Vietnam War are defense related ones. Accordingly, defense
purchases, military manpower and compensation, and orders for defense
capital goods become the items to be adjusted. In addition, nondefense
expenditures and tax policy must be considered as well.
Of the initial four scenario options, two were selected as the most
important representing the outer boundaries.
OMB
1. The first case simply eliminated all costs directly attributable to the
war and assumed that no other expenditures would have been
altered. The costs (full) of the war were taken from the Office of
Budget and Management (OMB), and hence this case was labeled
the OMB approach.
2. Military manpower was assumed constant at 2.7 million.
3. New orders for defense goods were held constant at $16 billion.
The Middle Years 45
In this restrictive case, none of the Vietnam expenditures would have been
replaced by expenditures in other areas or sectors; simply, no wartime
expenditures would have been made with everything else equal.
WEFA
1. The Wharton Economic Forecasting Associates (WEFA) case as¬
sumes that defense purchases would have grown at an annual rate
of 1.5 percent, the average annual rate for the period 1956-62.
2. Military manpower was held constant at 2.7 million.
3. New orders for defense capital goods were assumed to rise at an
annual rate of 4.5 percent.
4. The tax surcharge of 1968 was eliminated.
5. Nondefense expenditures were assumed to grow at an annual rate
of 6 percent.
This case (WEFA) permits “normal” growth of nondefense expenditures

and permits a tax policy consistent with the assumption that no war took
place.
Some of the results of the simulations studies are shown in Table 3.4.
The OMB (no war, everything else equal) and the WEFA (no war with
adjustments made to defense and nondefense spending and taxes) are
shown juxtaposed for easy reference.
Looking first at aggregate demand, the impact of the war was much
greater using the OMB assumptions. In 1966, the OMB methodology
estimated that GNP in 1972 doll irs was nearly $25 billion higher as a result
of the war, and that amount inr reases to nearly $50 billion in each of the
years from 1967-69. Note th t housing demand and net exports would
have been greater and consumption and investment would have been lower
had there been no war.
However when one considers a normal trend in government expendi¬
tures and the elimination of the tax surcharge, the estimates differ consid¬
erably. Looking at the WEFA simulations, the initial impact of the war on
the GNP of $10 billion in 1966 rises to about $25 billion in 1967 and 1968,
but falls to only $3 billion in 1969. By 1969, then, most of the impact of
the war is over, and the GNP is only some $3 billion more than it would
have been in the absence of the war. Again without the war, housing and
net exports would have been greater. Without the war, purchases from other
countries to support the war effort would not have been necessary, and net
Economic Stabilization Policies: The Historical Record, ]962-76', 95th Congress, 2d Session (Washington D.C.: U.S. Government Printing Office, November
Source: Adapted from U.S. Congress, Joint Economic Committee, Wharton Econometric Forecasting Associates, Inc., “A Study in Counter Cyclical Policy,” in
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The Middle Years 47
exports would have expanded. >\^thout the war, more resources would
have flowed into the housing sector. In short, by 1969 using the WEFA
model, the economy would have returned to its “normal” path, and the
impact of the war on the economy would have been minimal.
Of particular interest is the effect of the no war scenario on the labor
market. Without the war, many military personnel would have been
available for civilian employment Depending upon the assumptions made
regarding the participation in the civilian labor market of these military
personnel, the results show up in the unemployment rate. Instead of the
tight labor markets found in actuality in this period, the no war scenario
leads to unemployment rates that range from nearly 3 percentage points
higher than actual experience in the case of the 0MB model in 1969 to 1.6
percentage points higher in the WEFA model in the same year. The
unemployment data are given in Table 3.4.
The OMB model postulates that lower wages would result in more
people leaving the labor market (or not entering it), and hence its un¬
employment rate remains high. The WEFA model, which attempts to
restore normal economic growth paths, results in the unemployment rate
falling as more military personnel are absorbed in civilian employment.
Finally, as might be expected, prices would have been lower. Table 3.4
shows that most of the impact on prices occurs in 1969, The CPI and the
GNP deflator are between 2-3 percentage points lower than historical
levels in the OMB case, and around 1.5 percentage points in the WEFA
case. The lower inflation rates in the OMB case reflect the higher un¬
employment rates in that model, while the WEFA model assumes greater
productivity growth that serves to reduce its inflation rate.
These are just some of the results obtained by the Wharton Associates
in their simulation studies. In most cases they confirm the trends that might
have been anticipated by observation of the historical record. In this sense
they are certainly useful as a check on preconceptions.
Yet the world they postulate is forced to be somewhat artificial. This
controlled and constrained world limits their ability to obtain more precise
magnirndes, but more important, limits their ability to incorporate reac¬
tions and responses of economic agents to changing economic conditions.
To change one important fact, i.e., that no war took place, and then assume
everything else remains the same is clearly not realistic; in the other case,
to assume a no war situation and then postulate that historical changes of
other variables continue may be more realistic, but not much more so.
In fact one of the major themes of this book is that the war disrupted so
many past relationships, and disrupted so much of our economic behavior.
that the economy underwent significant changes. So merely extrapolating

past economic relations would tend to distort the impact of the war on the
society. Instead the war fostered new economic behavior, forced structural
changes on the economy, and helped promulgate new institutions.
If people observe their world changing, as an event such as a war would
clearly accomplish, then they will likely respond to those changes, again
fostering new and different responses, etc. In the end the new world may
differ significantly from the old, an eventuality that simulation techniques
simply cannot handle.
So without pausing to examine critically the actual results of the
simulations, we turn to some of the structural changes that surfaced in this
period; changes that argue against the use of simulation models that are
forced to create an artificial world against which to measure the real one.
NOTES
1. Doris Kearns, Lyndon Johnson and the American Dream (New York: Harper and
Row, 1976), 335.
2. Ibid., 251-52.
3. Walter W. Heller, New Dimensions of Political Economy (New York: W. W.
Norton, 1967), 87.
4. See Robert W. Stevens, Vain Hopes, Grim Realities (New York: New Viewpoints,
1976), 75.
5. Edwin L. Dale, ‘The Inflation Goof,” New Republic (January 4,1969).
6. Arthur M. Okun, The Political Economy of Prosperity (New York: W. W. Norton,
1970), 71. In the next paragraph, Okun makes a point that will occupy us in the next
chapter:
The January 1966 budget marked the first defeat of the new economics by the old
politics since Kennedy’s decision in August 1962 to delay a tax-cut recommenda¬
tion. Even more important, the new economics could not pass its crucial test
because of the defense upsurge and the political paralysis of tax rates. The new
economists had insisted repeatedly to their critics that the policy of fiscal stimulus
would be turned off in time and would be amended to head off inflation when the
economy did reach full employment. For political—not economic—reasons, the
skeptics won the debate.
7. See the Council of Economic Advisors’ analysis in their Economic Report of the
President, 1967,42-45.
8. See Arthur Okun, The Political Economy of Prosperity, 76-78.
9. See Jean Crockett, Irwin Friend, and Henry Shavell, “The Impact of Monetary
Stringency on Business Investment,” in U.S. Department of Commerce, Survey of
Current Business 41 (August 1967): 10-27.
10. Okun, The Political Economy of Prosperity, 81.
The Middle Years 49
11. Ibid., 83.

12. See Arthur Okun, “The Personal Tax Surcharge and Consumer Demand, 1968-
IQ” 'm Brookings Papers (Washington D.C.; Brookings Institution, 1971), 167-212; and
William L. Springer, “Did the 1968 Surcharge Really Work?” American Economic
Review 65 (September 1975): 644-59; and the subsequent exchange between the two
economists in ihc American Economic Review 67 (March 1977): 166-72.
13. Perhaps Okun put it best:
The difficulties of explaining the movements of private demand and responses of
public policy during 1968-69 remind us of how much economists have to learn.
They also remind us that changes in attitudes in the private economy can at times
swamp decisions of public policy. They argue for humility in our discussions of the
economic outlook and for flexibility in the making of policy.
Okun, Political Economy of Prosperity, 96.

14. See U.S. Congress, Joint Economic Committee, Wharton Econometric Forecast¬
ing Associates, “A Study in Counter Cyclical Policy,” in Economic Stabilisation Policies:
The Historical Record, 1962-76, 95th Congress, 2d Session (Washington, D.C.: U.S.
Government Printing Office, November 1978).
6*mr-
iH^ V
■i- .IkXT 11
3(
.* ■■»'?’4
4 THE CHANGING ECONOMIC
STRUCTURE, 1966
The ultimate economic consequences of the \êtnam War can never be

known with any degree of precision. The war affected the entire society in
so many ways that everyone’s life was touched at some point if only by the
atmosphere it created. For some, the war presented an opportunity for private
gain regardless of questions of morality or justification; no qualms intmded
upon their decisions, and no nagging doubts restrained their actions. Many
others rejected the war and opposed U.S. involvement in the internal affairs
of other nations. For these people, the war was immoral, and anyone who
contributed to it, participated in it, or fostered it was subject to condemnation.
Of course, there were all shades of opinion between these extremes.
Allowing for the spectrum of views, however, is merely to acknowledge
the controversy surrounding all facets of the U.S. involvement in Southeast
Asia. It does not reveal which actions were taken because of the war, which
were postponed, and which were cancelled; there are no records of which
firms adjusted their operations to profit from the war or which ones refused
to do so. Similarly we cannot know how many individuals pursued careers
they would normally not have, e.g., idealists who escaped the draft in
college classrooms and then became educators, or at the other extreme,
drafted men who went on to make the military a career.
Clearly the war affected many decisions, but short of a national
survey, they cannot be tabulated or measured in some convenient giant
matrix. Wars in general have a habit of severely disrupting a society
and affecting the decisions of everyone. Many choices have to be made
under conditions not conducive to making them: what occupation to
pursue; where to live; when to marry, have children, divorce, buy a
house, and so on.
Yet the Vietnam War was different in that it was not a total war and thus
did not affect the lives of everyone in equal measure. Many were simply
bystanders while others made heavy sacrifices. The distribution of the
burden was not equally shared. For example, most benefited by the
booming economy and made no sacrifices in their living standards. True,
taxes did rise somewhat, but they could be paid for out of rising and inflated
incomes. There was no need to make any sacrifices hi die consumption of
durable goods or particular services as was the case in World War n. A
large proportion of the sacrifices that were made were confined to the poor
who saw their social programs being cut and their expectations for im¬
proved lives dashed. The poor sent their sons to the war while the middle
and upper classes sent theirs to college to escape the draft. Only when the
college deferment was dropped in favor of a lottery, and the draft became
more democratic did the more favored groups in the society find fault with
the war. As long as it meant just paying for it, the war seemed remote from
their daily lives. When the lives of their sons were disrupted, and even
threatened, then the war became a reality.
There is no need to belabor the point: many decisions and actions were
affected as a result of the war. That we cannot know what these decisions
were or how they affected the society and the economy calls for humility
in any attempt to account for the consequences of the Vietnam War. All
that we can measure in economics are the results of these decisions as they
were reflected and registered in conventional measures like inflation,
employment, and GNP.
However in addition to these conventional measures, it might be useful
to suggest some of the structural changes made in the economy immedi¬
ately following the Vietnam War escalation. Some of these changes
occurred around the year 1966 and can be traced directly to the war; other
changes occurred as a result of forces percolating over the years that
seemed to come to a head in that year. Still other changes may be unrelated
to the war but were heavily influenced by the economy that resulted from
the war. Again no magic matrix exists to identify which type of change
occurred as a result of the war and which would have happened anyway.
All that can be done is to catalog the changes and suggest the category to
which they can be attributed. ‘
INFLATION
After a long period of price stability, inflation revived in 1965. In the
period 1960-64 for instance, the CPI rose by 1.2 percent and in 1965 by
The Changing Economic Structure, 1966 53
1.9 percent; in the same periods the WPI rose from zero change to 3.3
percent, and the GNP index rose from 1.3 percent to 2.7 percent. The
sharp increase in the CPI occurred in the second quarter of 1965 when
the rate jumped from 0.8 percent at annual rates to 2.9 percent. Even a
cursory examination at the defense obligations series (see Table 2.1)
reveals the Vietnam War as the culprit for the resurrection of inflation.
National defense obligations also rose sharply in the same quarter by
about eight percent or by 33 percent at an annual rate. While this
concurrence seems extraordinary, there is widespread agreement that
the inflation of the next decade began here and was a direct result of
increased military spending. Table 4.1 provides the necessary data to
support that conclusion.
There seems to be no question as to the origin of the inflation, but how
much of the subsequent inflation can be accredited to the Vietnam War?
Some insight can be gained by looking at the price indexes and defense
expenditures on Vietnam. Here the data show the Vietnam buildup oc¬
curred in 1965 at the same time that prices began to accelerate. Vietnam
spending exploded in 1966 and then the increases tapered off until they
began to fall in 1970.
Thus looking only at expenditures in Vietnam, the major contribution
to inflation would have been in the years 1966-68; thereafter, as the war
wound down, direct spending on Vietnam would not appear to have been
responsible for the observed continued price increases.
Table 4.1
inflation in the Vietnam War Period (Percent Change)
Year Consumer Wholesale GNP National Actual

Price Price Index Defense Expend
Index Index Oblig- Vietnam
(unadj.) (Unadj.) ations War
1960-1964 1.2 0.0 1.3 - -

1965 1.9 3.3 2.7 4.8 16.8
1966 3.4 2.2 3.6 26.8 5700.0
1967 3.0 1.6 2.6 3.2 217.2
1968 4.7 3.1 5.0 7.0 31.8
1969 6.1 4.8 5.6 0.6 8.7
1970 5.5 2.2 5.5 -4.1 -20.1
Source: Price changes calculated from Economic Report of the President,1987•, National defense
obligations calculated from U.S. Treasury Department, Bulletins, various years. For Viet¬
nam exp>enditures, see Tables 1.1 and 3.2.
Looking at defense obligations data for a better series to measure the

economic impact again reveals the enormous buildup in 1966 with the
tapering off of obligations coming earlier and falling more rapidly than
actual expenditures on Vietnam. Of course, these data refer to total defense
obligations and not just to Vietnam alone, and thus it is not as easy to make
general statements without further investigation.
Evidently then, demand pull inflation was instigated by the Vietnam
War expenditures starting in 1965 and continuing in 1966. The gap
between actual and potential GNP had been closed by the end of 1965 and
further expenditures not fully offset by tax increases clearly resulted in a
period of excess demand. With a virtual zero gap between potential and
actual GNP, the increase in defense obligations of $16 billion from 1965
to 1966 can serve as an approximation of the amount of excess demand in
the economy. The rise in prices was inevitable.^
Yet the rise in prices was gradual and slow to develop. Even with the
added demand pressures, the legacy of prior price stability meant that
inflation was not anticipated or expected to continue in the early part of
the period and thus was not built into plans; even by 1968 the rate of change
iii the CPI was just 4.7 percent and 5 percent in the GNP index. What this
implies is that there was time to combat inflation in the early stages if the
proper mix of monetary and fiscal policy had been employed. However
the expansionary fiscal policy in 1965 combined with a contractionary
monetary policy in 1966 created only uncertainty and fears that further
government actions would be necessary in the coming years.
The monetary policy that brought about the credit crunch of 1966
was intended to fight the excess demand problem, and as we have seen,
the result was a mini recession in 1967. Price increases moderated in
1967 but continued their upward march once the monetary authorities
retreated in the face of the financial crisis they created. As defense
spending decreased, and the Vietnam War deescalated, can the rise in
prices beyond 1967 be attributed to the Vietnam War or to defense
spending in general?^
Part of that answer can be found in the WEFA study cited in Chapter 3.
Using the GNP price deflator as the measure of price changes, the results
of that study found that there were small differences between actual history
and either model in the early years, 1966-67. In 1968 and 1969 the models
begin to diverge from the actual data. Without the war by 1969, inflation
would have been lower by one full percentage point using the OMB model
(no war, everything else equal) and 0.6 percentage points less using the
WEFA model (no war, other variables return to normal paths).
The Changing Economic Structure. 1966 55
Clearly the war can be blamed for some inflation beyond 1967 according
to these results. One study, using different techniques and data, found just
the opposite but the conclusions rest on a peculiar definition of demand
pressures, and did not allow for expectations (or cost push inflation) to
influence the analysis.
But the situation heading into 1968 was different from that at the outset
of the war. By 1968 inflation was no longer a possibility, it was a reality
and becoming obvious to most people. Since inflation was expected to
continue, people began to build it into their price quotations, wage
demands, interest rate charges, and so on. Everyone tried to stay ahead of
inflation by protecting his own reward; of course, not everyone succeeded
at this game, and in the end, most prices tended to rise. What started out
as demand inflation was transformed into supply or cost push inflation
whereby those who had market power began to demand higher prices or
higher wages, even when the demand was not excessive for their output
or service.
Cost push inflation is difficult to prove and remains controversial
especially to those who deny market power as an explanation for inflation.
Those who do favor the concept of cost push or sellers’ inflation would
find that the economic conditions in 1968 would support their contention:
Labor markets were tight with unemployment averaging about 3.6 percent;
the growth in labor productivity was leveling off while compensation per
hour was rising meaning rising labor costs; manufacturers’ usage of
capacity was beginning to fall; corporate profits were increasing, and so
on. Thus the right set of conditions were present to support the view that
cost push inflation had begun to take over from excess demand inflation
due to the inability or unwillingness to combat inflation when it first began
to threaten. Much has been written about these factors and we will return
to some of them in later discussions, but the point is that excess demand
may initiate a period of inflation but the effects on the economy do not
stop once the source of the excess demand has stopped. Unless fought at
the outset, inflation will begin to permeate the economic system and
become embodied into all contracts as it winds its way through the system,
and as always, those who are able to protect themselves wUl take actions
designed to do so while those who are less powerful will fall behind.
One theory that accounts for these shifts in inflation and attempts to
explain the elements of inflation is the theory of core inflation.^* Less
controversial than pure cost push inflation, core inflation still attempts to
account for inflation from the cost side as well as the demand side. In the
words of Otto Eckstein:
Core inflation [is] defined as the trend rate of increase of the price of
aggregate supply. All supply can be traced back to labor and capital,
the two primary factors of production. Labor costs are determined by
the rate of wage increase adjusted for the productivity trend. Capital
costs are set by interest rates, equity prices and the relative price of
capital goods. While there are numerous short-lived inflationary
elements in the economy, the underlying thrust comes from the
gradual rise in the price of labor and capital, the core inflation rate.
The temporary inflation forces are classified into two headings:
“shock inflation,” such as increases in oil and food prices, and
“demand inflation,” the classic pull of tight labor and product markets
on the price level. Total inflation is the sum of all three sources: core,
shock and demand.^
According to this theory, core inflation was virtually eliminated in 1965

but began to reappear thereafter as a result of military expenditures as it
accounted for 0.9 percent of the inflation rate in 1966,1.6 percent in 1967,
1.9percentin 1968, S.Opercentin 1969 and 4.1 percentin 1970. (See Table
4.2.)
Note how price expectations became increasingly important as an
explanatory factor in the inflation rate, along with the phenomenal increase
in the cost of capital and the less spectacular increases in wage gains. Also
important is the increase in interest rates as tight money in 1966 became
embodied into the rate stmcture. Shock inflation is less important in this
period; price shocks, from food and energy sources, would appear in the
1970s.
Of course demand inflation clearly shows up as the main factor in
inflation in 1966 and 1967, but note how excess demand becomes less
important after 1968 as a source of inflation. The initial price increases
due to excess demand were by 1968 incorporated into the long-term
expectations of households and firms. Once the short-term inflationary
factors have been transferred into long-term expectations, i.e., core infla¬
tion, they are likely to persist, and therefore are difficult to combat by
ordinary fiscal and monetary policies.
INFLATIONARY EXPECTATIONS
Thus one of the first economic consequences of the Vietnam War and
the military buildup was inflation. Not only inflation in the years in which
the military spending was initiated and piled on top of a smoothly function-
Table 4.2
Core, Shock, and Demand Inflation, 1965-70 (Percent Change)
1965 1966 1967 1968 1969 1970
Unit Labor Cost Trend (weight .65). 0.9 1.0 1.3 1.7 2.6 3.3
“Equilibrium" Wage Gains. 3.9 4.0 4.4 4.6 5.2 5.6
Actual Wage Gains. 3.4 4.4 4.9 6.2 6.7 6.7
Price Expectations. 1.5 1.7 2.0 2.4 2.9 3.4
Unemployment Rate (level). 4.5 3.8 3.8 3.6 3.5 5.0
Productivity Trend . 2.9 3.1 3.0 2.9 2.5 2.2
Actual Productivity Gains. 3.4 2.5 1.6 3.2 -0.2 0.1
+ Capital Cost Trend (weight .35). 0.0 0.9 2.1 2.2 3.7 5.6
Actual Rental Price of Capital. 2.2 6.4 0.1 6.8 11.1 5.6
Aftertax Cost of Capital. 5.3 3.8 -6.3 1.7 -1.3 -3.7
Prime Rate (level). 4.54 5.63 5.63 6.28 7.95 7.91
New High-Grade Corp. Bond Rate (level).. 4.54 5.44 5.77 6.48 7.68 8.50
Price Expectations. 1.5 1.8 2.2 2.7 3.3 3.9
Dividend-Price Ratio—S&P 500 (level).... 3.0 3.3 3.2 3.1 3.2 3.8
= Core Inflation Rate. 0.6 0.9 1.6 1.9 3.0 4.1
Shock Inflation Rate. 0.3 0.7 0.0 0.2 0.5 0,4

WPI—Farm Products. 4.4 7.3 -5.6 2.5 6.4 1.7
WPI—Fuels. 1.8 2.5 2.3 -1.1 2.0 5.3
Trade-Weighted Exchange Rate. 0.0 0.0 -0.1 -1.3 -0.1 -2.5
Social Security Tax Rate (difference). -0.002 0.014 0.003 0.001 0.004 0.000
Minimum Wage (S/hour). 1.250 1.250 1.387 1.583 1.600 1.600
Demand Irfliation Rate. 0.7 1.4 1.2 2.1 2.0 1.4

Capacity Utilization in Manufacturing
(level). 0.895 0.911 0.869 0.870 0.862 0.794
Unemployment Rate (level). 4.5 3.8 3.8 3.6 3.5 5.0
Consumer Price Index. 1.6 3.0 2.8 4.2 5.4 5.9
Source: Otto Eckstein, Tax Policy and Core Inflation, for the Joint Economic Committee, 96th
Congress, 2d Session (Washington, D.C.: U.S. Government Printing Office, April 10,1980),
28.
ing economy, but in subsequent years as well. Failure to combat it in the

early stages meant that inflationary expectations were allowed to develop
and influence the core rate of inflation, i.e., price increases became built-in.
This is the second economic consequence of the Vietnam War. Whereas
inflation was virtually nonexistent prior to 1965, it became increasingly
important as the war continued. According to the Gallup polls, 76 percent
of the people polled expected prices to rise in the coming year in 1965; in
1966 81 percent expected prices to go up in the next six months; and by
1967, even as price increases moderated, 46 percent of those polled
favored a wage freeze for the duration of the Vietnam War.
As inflationary expectations develop, people spend more time and effort

trying to stay ahead of inflation by arranging their affairs to avoid being
hurt by rising prices. Everyone tries to minimize his or her cash holdings,
households begin switching funds from savings to checking accounts only
when necessary, corporate treasurers are busy shifting funds between
short-term assets, and banks start demanding a premium for loans, and so
on. These actions require the preoccupation of firmsând households with
economic matters. The cost of activity designed to avert economic losses
caused by inflation are many as attention is diverted from productive
activity to the mere rearrangement of portfolios. The cost is referred to as
a “dead weight loss” by economists because it involves unproductive
activity.^ As inflation continued for more than a decade later, these infla¬
tionary expectations continued as well and became even worse in the
1970s. Over the years the sources of inflation changed, of course, but there
was no doubt that inflation became commonplace.
Still later, as a result of a decade of inflation, there developed a
reluctance to utilize whatever fiscal and monetary policy was necessary to
revive a sluggish economy because of fears of reviving inflation. This is
not to attribute the failure to employ macroeconomic policies to the
Vietnam War but only to indicate one of the consequences of the failure
to address price increases before they became part of the core inflation,
and that occurred in the year under scrutiny, 1966.
THE GUIDEPOST PROGRAM

The program of voluntary wage and price controls, called the
guideposts by the Kennedy administration that initiated them in 1962,
was another, related casualty that occurred in 1966. It can be argued
that the program would have collapsed anyway at some time, and that
is certainly a plausible deduction. Yet it did occur in 1966 when the
program became obsolete by conditions caused essentially by the
military expenditures on Vietnam.
Recall that the guidepost program was designed to combat inflation
by proposing that wages should rise according to the average increase
in productivity experienced by the entire economy. That is if the
average increase in labor productivity in a period were 3.2 percent,
wages could rise by 3.2 percent. Labor costs would not increase, hence
there would be no pressure to raise prices or profit margins. The
productivity gains would be shared equally by all. An argument can be
made here that supports the view that the guideposts would have
collapsed anyway. Why would organized labor favor a policy that kept
labor’s share of the output constant when labor’s productivity was increas¬
ing? Many labor leaders and firms were opposed to the whole idea from
the start, of course, and many more could have been expected to join them
in time.
Again, however, this was an educational program designed to teach both
workers and firms of the benefits to the nation of limiting their demands
to what productivity warrants. The Council of Economic Advisors stressed
that the guideposts were just guides, and there were many exceptions and
allowances to the general rules. The guidepost policy was voluntary and
lacked sanctions but did manage to avoid the bureaucracy of more formal
types of incomes policies.
Whether they restrained wages and prices according to the formula is
debatable, but at least one researcher found that the program did work to
some extent. After examining the evidence, John Sheahan concluded,
“They add up to a convincing case that wage behavior in manufacturing
became more restrained in the four years following presentation of the
guideposts'than it had been in the preceding decade.”^ The numerical
estimates of just how effective appear rather modest, from 0.8 percent to
1.6 percent for combined wage and price restraint in the period 1962-65.
However the results must be considered in light of the general price
stability over the period.
In 1966 this initial attempt of government to intervene in the wage and
price decisions, albeit on a voluntary basis, began to unravel. Once food,
housing, and other services prices rose, by 5 percent, 2.4 percent and about
2.6 percent, respectively, from 1965 to 1966, and the rate of growth of
productivity began to diminish, asking workers to adhere to the guideposts
would have meant asking them to accept a decline in their real wages.
Organized labor joined with firms to declare the guideposts unworkable
and obsolete. The end really came in midsummer of 1966 when the airline
machinists strike was settled by wage and fringe benefit increases of over
5 percent, far in excess of the guideposts. Other collective bargaining
agreements in other industries indicated that the wage increases granted
in 1966 were substantially higher than in the period 1961-65 with in¬
creases in 1966 averaging 4.4 percent where they had been 3.2 percent in
1964 and 3.8 percent in 1965.*
Gradually Ae guideposts were ignored as violations of their provisions
became routine. The administration continued to jawbone for wage and
price restraint but to no avail.^ The guideposts simply faded away—
another casualty of inflation and the Vietnam War.
THE WAR ON POVERTY
The War on Poverty was initiated in the Kennedy administration at the

urging of the Council of Economic Advisors (CEA) led by Walter Heller.
Robert Lampman, a staff economist, had studied the problem and convinced
Heller and through him, the president, that the New Frontier had failed to
address this national problem. President Kennedy instructed the CEA to
study the problem further and develop programs to combat poverty, pre¬
sumably in time to make it a campaign issue in 1964.*° The political wisdom
of making poverty a campaign issue did not have to be faced, however, and
the whole question was passed on to the Johnson administration.
When asked if the CEA should continue its work on poverty analysis
and program development, Johnson, the populist, declared, “Fm inter¬
ested. Fm sympathetic. Go ahead. Give it the highest priority. Push ahead
full tilt.” In his first State of the Union address he proclaimed, “This
administration today, here and now, declares unconditional war on poverty
in America.”
The funds allocated for the task never did match the rhetoric, but The
Equal Opportunity Act that was passed in August of 1964 did recognize
the changing character of poverty and did incorporate new approaches to
its elimination. The Act provided for a series of programs, some ex¬
perimental and others traditional, targeted at specific groups of disad¬
vantaged with the goal of lifting people out of poverty by providing them
the means and the motivation to seek self-improvement. In effect the
federal government bypassed the state and local governments to reach
directly to certain agencies and communities to administer the programs
directly. These community action programs included Head Start, VISTA,
Job Corps, Neighborhood Youth Corps, Family Planning, Legal Assis¬
tance, College Work-Study, and many others.
Evaluating the success of these short-run programs has proved extreme¬
ly difficult, and whether a longer-term commitment to them would have
provided the necessary information to make a judgment must be left to
others to decide.** The point here is that such a long-term commitment to
the elimination of poverty did not exist, and the first signs of retreat
occurred in 1966. One look at Table 4.3 is sufficient to show the difficulty
of funding the war on poverty while conducting the war in Vietnam, and
the data illustrate the case that butter was sacrificed for guns.
The war on poverty was fought with insufficient funds, and this lack of
resources was evident right from the beginning. Less than a billion dollars
was allocated in 1965 to the Office of Economic Opportunity (OEO), the
The Changing Economic Structure. 1966 61
Table 4.3
Office of Economic Opportunity Budgets, 1965-68 (In Millions of Dollars)
Fiscal Budget Authorization Appropriation

Vear Request
1965 $ 947.5 $ 947.5 $ 800.0*

1966 1500.0 1785.0 1500.0
1967 1750.0 1750.0 1687.5
1968 2060.0 1980.0 1773.0
Approfwiation for less than a full year.
Source: Sar A. Levitan, The Great Society's Poor Law: A New Approach to Poverty (Baltimore:
Johns Hopkins Press, 1969), 93.
agency set up in the White House to administer the programs. The

opportunity to secure more funds and expand the antipoverty programs
from a liberal and receptive Congress was gradually lost as President
Johnson surrendered the initiative.
It is evident that the administration did not pursue the poverty program
vigorously for it cut the budget request of OEO for the fiscal year 1966
from $3.4 biUion to $1.75 billion. Thus even before Congress forced the
president to cut domestic spending in order to secure funding for the
Vietnam War, the administration was willing to cut antipoverty spending
on its own. In short, the administration began to decrease its commitment
to fighting poverty in 1966. Johnson apparently did worry about losing his
“passport to historical immortality.” As he declared later, “Losing the Great
Society was a terrible thought, but not so terrible as the thought of being
responsible for America’s losing a war to the Communists. Nothing could
possibly be worse than that.”*^
In the following year, OEO reduced its request for funds by nearly a
billion dollars in a movement of self-inflicted restraint. Congress also
helped to restrain OEO as it voted more and more varied programs without
increasing the funds necessary to carry them out. Thus the funds had to be
spread over more and more programs, robbing them of their effectiveness.
These actions of the administration and Congress continued until the early
1970s when the entire antipoverty program was slowly dismantled. With
the dismantling went the entire community action approach to fighting
poverty, which the Equal Opportunity Act had incorporated. The ex¬
perimentation appeared to be over, and a reversion to more traditional
approaches would soon follow.
In summary, the antipoverty program that was initiated with such
fanfare became an early casualty of the Vietnam War. Even before it was
necessary for budgetary reasons, the Johnson administration became

preoccupied with the Vietnam War and neglected the other war. In reducing
its request for funds for fiscal year 1966, the administration signaled its
readiness to retreat even before the enemy, poverty, was encountered. True
the whole exercise called attention to the problem of poverty amidst
affluence, and other programs, such as Medicare, were developed as a
result, but it still remains that more could easily have been accomplished
were it not the case that Johnson became obsessed with the situation in
Southeast Asia. In the end the real casualty was the commitment to do
anything to fight poverty in the United States; it would later become
possible to assert that we had tried to fight poverty through direct govern¬
ment action, and the fight was lost. In this view it follows that the federal
government should refrain from attempting to alleviate poverty and recog¬
nize the Biblical admonition that the poor will always be with us.
REVOLUTION OF RISING EXPECTATIONS

The mid-1960s also witnessed the explosion of the black ghettos. Riots
broke out in Watts, Newark, Chicago, Detroit, and many other cities. They
began in 1965 and increased dramatically in 1966 and 1967. The causes
of these riots were many and varied, but according to the Kemer Commis¬
sion appointed to investigate them, many of the causes were economic in
character—inferior housing, education, unemployment, and lack of health
care and sanitary conditions. Indeed the Kemer Commission concluded
that “Our nation is moving toward two basic societies, one black, one
white—separate and unequal.”^^ White racism was the cause.
The civil rights movement for political power, for access to public
facilities, and for an end to racial discrimination in every area, had
begun in earnest in the early 1960s and had raised the expectations of
blacks that years of discrimination could be reversed. Now the disil¬
lusionment with the slow progress being made in many areas was
coming to the surface.
Under these conditions, the Equal Opportunity Act, with its emphasis
on community involvement in identifying and solving problems, would
appear to be tailor-made to address the problems of the black community.
It did not work out that way. The OEO found itself in the middle of the
black militants and the white backlash. The black militants found that the
programs did not go far enough and stopped cooperating with the OEO,
while the white power stmcture feared and resisted black involvement and
advancement. Many black groups continued to work with the OEO, of
course, and the OEO itself recognized the problems and tried to work
around them.
The civil rights activists, however, became openly hostile to the OEO and
withdrew their support. Programs that became too critical of whites, such as
the antiwhite plays of LeRoi Jones (who has since changed his name to Imamu
Amiri Baraka), caused great consternation in the white community; and
programs to increase the literacy and political awareness of poor blacks were
not funded at all due to political pressure from white groups. In the meantime,
blacks/e/r that they were disproportionally represented on the battlefields of
Vietnam since they were being drafted at a higher rate than whites, many of
whom were in college classrooms. The actual count of Viemam veterans does
not support the contention that blacks were disproportionally represented in
the war, the data suggest that they were proportionally represented at ap¬
proximately 10 percent. Nevertheless the perception of overrepresentation was
evident and frequently voiced, and in the end, facts cannot compete with
emotional responses. So in this case, perceptions were important because they
could and did influence behavior.
It would be naive to suggest that these events were not connected by
black leaders, especially so when the funds for the war on poverty quickly
began to decline after the fanfare in 1965. Whatever expectations were
raised by the “war” on poverty were soon dashed by the war 10,000 miles
away. Consider the reflections of Martin Luther King:
A few years ago there was a shining moment in that struggle. It

seemed as if there was a real promise of hope for the poor—both black
and white—through the Poverty Program. There were experiments,
hopes, new beginnings. Then came the build-up in Vietnam and I
watched the program broken and eviscerated as if it were some idle
political plaything of a society gone mad on war, and I knew that
America would never invest the necessary funds or energies in
rehabilitation of its poor so long as adventures like Vietnam continued
to draw men and skills and money like some demonic destructive
suction tube. So I was increasingly compelled to see the war as an
enemy of the poor and to attack it as such.'^
The betrayal of these expectations could have entered into the equation
that justified the rioting in 1966 and 1967. It would be equally naive to
suggest that the cause of the riots was the decline in funding of OEO. Years
of discrimination were sufficient to explain the uprisings in the ghettos,
and many local concerns were germane to particular instances.
Yet the betrayal of rising expectations, some of which may have been
created by the war on poverty, cannot be dismissed as a possible cause of
the inchoate revolution in the black communities.'^ To some unspecified
extent the war in Vietnam and the decline in commitment to the improve¬
ment of the nation’s poor, so many of them black, must be included as a
cause of the social unrest in the ghettos. That these events converged in
the turning- point year of 1966 may well be coincidental, but it is inserted
here as a reminder of the many ramifications of military adventures at the
expense of domestic matters.
THE SLOWDOWN IN PRODUCTIVITY GROWTH

One of the fascinating and puzzling developments that occurred in the
mid-1960s was the decline in productivity growth. Up to the present, no
satisfactory explanation has been provided for the observed fall in the rate
of growth of this significant magnitude for the U.S. economy.'^ In fact too
many explanations have been offered, which invariably is an indication of
confusion rather than enlightenment. The range of determinants runs from
too much government regulation or tax provisions affecting capital invest¬
ment and lack of expenditures on research and development, to the change
in workers’ attitudes toward work, and the shift from manufacturing to
service industries. That no one variable or even groups of variables can
account for the decline is evidence that the explanation is a complex one.
Of course, the measurement of productivity is a difficult task, the more
so the more aggregate the data. Everyone admits the problems of mea¬
surement, but the data, however measured, do support the claim that
something happened to the growth of productivity in the U.S. economy.'*
It is not the purpose of this section to enter into the debate nor to provide
a complete list of the possible explanatory factors. The data in Table 4.4
are supplied as evidence that something happened to productivity, but no
claim for accuracy is implied and no detailed explanations are attempted.
There are many ways to measure productivity, and the means shown in
Table 4.4 is just one of them; however, any measurement of productivity
would reveal the same trends if not the same numbers. The decline in
productivity growth actually started in 1965 when the rate of growth of
nonfarm business output per hour fell from 3.9 percent to 2.5 percent and
then to 2.1 percent in 1966. However the rate of growth of productivity,
being procyclical, picked up again in 1967 and then fell precipitously in
1973 and 1974 (when it became negative by 2.2 percent). These dates also
identify the business cycle in the United States. When output increases in
Table 4.4
Productivity in the Business Sector, 1947-85 (Average Annual Percent
Change)
Period Output per Hour of All Persons

Business Nonfann Business
Sector Sector
1947-1965 3.3 2.7

1966-1972 2.0 1.7
1973-1979 0.6 0.5
1980-1983 1.2 1.2
1983-1988P 1.7 1.4
p = preliminary
Source: Calculated from data in the Economic Report of the President, 1989.
the upswing, productivity growth tends to increase as well since labor is

relatively fixed; when output falls, as in 1973-74, productivity growth
tends to fall as well since labor is retained for some time before layoffs
occur. Hence the growth of productivity varies directly with the business
cycle. From 1973 onward the rate of growth of productivity has remained
below historical standards and even in the recovery years of the late 1980s,
the rates of growth were below those of the early 1960s. Clearly produc¬
tivity growth has fallen relative to the past record and that decline started
in earnest in the mid-1960s.
Again the mid-1960s stand out as a period when the economy changed
in a fundamental way—in this case in an essentially unexplained decline
in the rate of growth of productivity. It is an important measure since
productivity is perhaps the most important indicator of a nation’s ability
to provide a rising standard of living for its residents and in the 1990s, an
indicator of its ability to compete in the international market. For the
standard of living to rise, people must produce more and more with their
resources, otherwise the division of less goods among more people must
result in a decline. Beginning in the 1980s, when the United States became
a debtor nation, the situation became even worse since to repay the debt,
some of national output had to be paid to foreigners which means less is
left over for domestic residents. If productivity is falling, there will be even
less left over, and hence a slower increase in the standard of living is
inevitable.
There is no question of the importance of productivity but there is a
question of how much, if any, can be attributed to the Vietnam War. Here
the answers are far less reliable and problematic. It might be argued, for
instance, that the best brains were enticed by the military establishment
and hence innovations in the productive process or in the introduction of
new goods were foregone in favor of superior military weaponry; or it
might be argued that most of the R & D funds were garnered by the military
with similar results. Perhaps inflation and high interest rates discouraged
capital investment, or tight labor markets encouraged sloth. It is doubtful
if any of these or other variables can be directly linket^tothe Vietnam War,
and thus the war as a causal factor in the decline in productivity must
remain tenuous and speculative. All that can be said with any degree of
certainty is that something happened around the time the Vietnam War
escalated, but whether that was coincidental or not is unresolved; all that
is necessary here is to establish that somewhere about 1966 the economy
experienced a severe blow to one of its most significant ingredients, and
that blow represented a sharp break with the past in that productivity
behaved erratically and failed to recover even as the economy boomed. In
the 1970s another sharp break occurred around 1973, but whether the two
breaks are related or due to the same set of factors remains to be estab¬
lished. The situation in 1973 is further complicated by the emerging energy
problems that compound the difficulties of explaining the drop in productivity.
DECLINE OF LIBERALISM AND FISCAL POLICY

The financing of the Vietnam War delivered a major blow to liberalism
and accelerated the drift toward conservatism. Keynesian countercyclical
fiscal policy, barely becoming acceptable, and liberalism, barely recrudes-
cent, were early casualties of the war. Indeed it is almost possible to assign
a date to the decline of liberalism and the fiscal policy that was identified
with it.
Again the year 1966 registered the disillusionment with fiscal policy
and the inability of the federal government to manage the economy with
the failure to enact a tax increase. The economic consequences of that
failure have already been outlined, but it is important to reiterate that the
administration was well aware of the need for a tax increase but allowed
political factors to overrule economic imperatives. As a result, fiscal policy
“veered off course,” wrote Arthur Okun, adding.
The January 1966 budget marked the first defeat of the new
economics by the old politics since Kennedy’s decision in August
1962 to delay a tax-cut recommendation. Even more important, the
new economics could not pass its crucial test because of the defense
upsurge and the political paralysis of tax rates. The new economists
had insisted repeatedly to their critics that the policy of fiscal stimulus
would be turned off in time and would be amended to head off
inflation when the economy did reach full employment. For politi¬
cal—not economic—^reasons, the skeptics won the debate.*^
Walter Heller, writing of this same period noted,
One wistfully concludes that were it not for Vietnam, early 1966
would have found us comfortably contemplating the form and size
of the fiscal dividends needed to keep us on the road to full employ¬
ment, rather than considering what further actions might be needed
to ease the strain on our productive capacity and deal with the vexing
and perplexing problem of inflation.^®
Thus in a few short years, the belief and trust in the federal government’s
ability to manage the economy went from buoyant confidence to cynical
skepticism.' The new economics became defensive and Keynesian
economics soon was put in quotation marks to register an implied disap¬
proval. Critics and some advocates had always maintained that stimulating
an economic system was easier than applying the brakes, that managing
recessions was easier than managing prosperity.
Now the nature of the bias was exposed and macroeconomic policies
were asymmetrical. It did not matter that the fault lay more with politics
than economics; it is easy for conservatives to condemn what they had
opposed anyway. Yet since some controls over the economy were essential,
monetary policy was pushed into the forefront to occupy the vacuum.
Favored by conservatives anyway, monetary policy was now elevated by
default to the principle means of management.
With its acceptance came also the primary emphasis on securing price
stability and maintaining orderly markets, for monetary policy is best
suited to minimize price fluctuations that upset asset values. So the
problems of portfolio managers were given precedence over other societal
problems, many of which lost funding or were forced to seek solutions by
other means, or were made to wait for another time.
Clearly the movement toward monetary policy involved much more
than the choice of alternative instruments to control the demand side of
the economy. More important was the not very subtle shift in philosophy
that favored the protection of asset values of higher income classes to the
redress of social ills that were directed toward the less fortunate members
of the society. As we shall see, this shift away from fiscal policy to
monetary policy was to outlast the Vietnam War and was accompanied by
the decline in the zeal to correct social problems through government
actions.
DESTABILIZING FINANCIAL INNOVATIONS . >

Aside from the shift toward monetary policy, the credit crunch of 1966
fostered the growth of innovations in the banking and financial sector.
These innovations have resulted in a decline in the effectiveness of
monetary policy and/or a shift in who is affected by monetary policy. In
either case they have made the conduct of monetary policy more complex,
more difficult, and in the end more destabilizing.
Whenever there are barriers to the conduct of business as usual, such as
slow monetary growth or rigid regulations in the face of dramatic pres¬
sures, there is the invitation to circumvent these conditions by innova¬
tions.^^ Thus, for instance, monetarism, or control over a monetary
aggregate, is likely to be self-defeating; so too are inflexible regulations
that become too stringent for the prevailing conditions.
The period under review, 1966-69, was a good example of these
tendencies. The slow growth of the money supply—the credit crunch—
combined with the interest rate ceiling imposed by Regulation Q, set in
motion the attempts to avoid the problems caused by the credit crunch and
any repetitions of it thereafter. Several financial innovations were ac¬
complished to foil any attempt by the monetary authorities to restrain the
actions of money market participants. Recall that in 1966, interest rates
rose above those set by Regulation Q (that set the maximum interest rate
that could be paid on time deposits) and funds flowed out of institutions
affected (disintermediation) such as the thrifts; with higher mortgage
interest rates, the housing industry was crippled. With the demand for
funds high and the supply low, banks sought ways to satisfy the demand
and satisfy their long-time customers as well.
Unable to avoid Regulation Q as they had in the past by issuing
certificates of deposit (CDs) at market interest rates, banks chose to avoid
it altogether by forming one-bank holding companies. Banks could now
raise funds by issuing commercial paper whose market interest rates
escaped the control of the Federal Reserve. This avenue of escape was
partially closed later, but the ability of the Federal Reserve to control
broader measures of credit conditions, e.g. M2 or M3, was severely tested,
and the fragility of the banking system was increased as these bank holding
companies increased the debt to equity ratios over that of other sectors of
the banking system.
In another development, banks established branches offshore where
deposits are regulated by the country of location not the Federal Reserve.
Many of these branches were merely small offices or shells for that is all
that is needed to avoid the U.S. regulations. Furthermore offshore banks
also borrowed Eurodollars to lend to foreign affiliates of U.S. firms and
both escaped Federal Reserve control. Of course, large banks in the United
States also borrowed Eurodollars that were free of reserve requirements
until 1969 and also escaped controls.
In a related development, foreign banks set up additional branches in
the United States and began lending to U.S. firms from funds raised in
Europe. These deposits were not recorded in U.S. monetary data at the
time and thus were not considered in determining monetary policy nor
in gauging its success or failure. Clearly large firms and large banks
found it relatively easy to escape the stringent monetary policy of the
period.
Another means to avoid reserve requirements or interest rate ceilings
was found in repurchase agreements and in the federal funds market. In a
repurchase agreement, the bank sells a government security to a firm or
agency of government for a short period with the promise to buy it back
at a stated price that includes interest. The buyer gains in the form of
interest on what are essentially demand deposits (not permitted at the time)
since the sales proceeds are redeposited in a demand deposit. The bank
gains as it has use of the funds over the period. Similar results appear in
the federal funds market where banks borrow from each other on an
unsecured basis when short-term funds are needed.
Finally in an effort to avoid budgetary deficits and protect selected
markets like housing and agriculture from the ravages of high interest rates
experienced in 1966, the federal government through various agencies
began to intervene in financial markets to increase the flow of funds and
reduce interest rates to these favored markets. While the housing and
agricultural markets benefit from government intervention and protection,
monetary policy was made more difficult since some markets were now
shielded from the effects, or the policy had to be pursued with greater
severity to have any effect.
What is true of off-budget items is true in general as a result of financial
innovations—monetary policy has been either circumvented or made less
effective. While not due solely to the economic conditions surrounding
1966 (after all many of these avenues were available prior to that period).
much of the impetus for developing them can be traced to the desire to
avoid a repetition of the credit conditions in that year.
CHALLENGES TO INSTITUTIONS
The decline in liberalism was helped along by an intransigent president
who refused to yield his neo-New Deal dream to the 'war he essentially
elevated to a crusade. When his promise of guns and butter did not
materialize the way was open for an alternative vision. If government could
not or would not solve problems perhaps it was causing the problems in
the first place. Gradually this view, mixed as it was with the identification
of Johnson’s brand of liberalism with the war, obtained more and more
credence and more and more adherents. Critics of an active federal
government were always present and now they had some evidence to
support their case.
Government was not to be trusted. Even if its goals were laudable, it
could not efficiently accomplish them and could even make them unat¬
tainable. Better to leave the solving of problems to the private sector.
Moreover, take as much of the discretionary powers away from public
officials as possible and require that they obey rules. Hence the rise of
monetarism, which suggested that monetary influences were the most
important in the economy, and control over the money supply should be
the sole aim of the authorities. Even here, the best method to achieve
monetary control was to require that the money supply grow at a steady
rate—a rule. In fiscal policy, the government ought to balance its budget
annually—another rule. Rules replaced discretion in this conservative
ethic and although never totally accepted, many were heavily influenced
by the basic message—distrust in the ability and the efficacy of govern¬
ment to manage the economy.
This distrust of government, again fostered by the deceptions, lies, and
misrepresentations of the war, was to linger for the next decade. The Nixon
administrations were only to add to the already evident disillusionment
with the actions of public officials and with government in general. This
attitude is always present with reference to politicians, but was now being
extended to cover all governmental attempts at managing its affairs.
Distrust in the military followed in much the same way. The conduct of
the war with its wildly inaccurate forecasts of military requirements, with
its inept tactics, and, as the war evolved, with its declarations of victories,
ludicrously expressed by body counts, and so on, did little to enhance the
reputation of the military. Nor did it further the cause of those who favor
military solutions as victory eluded the superior forces of a great nation.

Eventually a “Vietnam syndrome” emerged in which further adventures
and exploits of this kind were prohibited by the experience of the war in
Southeast Asia.
Perhaps these challenges would have been mounted in time anyway but
were hastened by the atmosphere created by the war. They are, after all,
not novel ideas but have been expressed many times in different ways. In
this period they may have emanated from and were characterized by
frustration, generated by the war.
In a similar vein, there were emptions in other parts of the society that
reverberated on existing institutions, and it seemed to many that the social
fabric was being tom apart. One of these was the accord between organized
labor and management that ensured a long period of industrial peace. After
the end of World War II there was a struggle between labor and manage¬
ment for control over the workplace. Organized labor wanted to protect
and extend its gains made in the preceding decade, while management
wanted to reverse those gains and return to the relationships that existed
prior to the depression. Put simply, the accord reached allowed labor to
control the labor side through the right to bargain collectively, to set
membership conditions, the collection of dues, and so on; management
maintained control over the workplace, and over investment and produc¬
tion decisions.
The accord lasted as long as the parties represented the groups they served.
Corporate power did not go unchecked but small businesses were hardly in a
position to challenge the dominance of large firms. However organized labor
did witness an erosion of its influence. Union membership declined steadily
from the end of World War 11 from approximately 35 percent of the nonagricul-
tural labor force in 1945 to 23 percent in 1966. Over that time period too many
jobs were created in the nonunion sector for those who were not tied to the
labor union movement. These jobs were in the service sector and were filled
by women, minorities, and the young. These groups, long ignored by the labor
union movement, now found their voices, and they began to object to the
conditions that relegated them to low-paying, dead-end jobs. The feminist
movement began to call attention to the job and wage disparities; the civil
rights movement forced these and other issues on the nation; and the youth of
the nation, faced with these labor market conditions or military service in
Vietnam, often chose to escape the country or to escape the dismal prospects
by resorting to crime or to dmgs.
Meanwhile the tight labor markets, together with the gains made in the
form of social reforms—unemployment compensation, social insurance—
permitted labor to feel more independent of past restraints.^^ The freedom

found expression in additional strikes, in the willingness to change jobs,
or in other challenges to corporate power.
This, in brief, describes the breakdown of the old mles of the game with
regard to the proper place of various groups and the proper roles they were
supposed to play. From this period on it would be impossible to ignore the
demands of those previously excluded from implicit'or explicit agree¬
ments. The labor movement was fragmented and would begin to sacrifice
power in its attempt to stabilize its eroding base. Later the continuing
growth of the service sector would exacerbate organized labor’s problems.
In this period, it is sufficient to note that challenges were being made to
both organized labor’s traditional role and representation and to the
traditional vision of corporate control and power.
One last consequence of the war to be considered was the fragmentation
of the labor movement. Organized labor’s response to the war was am¬
biguous, to put it kindly. The leadership AFL-CIO, led by George Meany,
supported the war and urged victory, sometimes inferring at any cost.
Organized labor was largely missing from the ranks of those opposed to
the war, and its absence was noted with much regret. Individual unions,
and other union leaders, such as Walter Reuther, did object to the war and
voiced concerns over the morality of war-induced prosperity, even if more
employment was created as a consequence. Many felt that the prosperity
brought no lasting gains to labor anyway.
Perhaps the wounds of the divisions opened up in this period have healed
over time, as other concerns have replaced those emanating from a
war-tom society, but who is to document the respect lost for organized
labor by the youth of the time who sought allies and support from those
who had been regarded as traditional sources of dissent?^
OTHER DEVELOPMENTS IN OR AROUND 1966
Capacity Utilization
The year 1966 also saw the peak of manufacturers’ use of their
capacity. Manufacturers were using an increasing amount of their
facilities from 1962 to 1965 going from a rate of utilization of 81 percent
to 90 percent in 1965. In the peak year of 1966, the rate climbed to over
91 percent but it fell quickly and has never returned to this rate up to
1988, where it stood at nearly 84 percent.
Since 1966, then, the U.S. economy has been saddled with excess
capacity, and unemployed capital is just as much an economic loss as
unemployed labor. Not all industries experienced the same decline as did
total manufacturing, of course, and some industries simply varied capacity
usage over the business cycle. Still over the years since 1966 the trend is
unmistakable—U.S. firms are using less of their facilities, particularly in
the nondurable manufacturing areas.
Whether this development is related to the decline in productivity is not
clear but the possibility does exist. It is more likely to be related to the
topic of the next section—corporate profits. Neither is it clear that the
Vietnam War is a logical explanation for the trend. In either case, the
existence of excess capacity is undesirable for any economy and especially
for one that is struggling with economic growth. Business firms are
unlikely to invest in the latest capital equipment, likely to be more
productive, when they already have the capacity to meet demand; when
demand is sluggish, as is the case for a stagnating economy, the situation
is even more acute. But the failure of investment to grow not only means
a stagnating economy on the demand side but a slow growing one on the
supply side. Without growth, fewer jobs and opportunities are created,
productivity declines, and the standard of living will not increase. The U.S.
economy can afford none of these conditions in the 1990s when it must
grow to repay its debt in a very competitive world. Indeed the decline in
the manufacturing sector is clearly reflected in the decline in capacity
usage as the rest of the world has forced many U. S. firms to retrench and
idle their equipment.
Corporate Profits
Bowles, Gordon, and Weisskopf wrote of the decline in corporate profits
after 1966 in terms of the decline in the corporate sector’s ability to control
economic agents with whom it deals. They pointed to the decline in the
terms of trade, to the increase in financial security and hence independence
of workers, and to the increase in the cost of raw materials as responsible
for the decline in profits and for the erosion of control and power of
corporations in the post-1966 period.^"*
No one would quarrel with the explanation of the decline in corporate
profits as a result of the increases in the cost of raw materials—oil for
example. Nor would anyone contest the possible fall in profits due to
increasing competition from abroad and the decline in the terms of trade.
Profits would be expected to fall under these circumstances, and these

remain plausible explanations for the post-1966 trend. The evidence that
labor has become more secure and thus more independent of corporate
domination is possible but less defensible, and that explanation must be
put aside for the time being.
The existence of excess capacity demonstrated in the previous section
accounts for much of the cyclical fluctuations in corporate profits. The
higher the rate of capacity utilization, the greater is output and hence
overhead costs are spread over more units and profits are higher and vice
versa. Yet even after removing the effects of excess capacity, Martin
Feldstein and Lawrence Summers found that the rate of profit had begun
to fall in the 1965-66 period.^^
The definition and measurement of corporate profits is not as
straightforward as would appear. Several questions arise: how to treat
interest payments; how to adjust for inventory valuation adjustments and
capital gains; how to handle depreciation allowances; and what measure¬
ment of capital stock to use are just a few of the difficulties involved. Using
different measurements from Feldstein and Summers, William Nordhaus
reached different conclusions: “Over the postwar period the share of
measured profits has declined in a dramatic way.”^ In the longer run, he
expected the share of profit to depend upon policy measures designed to
affect the share and the state of the economy.
The issue is a complex one and cannot be discussed fully here. The point
is that profits, at least in the corporate nonfinancial sector, declined in the
period under review and did not recover within that period. Indeed,
Nordhaus began his article with this statement: “By most reckonings
corporate profits have taken a dive since 1966.”^^ The variety of reasons
given for the decline in profits and the various forecasts offered
demonstrate again the complexity of the issue but one conclusion stands
out: corporate profits declined on or about the year 1966. Without attempt¬
ing to explain the evidence, or even to present it with all the detail that
would be required, we will simply accept the fact and note that it concurs
with other evidence that suggest that 1966 was a pivotal year for the U.S.
economy.
Before leaving the topic, it might be interesting to see what the simula¬
tion models tell us about corporate profits in the early years of the war.
Without the war, corporate profits would have been even less; in either
model, corporate profits before taxes would have been less than the actual
record (or alternatively stated, the war boosted corporate profits). For 1966
through 1969, for example, the 0MB model (no war, everything else
constant) shows that corporate profits would have been less by $8.4 billion
in 1966, $11.3 billion in 1967, $11.3 billion in 1968, and $2.0 billion in
1969. Using the WEFA model (no war, adjustments made to return to
normal paths) the data for the same period are $2.6 billion in 1967, $5.5
billion in 1968, and $3.0 billion in 1968, but for 1969, corporate profits
would have been larger by $11.5 billion.^* The Wharton economists noted
that this result was accounted for by the labor market conditions caused
by the war. The war reduced the unemployment rate, created a tight labor
market, and shifted the income shares in favor of wages and away from
profits. Without the war, profit shares would have recovered in the WEFA
model by 1969 and been greater than the actual record, and nearly so in
the OMB model.
SUMMARY AND CONCLUSIONS

The enumeration of developments surrounding the year 1966 clearly
reveals that some fundamental changes occurred in the structure of the
U.S. economy. These changes were to affect the functioning of the
economy for years after the events that precipitated them. Whether or not
the changes would have occurred anyway is debatable, but it is undeniable
that some of them can be traced to the Vietnam War. The Vietnam War
created strains in the economy, and economic agents reacted to them, and
altering the way the economy works or is perceived to work in the process.
There is no way, of course, to chart all the changes that occurred nor is
it possible to understand all the implications of those changes. How many
plans were altered, how many decisions postponed, how many actions
were taken that would not have been necessary in other times, cannot be
known. Some changes, for instance, were temporary and omitted from the
foregoing discussion. There was for example, a dramatic increase in the
inventory-sales ratio in 1966 as firms bumped against capacity, and the
economy was booming; there was also an upsurge in direct foreign
investment in the United States perhaps prompted by the same booming
economy. These changes were reversed in later years but in the meantime,
how many plans were altered as a result of them? Perhaps a domestic firm
was discouraged from investing in its industry by the competition coming
from foreign investment. There are no ready data for actions not taken.
In the end we are forced to record only those events that resulted in actions
taken that were measurable. But these actions resulted in the subtle transfor¬
mation of the economy and forced us to enter into uncharted areas. The old
rules of the game were discarded, and the new rules were not yet available.
NOTES
1. The year 1966 was also seen as a turning point for the U.S. economy by Samuel
Bowles, David M. Gordon, and Thomas E. Weisskopf in Beyond the Waste Land (New
York; Anchor/Doubleday, 1983) and in my U.S. National Economic Policy, 1917-1985
(New Yoiic: Praeger, 1987).
2. In the words of the Council of Economic Advisors, “A major economic ac¬
complishment of 1966 is that the United States made essentially full use of its productive
capacity. Gone were the chronic underutilization of resources, general excess supply in
labor markets, and wastefully idle industrial capacity that had blemished the performance
of the economy for a decade.” Economic Report of the President, 1967,42; later on page
74, “The year 1965 marked the end of a long period of price stability.”
3. U.S. Congress, Joint Economic Committee, Wharton Econometric Forecasting
Associates, “A Study in Counter-Cyclical Policy,” in Economic Stabilization Policies:
the Historical Record, 1962-76,95th Congress, 2d Session, November 1978,96. For the
view that Vietnam War expenditures cannot be blamed for the inflation beyond 1967, see
John F. Walker and Harold G. Vatter, “The Princess and the Pea; or. The Alleged Vietnam
War Origins of the Current Inflation,” in the Journal of Economic Issues 16 (June 1982):
597-608. For a contrary view see the comment to this article in the same Journal by
Charles B. Garrison and Anne Mayhew,“The Alleged Vietnam War Origins of the Current
Inflation; A Comment,” Journal of Economic Issues 17 (March 1983); 175-86; and the
immediately following reply by Walker and Vatter, “Demonstrating the Undemonstrable:
A Reply to Garrison and Mayhew,” 186-96. See also the unpublished paper of Tom
Riddell, “The Vietnam War and Inflation Revisited” presented at the Fifth Annual
Presidential Conference Lyndon Baines Johnson: A Texan in Washington at Hofstra
University, Hempstead, New York on April 10,1986.
4. This is primarily the work of Otto Eckstein. See his Core Inflation (Englewood
Cliffs, NJ.: Prentice-Hall, 1981).
5. Ibid., V.
6. For an excellent guide to inflation see, Robert M. Solow, “The Intelligent Citizen’s
Guide to Inflation,” The Public Interest 38 (Winter 1975): 30-66.
7. John Sheahan, The Wage-Price Guideposts (Washington, D.C.: Brookings Institu¬
tion, 1967), 90.
8. Economic Report of the President, 1967, 81.
9. See Okun, The Political Economy of Prosperity (New York:W. W. Norton, 1970),
76-78.
10. For a detailed history and development of the war on poverty see Sar A. Levitan,
The Great Society’s Poor Law: A New Approach to Poverty (Baltimore: Johns Hopkins
Press, 1969). An analysis of the success of poverty programs can be found in, Robert D.
Plotnick and Felicity Skidmore, Progress Against Poverty: A Review of the 1964-1974
Decade (New York; Academic Press, 1975).
11. For an excellent review of poverty in the United States see Isabel V. Sawhill,
“Poverty in the U.S.: Why is it So Persistent?” Journal of Economic Literature 26
(September 1988): 1073-19.
12. Quoted by Doris Kearns, Lyndon Johnson and the American Dream (New Yoik:
Harper & Row, 1976), 259-60.
13. Report of the National Advisory Commission on Civil Disorders, chaired by Otto
Kemer (Washington D.C.: Government Printing Office, March 1968), 1.
14. Levitan, Great Society’s Poor Law, 87.
15. Martin Luther King, Jr., “Beyond Vietnam,” in Vietnam and Black America, edited
by Clyde Taylor (New Yoric; Anchor Press/Doubleday, 1973), 81. Also in the same book,
Julian Bond wrote, “The Roots of Racism and War” on page 109, about the age old
divisions of rich and poor, black and white and despaired over the possibility of closing
the divisions, “no nation which cares for its people can make war on another, no nation
which cares about the individuality of all men could let the people of its own soil exist
as some of the people of this nation do.”
16. In the words of Johnson’s biographer, Doris Kearns,
His [Johnson’s] difficulties as a public leader were rooted in the choice he made in
1965 to commit American troops to an undeclared war in Vietnam while continuing
to build the Great Society and while keeping the full extent of America’s commit¬
ment from the public, the Congress, and even members of the executive branch.
And taken together, these decisions produced an atmosphere of frustrated hope that
contributed to the outbreaks of ugly riots in city after city for three turbulent
summers.
Kearns, Lyndon Johnson, 303-4.

17. One of the early attempts was made by a leader in this field Edward F. Denison,
“Explanations of Declining Productivity Growth,” in U. S. Department of Commerce,
Bureau of Economic Analysis, Survey of Current Business 59, no. 8 (August 1979): 1-24.
18. For the view that the decline in productivity is nonexistent and a smokescreen see
“Productivity Slowdown: A False Alarm,” Monthly Review 31 (June 1979): 1-12. The
argument here is that the decline is a statistical artifact meant to provide justification for
another round of speed-ups for the U.S. worker. This radical interpretation by Harry
Magdoff, one of the leading Marxists in the United States was challenged by younger
radicals Samuel Bowles, David Gordon, and Thomas Weisskopf, Beyond the Waste Land
(New York: Anchor Press/Doubleday, 1983). The latter explanation for the decline in
productivity involves a social determination rooted in the antagonism between labor and
management
19. Okun, The Political Economy of Prosperity, 71-72.
20. Walter Heller, New Dimensions in Political Economy (New York: W. W. Norton,
1967), 87.
21. For an excellent introduction to this fascinating idea, see Donald D. Hester,
“Innovations and Monetary Control,” in Brookings Papers on Economic Activity 1
(1981): 141-99. The discussion in the text owes much to this outstanding contribution to
the literature on the efficacy of monetary policy.
22. See Bowles et al.. Beyond the Waste Land, 84-91 for further elaboration on these
points.
23. For a chronicle of labor’s role in the Vietnam War, see Philip S. Foner, American
Labor and the Indochina War: The Growth of Union Opposition (New York: International
Publishers, 1971).
24. Bowles et al.. Beyond the Waste Land, 95-97.
25. Martin Feldstein and Lawrence Summers, “Is the Rate of Profit Falling,” in
Brookings Papers on Economic Activity 1(1977): 211-28. They concluded, however, that
the decline would be temporary since the fluctuations in the rate of profit, on the order
of 1-2 percent were in the range of past fluctuations, and hence there was no conclusive
evidence that there had been any fundamental change that would cause any permanent
alterations in the rate of profit
26. William Nordhaus, “The Falling Share of Profits,” in Brookings Papers on
Economic Activity \ (1914,): \69--2\l. ^
27. Nordhaus, 169. Without cluttering up the text, additional evidence can be found
in Arthur M. Okun and George L. Perry, “Notes and Numbers on the Profits Squeeze,”
in Brookings Papers on Economic Activity 3 (1970): 466-73. They stressed the decline
in productivity as a major explanation for the falling share of corporate profits.
28. U.S. Congress, Joint Economic Committee, WEFA, “A Study in Counter Cyclical
Policy,” 99.
5 NIXON’S WAR, 1969-73
Richard Nixon’s phoenix-like return to politics found him running for the
presidency in 1968. In “the speech” that varied little from delivery to
delivery, Nixon promised “peace with honor” as he patted his breast giving
the impression that a plan to end the war was already formulated. No plan
was ever discovered, however, but Nixon won anyway as he appealed to
those who were tired of paying for social programs and wanted law and
order, who wanted the restoration of U.S. prestige, and who sought new
leadership. Nixon presumed to speak for the silent majority although how
he heard them remains a mystery.
His opponent. Vice President Hubert Humphrey, spoke of the “politics
of joy” but battled despair with the albatross of the Vietnam War hanging
around his neck. Threatened by Johnson with possible retaliation, he was
never able or willing to disavow his support for the U.S. involvement in
Southeast Asia. So instead the nation was treated to the televised spectacle
of demonstrations against the war in the streets of Chicago where the
Democratic presidential convention was held, and to the police riot that
ensued to control the civil disobedience.
Nixon won a narrow victory in November and began the slow and
imperfect turn of the society to conservative philosophy as indicated in the
previous chapter. Nixon did not take the lead in transforming economic
policy since he disliked economics and delegated much of the policy¬
making to others. Herbert Stein as chairman of the Council of Economic
Advisors was one of those, and he characterized the administration as
being composed of conservatives with liberal ideas.^ All this will become
evident later, but first it is necessary to review the progress of the war and
Nixon’s approach to it before learning how the economy was affected.
NIXON’S GAME PLANS

Nixon’s secret plan turned out to be merely a variant of the bargaining
through strength strategy. In this case, it meant bombing North Vietnam
into negotiating (there was no hope of winning the war militarily) while
solidifying the bargaining position of the United States and South Vietnam.
It was his “madman theory” which was designed to throw the enemy off
balance by creating the fear that his actions were both unpredictable and
unconstrained. He also hoped that the Soviet Union and China could be
prevailed upon to pressure the communists into agreeing to a solution of
the conflict.^
Both avenues to peace failed as the Soviet Union remained detached
except for supplying the arsenals of war. More important the bombing
campaign proved remarkably unsuccessful in either destroying the war
machine or the morale of the North Vietnamese. But in the process of
devising the strategy, Nixon and his National Security Advisor, Henry
Kissinger, had managed to centralize control over policy in the White
House.
When Nixon took office in January 1969, peace talks in Paris were in
progress but appeared to be going nowhere. Again resorting to force, he
authorized the secret bombing of Cambodia in March 1969 to destroy
sources of supply to the North Vietnamese. Prince Sihanouk, ruler of
Cambodia, had previously informed Washington that he was not adverse
to the United States crossing the border to pursue the enemy. The bombing,
although exposed, was not officially admitted until 1973, but the invasion
into Cambodia in April 1970 was more difficult to hide. The war was
becoming “Nixon’s war” without question.
Meanwhile under pressure from the public. Congress, and members of
his own administration, Nixon began to withdraw troops from Vietnam.
In June of 1969,25,000 troops were repatriated. This was part of the game
plan called “Vietnamization” in which South Vietnamese troops were to
be substituted for U.S. troops. The general policy, announced first in July
1969, of sending arms rather than men where deemed necessary, quickly
became known as the Nixon Doctrine.
The policy of withdrawing troops while negotiating for peace is, of
course, inconsistent since the North had only to wait out the troop
withdrawals to achieve its objectives. The North was in no hurry, but the
U.S. was under increasing pressure to reduce its involvement in Southeast
Asia. Indeed many in Congress were proposing legislation to fix various
dates for the total withdrawal of troops. Accordingly, periodic troop
Nixon's War, 1969-73 81
withdrawals were made as shown in Table 5.1. As these troop withdrawals

were taking place, Kissinger began secret peace talks in August 1969 in
Paris with the North Vietnamese. As was typical of an administration that
valued secrecy and surprise, these talks were not revealed until January
1972.
The war dragged on, of course, despite rumors of peace. In October
1972, just prior to national elections, Kissinger announced a breakthrough
in the Paris talks. However the “peace is at hand” condition broke down,
and the bombing of the North was resumed on Christmas day to bring the
North back to the negotiating table. The North Vietnamese agreed to talk
after the bombing stopped, and eventually a peace agreement was reached
in Paris in January 1973. The hated draft was ended, and the last troops
left Vietnam in March.
This very brief summary was included only to review some of the more
important events and dates and to prepare for the discussion of what was
occurring in the economy at the same time. First, let us review the
immediate costs of the war in dollar terms and reserve other costs for later
discussion.
THE DOMESTIC SCENE

The troop withdrawals and the slow winding down of the war did not
appease the critics of U.S. involvement in Southeast Asia. Even after the
Table 5.1
Vietnam Troop Withdrawals
Date of New
Announcement Number Limit
549,500 a
June 8, 1969 25,000 524,500
Sept. 19, 1969 40,500 484,000
Dec. 15, 1969 50,000 434,000
Apr. 20, 1970 150,000 284,000
Apr. 7, 1971 100,000 184,000
Nov. 12, 1971 45,000 139,000
Jan. 13, 1972 70,000 69,000
Apr. 26, 1972 20,000 49,000
June 28, 1972 10,000 39,000
* Ceiling prior to June 8,1969.
Source: U.S. Department of Defense (Comptroller), The Economics ofDênse Spending: A Look
at the Realities (Washington, D.C.: Government Printing Office, July 1972), 149.
first two troop reductions, there were massive antiwar demonstrations in

Washington—one in October and one in November 1969. Earlier, the
revelation that hundreds of innocent villagers had been massacred in
My-Lai in 1968 inflamed many, and the knowledge that this was only an
extreme case of common practices sent shudders among both opponents
and advocates of the war. The nation became preoccupied with the war, a
war that just would not recede into the background and permit people to
go about their daily business. In fact the war became a poison that spread
into the bloodstream of the nation as it was being consumed by it. The
universities were in turmoil as faculty and students protested U.S. policies;
households were divided over the justification for the war; friends were
pitted against each other; political parties became factious, and so on. No
one appeared immune to the infection.
Following the invasion into Cambodia, the demonstrations began anew,
and in May, four students were killed at Kent State by national guardsmen.
Once again the nation was shocked by the apparent senselessness of the
slaying and by the spectacle of troops on a college campus. The headlines
reflected the shame and bewilderment of the confused public. It was not a
good time for apathy.
The demonstrations trailed off as more and more troops were withdrawn
and U.S. direct involvement appeared to diminish. Eventually the war was
turned over to the South Vietnamese and they proceeded to blunder
themselves into defeat; in April 1975 the war was over and the North had
won, but in the process Cambodia fell to the communists as well.
Before updating the costs of the war, it would be appropriate to reiterate
a note of warning. It might be possible to document the direct costs of the
war, and even here the difficulties are formidable, but to attempt to account
for the social costs of the war is virtually impossible. There simply is no
calculus to enable us to identify and add together the social costs that this
unpopular war inflicted on the American public. Honest young men
learned to lie to escape the draft, learned to enter into careers or career
paths that would enable them to avoid military service, or learned that to
flee was the best avenue of escape. Families were devastated or broken by
such decisions and even middle and upper-class families learned that
merely paying the defense bill was not sufficient and began to object when
their sons were made subject to the draft. The poor learned, if they did not
know it before, that they were expendable. Since the war was so pervasive,
nearly every decision, whether it be an occupational one or not, was
affected by the impact of the war. It would be impossible to list all the
decisions affected by the war, every choice made with it in the background.
Nixon’s War, 1969-73 83
or each problem caused by the war that forced a decision that would
otherwise have been unnecessary. All that we can do is to note the omission
in passing and lament the lack of a calculus that would permit more
searching analysis of social costs.
DIRECT MILITARY COSTS

The direct military costs are less intangible than social costs although
by no means as accurate as one would like or expect. Table 5.2 provides
the estimates for the entire involvement in Vietnam.
The official direct cost of the war according to the Office of Budget and
Management (OMB) was $140 billion, which places it second in expense
to World War n which had a cost of $360 billion. These numbers do not
Table 5.2
Estimates of Expenditures on Vietnam War (Fiscal Year; in Billions of
Dollars)
Actual Incremental Brookings

Year Total Costs
Costs
1965 $ 0.1 $ 0.1 $ -

1966 5.8 5.8 -
1967 20.1 18.4 -

1968 26.5 20.0 24.1
1969 28.8 21.5 24.2
1970 23.0 17.4 16.7
1971 14.7 11.5 11.0
1972 9.4 7.0 6.8
1973 6.3 4.5 3.5
1974 3.1 - -
1975 1.4 - -
1976 0.3 - -
Total 139.5 - -
Notes'. Full costs are all the official costs of operations in the war; incremental costs are all official
costs over and above what would have been incurred anyway by regular base line forces—
i.e., the amounts that could be removed from the budget without the war.
Sources: Actual costs are those of the Office of Management and Budget and are taken from U.S.
House of Representatives, Committee on the Budget, Chronology of Major Fiscal and
Monetary Policies (1960-1977), prepared by the Task Force on Economic Policy
(Washington, D.C.: U.S. Government Printing Office, January 1978), 197; The Brookings
data included in the report were taken originally from Setting National Priorities, the 1973
Budget (Washington, D.C.: Brookings Institution, 1972), 75; Incremental costs from U.S.
Department of Defense (Comptroller), The Economics of Defense Spending (Washington,
D.C.: U.S. Government Printing Office, July 1972), 149. The incremental costs for 1972
and 1973 were estimated by the author by interpolation of published data.
appear very large with respect to the amounts spent on national defense in the
1980s that were approximately $300 billion. However in terms of the spending
on national defense in the 1960s, which were on the order of $75—80 billion,
they are laige indeed. For example, in 1968, the expenditures on the Vietnam
War represented approximately 34 percent of all defense spending and in 1969
the proportion rose to 37 percent. Put in this relationship, the expenditures
made in Vietnam are substantial and cannot be dismissed as insignificant either
as to their effects on the defense budget or on the economy.
Moreover there has always been a question as to whether the costs were
recorded accurately to reflect the tme costs of waging the war. Clearly
understating the costs of the war would serve many purposes: an unpopular
war would not appear to cost as much in monetary terms and taxes that
went to support it would not be as painful; the peace dividend, the amounts
promised to be returned to the civilian economy once the war ended, would
be smaller; and the effects of military spending on the economy and the
society would be minimized.
The total costs could be understated in many ways, not all of them
readily observable. If one were interested in the full costs of the Vietnam
War, it would be necessary to adjust the totals of Table 5.2 to account for
unrecorded costs. One such attempt was made by Robert W. Stevens who,
for example, made a $15 billion addition for the failure of the Defense
Department to include the full costs of military personnel.^ (This correction
made by Stevens and other adjustments will be discussed in Chapter 6.)
However, these estimates are not precise or even entirely justified, and the
true costs of military personnel, both those directly involved and in support
roles, can never be known with any degree of accuracy. Since we are not
primarily interested in accounting for the “true” costs of the war, the issue
can be put aside until Chapter 6 as we return to the main concern—the
domestic economic consequences of the war.
THE ECONOMY IN THE NIXON YEARS

The Nixon administrations brought to Washington the conservative
economics that had been growing in influence during the Kennedy-
Johnson years. As noted in the last chapter, they included: the rejection of
fiscal policy; the reliance on controlling the growth of money, even to
establishing a fixed rate of growth of the money supply; the belief in free
and unregulated markets; and the need for a balanced budget. The Nixon
economists, however, were not dogmatic conservatives and did not rigidly
subscribe to all of these beliefs.
Nixon’s War, 1969-73 85
Accordingly when they began to construct macroeconomic policy, they

were more pragmatic. Still the problem of inflation, a traditional issue for
conservatives, soon became the priority concern. Unfortunately, past
efforts to combat inflation usually involved “root canal economics”
whereby recessions were required to control inflation. But recessions
cause unemployment, and Nixon was sensitive to the unemployment issue
since he claimed that the failure to confront the unemployment problem
in 1960 cost him the presidential election.
When Nixon took office in January 1969, the unemployment rate was
3.6 percent and the CPI was rising at an annual rate of approximately 4.5
percent The problem for the administration was how to reduce the rate of
inflation without raising the unemployment rate above the (now) socially
acceptable rate of 4 percent. The guideposts, the concept a victim of the
war, were discredited, and any other type of direct intervention into the
economy was out in the free market atmosphere of this administration. So
the administration adopted a policy of “gradualism” that was an attempt
to cool off the economy over a longer time period with the primary means
of restraint coming from the monetary side.
Thus the growth of the money supply slowed from 7.2 percent in 1968
to 2.5 percent in 1969 for the year as a whole, but in the latter half of the
year the rate of growth fell to only 0.7 percent. The discount rate was also
increased in April to indicate even more directly the movement toward
monetary restraint. Fiscal policy also moved toward restraint as expendi¬
tures were cut by $7.5 billion and the budget registered a small surplus of
$3.2 billion (but an $11.7 billion surplus in the high employment budget
from a deficit of $6.0 billion in 1968).
The gradualism policy, however, did not work. Monetary restraint drove
interest rates up to their highest levels since the Civil War with three-month
Treasury Bills at 7.7 percent in December and mortgage rates at 8.5 percent;
another credit cmnch was in the making. Once again, the demand for funds
was strong resulting in the withdrawal of funds from institutions with interest
rate ceilings. Banks turned to other sources of funds: Eurodollars, repurchase
agreements, bank holding companies, etc., as outlined in the last chapter.
Financial flows were altered with favored customers securing funds but with
the housing market declining. So in the effort to control inflation, monetary
restraint was instead creating the conditions wherein market participants
were finding ways around the restraint and in the process altering the
financial structure of the economy. In the future, monetary policy would be
less effective as a result of the new institutions springing into place to avoid
the consequences of the Federal Reserve’s policies. ^
Again the inflation caused by the \êtnam War was changing the structure
of the economy. If that were not sufficient, inflationary expectations were
being allowed to develop, and high interest rates did not curtail spending.
The high costs of borrowing could easily be met by the higher returns caused
by inflation. The inflationary psychology, as it came to be called, soon was
built into the plans of everyone and once begun is difficult to reverse.
The Tax Reform Act of 1969, passed over the'objections of the ad¬
ministration, also potentially modified the structure of the economic
system away from fixed investment by removing the investment tax credit,
reducing accelerated depreciation allowances, curtailing depletion al¬
lowances, and increasing the taxation of capital gains. The immediate aim
of reducing inflation could have been at the expense of long-term growth,
and even though investment showed remarkable strength in 1969 consider¬
ing the announced attempts to restrain it, the longer-term prospects were
doubtful.
The results of the policy of gradualism were disappointing indeed. The
GNP fell in a mini recession, from a growth rate of 4.9 percent in the
previous year to 2.8 percent in 1969. Unemployment fell slightly to 3.5
percent while prices rose—by 5.4 percent in the CPI (from 4.2 percent),
by 3.9 percent in the WPI (from 2.4 percent), and by 4.7 percent in the
GNP price index (from 4.0 percent). Meanwhile two million people were
added to the ranks of the employed, mainly women and teens and many
at part time jobs, but the productivity of labor showed no increase while
wage and fringe benefits were rising at a 7-8 percent rate. Clearly there
were signs of trouble ahead, and the administration was not preparing for
it, but in fact promising more of the same.
The tight labor market and rising inflation brought many women into
the labor force, a trend that would affect the society in many ways not fully
recognized at the time. The effects on family life, the structure of jobs, the
need for facilities for the care of children, etc., were yet to be given serious
consideration. The entrance of women and teens into the labor force was
also identified as one of the causes of the continued decline in the
productivity growth of labor. The rapid entrance into the labor force of
young people of the baby boom generation, and the growth in labor force
participation of women, accounted for a reduction of 0.4 percentage point
in the annual growth rate of productivity in the period 1965 to 1973. The
Council of Economic Advisors, who made that estimate, also concluded
that the rate of reduction had fallen to 0.33 of a percentage point after that
period.^ With even more experience, the decline in the growth of produc¬
tivity from this source would no longer be as dramatic.
Nixon’s War, 1969-73 87
ECONOMIC POLICY REVERSALS
The policy of gradualism eventually led the economy into a mild

recession that began in December 1969 and lasted until November 1970.
But as the GNP fell slightly, the unemployment rate rose, and stagflation
became a reality. (See Table 5.3 for details.) The monetary authorities
reversed their tight money policy and permitted the money supply to grow
5.4 percent for the year. The credit crunch was eased. Interest rates fell
slightly but the financial markets were shaken by several events: the
invasion into Cambodia followed by the incident at Kent State and the
collapse of Penn Central Railroad.
In May, following the Cambodian invasion, the stock market fell by
about 15 percent from the first of the year, remained sluggish through the
summer, but recovered by the end of the year. The collapse of Penn Central
created immediate fears of a liquidity crisis. Since the credit crunch of
1966, corporations seeking to avoid a similar crisis, began to raise funds
by selling commercial paper. When they became due the firms simply
rolled them over and little notice was taken of financial soundness. When
Penn Central could not repay its loans, concern for the ability of other firms
to repay theirs arose, and of course, restricted the ability of corporations
to raise additional funds in this manner. The liquidity crisis was becoming
real for the banks were loaned up, and the stock market was depressed.
Once again the credit crunch of 1966 was affecting the economy as
shown in the last chapter. Now the second credit crunch of 1969 was
bringing the economy close to another genuine liquidity crisis. Again
banks and corporations reacted to the previous credit crunches by seeking
avenues to protect themselves but now those avenues were partially
blocked as well. Moreover the fears of a liquidity crisis were heightened
by the rumors of possible collapses of major U.S. corporations—^Lockheed
and Chrysler among them. In September, several brokerage houses were
also facing bankruptcy when mismanagement of the operations resulted
in millions of dollars of securities being lost. The volume of transactions
could not be handled even by computers.
Thus the Federal Reserve had to react, and it did so by opening the discount
window so that banks could make loans. The liquidity crisis and possible panic
were averted. Clearly, however, the concern for inflation had to be relaxed.
The ability to fight inflation was now being hampered by the very institutions
that were set up in response to past efforts to fight inflation.
The administration continued to cling to the belief that proper macro-
economic policies could be employed to bring the inflation rate down to
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Nixon’s War, 1969-73 89
the 3 percent range and the unemployment rate down to 4.5 percent range
by mid-1972—just in time for the next election. But the real world did not
cooperate, and both the inflation and unemployment rates were above
these targets in mid-1971. The administration, led by Secretary of the
Treasury John Connally, decided to apply a shock treatment to the
economy at this time in order to get closer to the targets before the election
and before accusations of political manipulation of the economy could be
leveled. So it embarked on August 15, 1971 on the most anticapitalist
policy that could be devised—wage and price controls—a policy that
implies that the free market is not working. For a group of allegedly
conservative economists, this was drastic medicine and only showed the
lengths to which the administration was willing to go to win the election
(the Watergate scandal was another).
Yet the economic data hardly justified such draconian measures. Even
a quick examination of Table 5.3 is sufficient to reveal that economic
conditions were far from catastrophic. The unemployment rate was hover¬
ing around 6 percent, and the CPI was rising at just over 5 percent in the
second quarter of 1971. Here was Nixon who had disavowed the use of
controls, but who loved to govern by surprise, proposing dramatic actions
and looking decisive and presidential in the process.^
One cannot attribute the policy of wage and price controls directly to
the Vietnam War, but it is possible to suggest that the policy reactions to
past problems had not worked, and some of these problems did emanate
from the war. Gradualism and credit crunches were ineffective as policy
moves and more drastic actions were required regardless of ideological
conflicts. Politics, pragmatism, and problems in the international economy
won out over ideological purity.
The controls were in effect until April 1973, and while the debate over
their economic effectiveness continues to the present, there is no debate
about whether or not they helped reelect Nixon for a second term. After
the election, the administration’s interest in controls quickly waned both
because they had done their job, and because other concerns began to
overwhelm the administration. The Watergate affair and the Arab oil
embargo began to occupy the nation as well as the economic policymakers.
Anyway it was no great feat to declare that the controls were not working,
not desirable, and not necessary any longer. Yet looking at the data in Table
5.3 reveals that the controls did serve to moderate the rate of increase in
prices but they also created many stains in the economic system such that
when they were removed, prices rose rapidly. Evidence suggests that the
controls were ill-designed and ill-administered, but whether the controls
worked or not is not the issue here; the point is that they were employed
after a series of inappropriate policies at least in part attributable to
problems created by the Vietnam War7
In the end the controls program was a political not an economic policy
and should more properly be judged on that basis. It allowed the
administration to pursue expansionary monetary and fiscal policies
without worrying about the consequences for inflation. A booming
economy is very useful in an election campaign, and that is what the
administration wanted and got. After the election was won, it could revert
to more traditional policy-making to repair whatever damages were
inflicted on the public and the economy. Thus in 1972 the administration
urged federal agencies to spend, spend, spend, and if a higher deficit
resulted, it could be corrected over time. This expansionary fiscal policy,
designed to stimulate the economy just prior to the election, was matched
by an expansionary monetary policy to facilitate the stimulative fiscal
policy. Arthur Bums, chairman of the Federal Reserve Board, was
pressured to pursue an easy money policy, and he caved in and supplied
the necessary monetary expansion.
After the election both monetary and fiscal policy turned restrictive, and
late in 1973 the economy turned down into another recession. This is yet
another example of political business cycles in which political rather than
economic considerations were dominant in determining the direction of
the economy.® These are intriguing developments in economic policy¬
making, but they cannot be discussed in detail here and divert us away
from determining the economic consequences of the Vietnam War. In
January 1973 peace agreements had been signed, the draft was ended, and
in March the last of the U.S. troops had been removed from \tietnam.
While expenditures identified with the war continued, they only
amounted to about $5 billion, hardly large enough to affect an economy
with a GNP of $1.3 trillion dollars. So Nixon’s war ended to be
followed by the Watergate revelations and the oil embargo. Nixon’s
attention to economic affairs, never high on his list of exciting
problems, now fell to nil, and his aides were given even more respon¬
sibility for economic policy-making. The Watergate affair consumed
him, and eventually drove him from office in 1974. Nixon finally
achieved peace but not with honor.
NOTES
1. Herbert Stein, Presidential Economics (New York; Simon & Schuster, 1984), 133.
Nixon’s War, 1969-73 91
2. For more historical background, see Stanley Kamow, Vietnam: A History (New
York: Viking Press, 1983), 582-600.
3. Robert Warren Stevens, Vain Hopes, Grim Realities (New York: New Viewpoints,
1976), 95-102.
4. For an interesting analysis of the role of credit crunches, see Albert M. Wojnilower,
“The Central Role of Credit Crunches in Recent Financial History,” Brookings Papers
on Economic Activity 2 (1980): 277-337.
5. Council of Economic Advisors, Economic Report of the President, 1979,68.
6. For an intimate look at the formation of the controls policy, see Stein, Presidential
Economics.
7. Many attempts have been made to determine the efficacy of wage and price
controls. Among them are the discussion papers on the panel, “Two Years of Wage-Price
Controls,” that appeared in the American Economic Review 64 (May 1974): 82-104; and
Karl Brunner and Alan Meltzer, eds.. The Economics of Price and Wage Controls, vol. 2
(Amsterdam: Camegie-Rochester Conference Series, 1976). See also Anthony S. Cam-
pagna, U.S. National Economic Policies, 1917-1985 (New York: Praeger, 1987), 376-96.
8. For confirmation of this political business cycle, see Douglas A. Hibbs, Jr., The
American Political Economy: Macroeconomics and Electoral Politics (Cambridge,
Mass.: Harvard University Press, 1987), 264-65. It is difficult to quarrel with his
observation that “without the 1972 experience to stimulate interest in the topic, it is
doubtful that most of the subsequent writing about the political business cycle
phenomenon ever would have appeared.”
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6 ECONOMIC COSTS AND
BENEFITS OF THE WAR
The discussion of the economic consequences of the Vietnam War up to

this point has proceeded according to how the macroeconomy was af¬
fected. Some of the effects of the war were easily seen, e.g., the effects of
inflation, and were relatively uncontroversial. But the analysis did not go
far enough and did not capture the full economic costs of the war. It is time
for a full accounting. One would like to write “final” accounting but the
total costs of the war will never be known. Still a more comprehensive
definition of the costs as well as benefits is required for a better, if
incomplete, accounting.
Several studies have made estimates of the economic costs of the
Vietnam War, some of these have already been mentioned but others not
previously cited must now be considered. While all of them did not
undertake a full accounting over the entire course of the war, they all
recognized that the full economic costs would include the following:
—The actual budgetary costs of the war

—^Future budgetary costs that will be incurred as a result of the war
—Ûnrecorded and hence unrecognized economic costs of the war
—Indirect costs that can be reasonably imputed to the war
ACTUAL BUDGETARY COSTS

The actual budgetary costs of the war are easiest to define and record.
Although not without controversy, these costs are recognized in official
sources. Table 6.1 summarizes some of these identifiable costs.
96 Economic and Societal Consequences
Table 6.1
Actual Budgetary Costs of the War (in Billions of Dollars)
I. Direct Costs, 1965-1976

A. Direct costs per
1. Office of Management and Budget (Table 5.2)
and Department of Defense® $ 136.6
2. Adjustments to Full costs for failure of pOD

to account for full personnel costs and'
understatement of full costs in 1965-67“ 15.0
3. Direct Personnel Costs prior to 1965^ .8
4. U.S. Military Aid to:

France and emperor Bao Dai, 1950-54“ 2.5-3.0
Laos and Thailand, 1950-66® -9
Cambodia, 1950-76® 1-3
South Vietnam, 1953-65^ 2.4
5. U.S. Economic Aid to Indochina and So. Vietnam,

1950-769 9.4
6. Support for the Free World Military Assistance

Forces- So. Korea, Philippines, Thailand,
1965-69^ 1-3
7. CIA Funds used to Support U.S. Policy^ n/a
Estimated Total Direct Costs3 $ 173.2
* Departmentof Defense data were p)relimmary for the years 1972 on so the estimates were adjusted
for the years 1972-76 in the above.
** Calculations made by Robert W. Stevens in Vain Hopes, Grim Realities (New York: New
Viewpoints, 1976), 95-98.
' Calculations made by Murray Wiedenbaum in Economic Impact of the Vietnam War, Center for
Strategic Studies, Special Report Series No. 5, Georgetown University (Washington, D.C.:
Renaissance Editions, 1967), 21.
** Stanley Kamow, Vietruim: A History (New York: Viking Press, 1983), 137,177.
® Department of Defense, Foreign Military Sales and Military Assistance Facts, December 1976.
^ Major General L. B. Taylor, Financial Management of the Vietnam Conflict, 1962-1972
(Washington D.C., Department of the Army, 1974), 23.
* U.S. Statistical Abstract, 1977,363.
** United States Senate, Committee on Foreign Relations, Subcommittee on United States Security
Agreements and Commitments Abroad, part 1, Republic of Philippines, 91 st Congress, 1 st session,
September and October, 1969,96,358; part 3, Kingdom of Thailand. November 1969, 657; part
6, Republic of Korea, 91st Congress, 2d session, February 1970,1545.
* Stanley Kamow in Vietnam (New York: Viking Press, 1983), frequently mentions the CIA and
the use of funds but no sources are given for these assertions.
^ Clearly these are rather crude estimates since much of the data are still classified or Vietnam
expenditures have not been separated from more general budgetary totals.
Items 1 through 3 of Table 6.1 do not require much explanation. Yet the
official estimated costs of the war have always been questioned, sometimes
encouraged by the reporting of them. Reporting full costs in some periods
Economic Costs and Benefits 97
and incremental costs in another only increased the suspicion that the
numbers were being manipulated for political purposes.
One underestimation of full costs is seldom mentioned but illustrates
the reason for continued skepticism. Equipment, planes, tanks, etc.,used
in the war from stock were not counted as costs. Only material purchased
for Vietnam were included as costs.* Clearly the amounts involved could
be enormous.
But we can ask: Why did the war cost so much? The answer from one
analyst is straightforward. Thomas Thayer states, “The answer lies in the
way we chose to fight the war—American Style, with our most expensive
forces.... It was, in resource allocation terms, first and foremost an air
war, and second, a ground attrition campaign against VC/NVA regular
units. Pacification was a very poor third.”^
Item 2, the understatement of full costs arises because in the early years
of the war, the Department of Defense (DOD) did not make any estimates
(or underestimated them) for the full costs of the personnel in Southeast
Asia. Only incremental personnel costs were counted. However, it is well
recognized that for every member of the armed forces directly involved
there is some multiple of that number needed in support—i.e. a 1.5:1 or
2:1 ratio. Stevens estimated an additional $15 billion adjustment for the
full personnel costs of the war: $7 billion of which is due to the nonrecog¬
nition of full personnel costs over the period 1965-72; and $7.5 billion is
due to the underestimation of the official full personnel cost for fiscal years
1966 and 1967.^
U.S. military aid (Item 4) is self explanatory but is by no means uncon-
troversial. The amounts given to France in the early 1950s are not well
documented. Moreover other military aid might have been given in the absence
of hostilities as part of the SEATO arrangements. The same is tme of economic
aid to the region. Some of the aid might have been forthcoming whether or
not the United States was seeking allies or trying to avert the spread of the war
into other nations. However it is still justifiable to consider the bulk of
economic aid as motivated by the need to retain control or influence over the
other nations contiguous to the conflict.
In the attempt to justify the intervention into Vietnam and to demonstrate
the dangers in the region, the United States sought to bring other nations
into supporting its policy. The United Nations and many nations were
called upon to support the actions of the United States, and a few finally
responded with military support—the Philippines, Korea, Thailand,
Australia, New Zealand. The administration claimed that these nations
were willing to supply combat troops and support and were motivated by
the desire to aid in the noble cause of stopping the spread of communism
in Southeast Asia. Australia and New Zealand provided only token sup¬
port, but even this was questioned in their own nations. The other countries
were little more than mercenaries since the United States made some very
beneficial agreements that allowed them to profit from this alliance.
For instance, in an elaborate agreement with South Korea, the United
States agreed to pay all the costs of deployment of ttoops and supporting
elements. Korean troops were paid an overseas allowance that amounted
to as much as their regular salaries, i.e., they were paid double their normal
pay. In addition the United States agreed to buy from Korean suppliers the
requirements of their forces and agreed to help them develop their export
markets. (In the 1980s when imports from South Korea flooded U.S.
markets this would appear to have been the height of folly.) Moreover
economic aid was promised, and an unspecified amount of loans was
included in the agreement. This kind of agreement was kept secret from
the American public, but in the hearings of the Senate Foreign Relations
Committee, Senator Fulbright suggested that instead of Koreans making
a noble sacrifice in joining forces with the United States, they were simply
making a good business deal.'*
Other nations contributed token humanitarian aid or relief supplies.
Spain, for example, contributed a medical team, and Taiwan sent an
agricultural team, a psychological warfare team, an electrical power mis¬
sion, and a surgical team.^ Most were being careful not to alienate a
powerful ally. In other areas, the United States was training or employing
other mercenaries, the Montagnards, to fight in Laos, Cambodia, or
anywhere in Indochina. Getting Asians to fight other Asians was an old
French scheme, and preceded the Nixon’s policy of Vietnamization that
was championed in the 1970s.^
Finally the CIA was involved in all phases of the war, from its inception
to the end. It used its funds to secure cooperation, to finance operations
before they were legitimized, and to buy the compliance of officials to adhere
to U.S. goals. Unfortunately the budgets of the CIA are not made public and
no estimate of these amounts is possible. Item 7 is included in Table 6.1 to
remind us that some of the costs of the conflict can never be accounted for
and to raise questions about a policy that permitted such unaccountability.
FUTURE BUDGETARY COSTS

Difficult as they are to estimate, direct budgetary war costs are easily
understood. Yet the costs of the war do not end when the war is terminated.
In the United States it has always been deemed appropriate to compensate

veterans for the sacrifices they made and in fact the compensation has
gotten more and more generous each time they are reconsidered. But the
interesting part is that the costs of veterans’ benefits extends over many
years after the war is over, and consequently the total costs involved are
much more than the direct costs of the war. When benefits paid to
dependents are included, it is even more dramatic and may extend to as
much as 100 years after the war was concluded.^
Clearly estimating total veterans’ benefits would seem impossible and
a hopeless exercise to be undertaken by those who retain an interest in
puzzles. Not only do the benefits change but the proportion of those who
avail themselves of them changes as well. About all that can be done is to
review the record of past wars and compute the percentage of the original
war costs and apply that percentage to the costs of the Vietnam War. James
L. Clayton has been making such estimates for some time and has come
up with the following for the last two wars (the experience of earlier wars,
while interesting, does not appear to be useful since the benefits, public
attitudes, and proportions of those who utilize the benefits can be expected
to have changed significantly): for World War II, veterans’ benefits are 101
percent of the original cost and for the Korean War, 184 percent.* In
estimating the future costs, Clayton used the latter percentage as the
appropriate one. Applying that average, 184 percent, to the approximate
budgetary cost of the Vietnam War, $ 155 billion, yields a future budgetary
cost of $285 billion; applying an average, 142 percent, of these two wars
yields a future budgetary cost of $220 billion. (See Table 6.2.)
These are staggering sums and difficult to put in perspective, but in 1984
both would have exceeded all the income that flowed to black and hispanic
households. But the story of future costs does not stop there, for future
interest costs must also be considered. Again the future interest payments
on debt incurred to fight the war are nearly impossible to isolate. Not only
is debt incurred for other reasons but the past debt is never repaid. Thus
World War II debt is still earning interest on bonds that have not been
Table 6.2
Future Budgetary Costs (in Billions of Dollars)
Veteran's Benefits $ 220
Interest Costs 31
Total $ 251
redeemed but rolled over. As a consequence, interest costs for World War
n and the Korean War cannot be calculated. Interest costs for World War
I were calculated at about 42 percent of the original cost.^ Still there is no
way to compare the financing of the Vietnam War to World War I; the two
wars are far too different in every way. Yet to ignore interest costs because
they cannot be accurately measured is to understate the total costs as¬
sociated with the war. The interest costs of earlier wars ranged from 15
percent in the Spanish-American War to 37 percent in the Civil War (Union
only). Thus if the past is any guide, a risky assumption, the interest costs
for the Vietnam War could range from 14—42 percent. Clayton suggests a
percentage at least as large as 20 percent for the Vietnam War, and it is that
proportion that will be used here.*®
Applying 20 percent to the approximate cost of the Vietnam War yields
a total future interest cost of $31 billion. It should be understood that
interest costs, unlike some of the other costs, do not necessarily represent
a burden to the community since interest payments represent a transfer to
bondholders from taxpayers. (Similarly other transfer, like payments to
survivors, are also not a burden to the entire community.) There may be
some adverse redistribution effects of the transfer but no loss of income to
the nation. In this period most of the bonds were held internally, however
the future burden of these interest costs may change as more foreigners
hold the old bonds as assets.
Budgetary costs, either present or future, present estimation difficulties
but are easily comprehended. They are direct costs that were induced by
and can reasonably be attributed to the war. But the war imposes other
costs to those who are forced to alter their plans as a direct result of the
war. Some of the interrupted or altered plans, such as postponed marriages,
may not be important enough to consider attempting cost estimates, or the
costs may be too small to worry about. However much they disrupt the
lives of the individuals involved, the costs to society may not be worth the
effort or be too difficult to compute.
However there are some costs to individuals that are significant and
should be included in any attempt to account for the total costs of the war.
Those who served directly in the war were forced to incur costs that were
not imposed on the rest of the community. As the war called for increasing
numbers of troops, the government conscripted large numbers of in¬
dividuals and in so doing subjected them to a special kind of taxation that
others were not obligated to pay. This conscription tax is roughly the
difference between what the individual was paid as a member of the armed
forces and what he would have been paid as a civilian employee. This is
a discriminatory tax since those who did not enter the armed forces did not
pay the tax and only through coercion can such a tax be imposed.
The conscription tax applies to those who were drafted or those who
volunteered under the threat of induction. In the Vietnam War, however,
not everyone was required to serve in the armed forces and for some time,
certain groups were excluded altogether, e.g., college students. Thus not
only did the threat of induction fall disproportionally on the low-income,
uneducated members of the society, but conditions were set up to provide
incentives for others to evade the draft. Hence in addition to the conscrip¬
tion tax itself, it was necessary to incur costs to collect the tax. In the words
of Robert Eisner:
How many hundreds of thousands of young men have been wasting

years educational resources which they do not want and do not use,
because they find this the most effective means of avoiding service
in a war of which they want no part? How many young men have
been forced into idleness or temporary jobs because employers would
not hire them in view of the possible imminence of military service?
How many indeed have left the economy by literally hiding from the
draft, fleeing the country or going to prison?'*
Both costs should be recognized as part of the economic costs of the

war, and several attempts have been made to estimate these losses to
society. The justification for and the procedures involved in making such
estimates were made by Larry Sjaastad, “Conscription as a Tax,” Chapter
3 of The Report of the President’s Commission on an All-Volunteer Armed
Forced Using these procedures, Robert Eisner estimated the costs of the
draft at $76 billion for fiscal years 1966-1970.'^ The Cornell University
Air War Study Group, using slightly updated data found the costs to be
$60 billion for fiscal years 1966-71.'"* Finally Robert Stevens made his
own estimate using only the difference in earnings as the cost of conscrip¬
tion and came up with $15 billion for the years 1965-72.'^
All are careful to warn of the difficulties of making such estimates, and
their works should be consulted by the interested reader. Moreover, all
have concluded that their estimates are on the conservative side. However
since the Cornell Group included tax collection costs and used updated
data from earlier studies, its estimate of $60 billion will be used here.
Finally there is to be considered the loss of output from the men who
were killed or hospitalized. In the case of those killed in action, then-
productivity over their lifetime is lost forever; whatever they may have
Table 6.3
Some Economic Costs of the War (In Billions of Dollars)
Conscription Tax $ 60
Earnings Loss of Casualties 23
Total $ 83
■v -V
contributed to the nation is sacrificed. One cannot measure the lost music,
paintings, or contributions to science, of course, but it is possible to
estimate the value of their lost output by examining the earnings sacrificed
and using this as a rough guide. Using data developed by Eisner, the
average annual earnings of males 20 and over in 1969 was approximately
$10,0(X). If 40 years is used as an estimate of their working lives, and the
number killed was 57,777, the total earnings loss is $ 23 billion.'^ Some
of the earnings would have been used to support themselves and should
be deducted but since no growth in the earnings is allowed ($10,000 is
used throughout), and no estimate is made regarding the earnings loss of
the disabled or hospitalized, the unadjusted loss of $23 billion is used
here.^^ Table 6.3 summarizes the economic costs.
OTHER COSTS
With the amount of inflation over the period, it might be expected that
the U.S. balance of payments would be adversely affected. Unless our
inflation were matched by our trading partners, our export prices would
make selling abroad difficult. In addition, rapid inflation and tight labor
markets might also cause supply or bottleneck problems, and these supply
problems could put U.S. manufacturers at a disadvantage in world markets.
Wartime conditions cause additional problems for foreign trade. In a
wartime situation, direct purchases of food, services and the like from
foreign countries for the military are routine, but they add to the balance
of payments problem. Similarly, it is usually the case that more inputs are
purchased from foreigners to be used as inputs in defense production, again
adversely affecting trade balances.
While these possible adverse trade conditions are readily acknow¬
ledged, the difficulty of estimating them is troublesome: how do you
separate the effects of the war from what might have occurred in its
absence? One attempt was made by Leonard Dudley and Peter Passell.^*
For the period 1964—67, they found that the U.S. current account balance
had been adversely affected by some $4 billion. The current account

balance measures the net balances of merchandise trade, the net investment
income, net travel balances, and other services. Of the $4 billion, $1.6
billion was accounted for by direct foreign purchases; $1.1 billion by
purchases of inputs from abroad; and $1.3 billion by the indirect effects
of the decline in exports.
These are large numbers and account for most of the deterioration in the
U.S. current account balance over the period. For 1964, the current account
balance was + $5.8 billion; thereafter it fell steadily to + $4.3 billion in
1965, + $2.3 billion in 1966, and to + $2.1 billion in 1967. (The current
account balance never did recover to prewar amounts for the duration of
the war.) Since the accumulated decline from 1964 to 1967 nearly matches
the total decline that Dudley and Passell attribute to the Vietnam War, there
must have been an underlying trend of improvement in the balance of
payments to offset this decline. In the absence of the war, trade balances
should have been improving.
Looking at the simulation studies of the last chapter supports this
contention. In either model, net exports (exports minus imports) would
have been greater had there been no war. The OMB model shows an
increase of $9.3 billion in net exports over the period 1966-67, and the
WEFA model shows an increase of $3.8 billion.
The loss appears to be plausible but how much remains the question.
Stevens adjusted Dudley and Passell’s data by the WPI to arrive at a total
through 1972 of $48 billion. ^ The basis for this type of adjustment is not
clear and was not explained or justified. A more reasonable, although no
more defensible, estimate would be to accept the WEFA results and extend
them for the balance of the war. This would make the total loss of net
exports about $7.6 billion through 1973. (A similar extrapolation of
Dudley and Passell’s estimate would be approximately $10 billion.)
Other costs that have been mentioned in connection with the Vietnam
War are less direct and more unmanageable in terms of estimation. For
example it is claimed that there could have been a reduction in the nation’s
productive capacity due to the shifting of resources from the private to the
defense sector. If true, this would represent a cost to future generations
who would not receive the capacity to produce and consume the volume
of goods they would have in the absence of the diversion of resources.^*
Similarly, the defense establishment itself was forced to cut back on
weapons research, development, testing, and construction. These cutbacks
would create a backlog that would have to be made up after the war was
concluded. However they really represent a cost of the war and should be
included as such. The Cornell University Air War Group estimated the
deferred costs at $15 billion.^
Furthermore the war induced many other indirect effects, some of
them more pertinent in the short run and others over longer time
periods. Inflation causes many redistributions among income groups,
but who wins and loses in the game is not always clear. Similarly
war-induced monetary and fiscal policies affect the level of output and
employment as well as what is produced and who is employed as a
result. Here value judgments enter into the analysis; if inflation or
government policies affect the distributions of income and wealth
adversely, i.e., make them more inequitable, is that a cost of the war or
the natural outcome of the economic system with its distribution of
rewards and penalties? Could or would these adverse effects be
reversed once the war-related conditions have passed?
One analyst, Robert Stevens, attributed the recession of 1970-72 to the
war-induced government policies and added $185 billion to the war bill.
In his view the overheated war economy was cooled by a recession, a
recession that would not have occurred had there been no war. The measure
of the cost to the economy is the potential GNP that it might have enjoyed
minus the actual GNP that was realized. For the years 1970-73, the GNP
sacrificed was about $185 billion.^^ This procedure assumes that the
economy would have operated at its potential throughout the period and
was prevented from doing so because of the war. This is certainly a
possibility, but it is a rather strong assumption to make considering how
few times the economy has performed up to its potential.
He also included as a cost of the war the excess inflation from 1965-72
of $140 billion. Taking 2 percent inflation as the target rate of inflation, he
multiplied the actual inflation rate in excess of 2 percent in each year by
the GNP to arrive at an estimate of the cost of excess inflation. Painful as
the inflation might have been, it is not realistic to measure costs in this
manner nor is it even a cost since many benefited from rising prices. More
likely income was redistributed in this period but that is not the same thing
as a cost to the nation.^"*
Finally, he estimated $8 billion as a cost stemming from the loss of
international trade due to the deteriorating terms of trade caused by
inflation. The loss stems from the two devaluations of the dollar in terms
of gold: one in 1971, and the other in 1973. The devaluation of the dollar
added about 10 percent to the average cost of imports. Using 1972 as an
example, Stevens estimated the cost of imports in that year to be about $8
billion.^^
These indirect costs total $378 billion, hardly a trifling amount. These
costs are more debatable than direct costs, and many would disagree with
them, both in theory and in their estimation.
Additional costs could easily be pursued. Housing starts were reduced
due to high interest rates; education could have been underfunded, hurting
future generations; urban problems could have been ignored; drug
problems were allowed to develop and become widespread; the Great
Society programs in general were allowed to languish and many pressing
social problems simply were not met; and so on. With a little imagination
it would be easy to impute many more costs to the Vietnam War but they
become more tenuous the greater the imagination.
Unfortunately, there is no calculus that would allow us to determine
these costs in the absence of the war. What might have been cannot be
ascertained. Moreover some of these costs could have been reversed
following the war and were thus temporary disturbances to the economy.
Quite simply, no real methodology exists that permits us to estimate the
indirect costs involved nor how much of them can be attributed to the
Vietnam War.^ It is quite possible, however, that the total indirect costs
involved could be in the hundreds of billions range.
BENEFITS
Our primary concern has been over the costs of the war and that is proper
but are there no benefits to counterbalance the costs? Surely some benefits
from the defense buildup and war-related economic activity are conceivable.
Individual members of the armed forces may benefit in a variety of
ways. Some receive training that will enable them to secure a better civilian
job when they leave the service. These benefits could be substantial but
again there is the difficulty in estimating them. Sjaastad cites an un¬
published study done by Phillips Outright of the Social Security Ad¬
ministration that tabulated a large sample of the effects of military service
on the subsequent earnings of selected individuals. The results indicate
“no net positive effect of the military service on future earnings except
possibly for persons in the lowest mental groups.”^^ Cutright concluded
the positive benefits of this group did not outweigh the negative effects of
others who were removed from the civilian labor force. (In the next
chapter, we will return to the experience of the Vietnam veteran when he
returned to civilian life.)
Other veterans will be able to take advantage of the veterans’ benefits
and receive additional education, receive subsidized housing, etc. How-
ever, these have already been accounted for as costs and cannot be counted
again as benefits. Simply put, the society would not have had to incur these
costs had not the war occurred.
There could be spillover benefits to the civilian economy from tech¬
nological advances in the military sector. It is possible that research for
military purposes could lead to new inventions, techniques, or materials
that might be useful in the production of civilian goo4s,,Examples of past
spillovers include computer technology, commercial airjets, and nuclear
energy. However it is argued by many that the diversion of research and
development into primarily military applications has robbed the private
sector with the result that domestic industries declined. In nations where
there is little diversion of R & D expenditures into military hardware, such
as Japan and West Germany, consumer products and industries have
flourished, and they have out-competed the United States.^ So the spill¬
over effects of defense spending are controversial even if they could be
identified and measured.
There is also the traditional argument, attributed mainly to Marxists but
others have joined in from time to time, that military expenditures are
needed to keep the economy booming. Increased expenditures on defense
stimulate the economic system; output and employment expand, and the
economy booms. In the absence of such stimulation, the economy would
stagnate. This argument has some merit, and several instances of defense
buildups leading to a booming economy can be found in U.S. history.
World War n took us out of the depression, and the Korean War followed
by the cold war kept the economy growing. But what of the Vietnam War?
The rapid defense buildup under Kennedy, to close the nonexistent
missile gap, helped to get the economy moving again towards the New
Frontier. Along with the tax cuts of 1964, the economy was growing out
of stagnation and reaching toward full employment when the Vietnam War
began in earnest. Thus while military spending helped to create the
growing economy, the Vietnam War was not “needed” to stimulate the
economic system. In fact it overstimulated it, and “overfull” employment
and inflation ensued.
Another contention of many is that adventures of this kind are under¬
taken to exploit the natural resources of a less developed country (LDC)
or to take advantage of unequal trade relations in order to dump goods on
the LDC, or interfere in other ways with its economic development and
independence. However valid such an argument in other parts of the world,
the situation in Vietnam does not fit the picture. There really are no natural
resources to speak of, and even the oil discovered late in the war did not
provoke much interest Neither did trade considerations prompt the inter¬
vention into Indochina. U.S. firms were not eagerly waiting to invest in
South Vietnam to exploit local economic conditions. In brief, the usual
charges against foreign interventions did not hold in this instance.
Rabid anticommunism can always be suggested as a cause for concern
in any part of the world. Reflexive reactions to any uprising that even
suggests any form of collectivism can be expected to follow from those
like Johnson and Nixon who were sensitive to charges of “losing” another
country to communism. Perhaps the reactions were more subtle and
represent a new form of imperialism. In the words of Melman,
The methods of the new imperialism included direct wielding of

military, political and economic power to checkmate leftist
nationalism and to take direct political control of entire nations—
without relying on, and even in the absence of, economic mechanisms
of trade and investment that were basic to the older imperialism.^^
Given the foreign policies of the Reagan administration in the

Caribbean and Central America, this explanation cannot be dismissed.
But the enormous costs that were incurred in order to make this policy
operational and to give it credence represent a tragic waste of resources
and human life.
OTHER DOMESTIC BENEFITS

We know that the growth of real wages did not increase in the period
but actually declined after 1965 and turned negative in 1970. Similarly
corporate profits did not increase as was seen in Chapter 4. Again it would
be necessary to follow the paths of income and wealth redistributions to
determine who won and lost in this period of inflation and full employ¬
ment. The overall distributions of wealth are not available for comparisons,
but the distribution of income shows little change over the period in
question with a small improvement in the lower ends of the distribution in
1966 when the lowest fifth of the population increased its share of
aggregate income to 5.6 percent from 5.2 percent in 1965, and the second
fifth increased its share in the same period to 12.4 percent from 12.2
percent. Thereafter they stabilized once again. The increases came at the
expense of the highest fifth of the population. There is nothing dramatic
here although the data are highly aggregated and may not show all the
movements that occurred.
It would hardly be surprising to discover that defense contractors would

be beneficiaries of war-related expenditures. However the data would not
always reveal the extent of profits because contractors may not be able to
separate commercial from defense work, are not required to report profits
on contracts, and because their profits are stated as a percent of costs and
not on a return of investment basis. If all the costs are not accounted for
when government property is used by contractors, a flat percentage rate of
profit would be misleading, and a rate of return on investment would be
more accurate. A $1 million dollar contract with a 10 percent rate of return
would yield a profit of $100,000; if however, the contractor had to utilize
only $500,000 of its equipment, then the rate of return on its investment
would be 20 percent.

To review the total costs and benefits involved in the Vietnam War
experience. Table 6.4 summarizes the costs accounted for in earlier dis¬
cussions.^®
According to Table 6.4, the total costs incurred in the Vietnam War were
over $500 billion and could range up to $900 billion if other costs are
included. These are staggering sums for “a war that nobody won—a
stmggle between victims. Its origins were complex, and its legacy remains
to be assessed by future generations. But whether a valid venture or
misguided endeavor, it was a tragedy of epic dimensions.”^^
Table 6.4
Summary of Costs of Vietnam War (in Billions of Dollars)
Direct Budgetary Costs (Table 6.1) $ 173
Future Budgetary Costs (Table 6.2) 251
Economic Costs of the War (Table 6.3) 83
Foreign Trade Costs 8
Total Costs of the Vietnam War $ 515
Ncê: If the costs calculated by others ($378 billion for recessions and inflation, the deterioration
in trade conditions, and the $15 billion for deferred military investment) is added to the
above sum, the total would rise to $900 billion.
It takes little imagination to wonder what sums like these could have
accomplished if used for other purposes. The Great Society was sacrificed,
urban problems were allowed to fester and grow, mass transportation was
discarded, schools were ignored, and so on. There is little point in belabor¬
ing the issue or in listing the social ills—the butter, that was sacrificed for
guns. Whether or not these problems would have been addressed in the
absence of the war is problematical anyway, and little is gained in specula¬
tion. It is sufficient to point to the enormous waste of resources in the
pursuit of unspecified goals and thereby hope to avoid its repetition.
The enormity of the folly is evident when one looks at the benefits of
the war. That no one, except perhaps for defense contractors, seems to have
benefited appears distressing in view of the costs involved. True, as in most
cost-benefit analyses, the costs may be easier to measure than the benefits,
but more gains should be readily identifiable. Only the military sector
appears to show temporary gains, either for contractors or in promotions
for officers who reported for battle. The rest of society was badly divided
with little in economic gains to smooth over the dissention.
Considering the total costs minus the total benefits leaves only one
conclusion—it was not a worthwhile endeavor. Looking at costs and
benefits are one way to pass judgment but whether considered from an
economic, legal, moral, or military view, the same conclusion emerges—
the war cannot be justified.
NOTES
1. Robert W. Stevens, Vain Hopes, Grim Realities (New York: New Viewpoints,
1976) , 93.
2. Thomas C. Thayer, “The American Style to War Made it Cosdy,” in The Lessons of
Vietnam edited by W. Scott Thomson and Donaldson D. Frizzell (New York: Crane, Russak,
1977) , 209-10. The same points are made by Senator Vance Hartke in his early book on the
war. The American Crisis in Vietnam (New York: Bobbs-Merrill, 1968), 100-115.
3. Ibid., 96. Stevens estimated that 38,000 military personnel were on hand at the end
of 1964. The support cost (at a rate of two support personnel per one directly involved is
then $836 million per year (38,000 x 2 x $ 11,000 per person). For the nine years, the total
comes to $7.5 billion. The remaining $7.5 billion results from official estimates made
after the official reports began to issue both full and incremental costs. Stevens maintains
that the estimate understated full costs in fiscal year 1967 by $4.4 billion. For fiscal years
1965 and 1966 no full costs were reported at all, and Stevens estimated the adjustment
needed for these years at $3 billion.
4. United States Senate, Committee on Foreign Relations, Subcommittee on United
States Security Agreements and Commitments Abroad, part 6, Republic of Korea, 91st
Congress, second session, February 1970,1552. In the course of these hearings. Senator
Fulbright raised many questions of U.S. policy in Southeast Asia and particularly in regard
to the enticing of other nations to join the United States in a war to which he was opposed.
5. Lieutenant General Stanley R. Larsen and Brigadier General James L. Collins, Jr.,
Allied Participation in Vietnam (Washington, D.C.: Department of the Army, 1975),
160-69. The actual troop strength is given in Table 6.5, from page 23 of their book.
Table 6.5
Military Assistance Forces, 1964-70 ^
Countrv 1964 1965 1966 1967 1968 1969 1970
Australia 200 1557 4525 6818 7661 7672 6763
Korea 200 20620 45566 47829 50003 48869 48537
Thailand - 16 244 2205 6005 11568 11586
New Zealand 30 119 155 534 516 552 441
Philippines 17 72 2061 2020 1576 189 74
6. See the Committee of Concerned Asian Scholars, The Indochina Story (New
YorkrBantam Books, 1970), 138-44.
7. See the prepared statement of James L. Clayton in U.S. Congress, Joint Economic
Committee, Subcommittee on Economy in Government, The Military Budget and Na¬
tional Economic Priorities, 91st Congress, 1st session, part 1, June 1969,146.
8. James L. Clayton, ‘The Fiscal Cost of the Cold War to the United States: The First
25 Years, 1947-1971,” in The Western Political Quarterly 66 (September 1972): 375-95.
The table appears on page 387.
9. John M. Clark, The Costs of the World War to the American Public (New Haven:
Yale University Press, 1931), 203.
10. Clayton, JEC Hearings, The Military Budget and National Economic Priorities,
148.
11. Robert Eisner, “The War and the Economy,” in Why Are We Still in Vietnam? edited
by Sam Brown and Len Ackland (New York: Random House, 1970), 119.
12. The Report of the President’s Commission on an All-Voluntary Armed Force
(Washington, D.C.: U.S. Government Printing Office, February 1970), Chapter 3,23-33.
13. Robert Eisner, “The War and the Economy,” 119. The estimation procedure
employed is given in the Appendix, 122-23.
14. Cornell University Air War Study Group, The Air War in Indochina, rev. ed.
(Boston: Beacon Press, 1972), 106 and 240. The equations of the two studies are:
Cornell: ACC = (-26.21) + (38.32) (AF) - (18.00) (AF)^ -i- (2.88) (AF)^
Eisner’s ACC = (-52.93) + (71.12) (AF) - (31.24) (APf + (4.64) (AF)^

Where ACC stands for Added Costs of Conscription in billions of dollars, and AF is total
military personnel in millions. The estimates differ because of updated data used in the
later Cornell study.
15. Stevens, Vain Hopes, Grim Realities, 184. Stevens took the difference between the
average yearly wage of a beginning unskilled blue-collar worker, $5,400, and the military
base pay, $1,655, and multiplied the difference, $3,745 times the estimated many years
spent by servicemen in Vietnam, 3,873,975 to arrive at his estimate of sacrificed earnings
of $14.6 billion.
16. See the statement of Robert Eisner in Congress of the United States, Joint
EcoiK)mic Committee, Subcommittee on Economy in Government, Changing National
Priorities, 91st Congress, second session, part 2, June 1970,677-78. In this statement,
Eisner used a 2 percent growth rate for earnings and discounted the total by a discount
rate of 5 percent to yield a present value of $11.6 billion. He also calculated the costs of
disability and hospitalization at $11.5 billion. In this book only current values are used
because it would be difficult to compare some values on a current basis and others on a
present value basis; also the focus here is on total cost dollars and not the total costs at a
particular time.
17. For those who are interested, the present value of the earnings loss using a
productivity rate increase of 2 percent and a discount rate of 5 percent and an initial
income loss of $10,000 is $13.5 billion. The casualties in the war amounted to 153,000.
With the assumption that the mean disability rate is 33 percent the present value of the
earnings loss due to disability or hospitalization is $11.9 billion. The total future earnings
loss discounted to 1970 is $25.4 = ($13.5 + $11.9) which is not very different from the
$23 billion used in the text
18. Leonard Dudley and Peter Passed, “The War in Vietnam and the United States
Balance of Payments,” The Review of Economics and Statistics (November 1971):
437-42.
19. For a contrary view of the balance of payments problem see. Department of
Defense, Comptroller, The Economics of Defense Spending: A Look at the Realities, July
1972,67-11. While admitting that defense expenditures contributed to the decline in the
balance of payments in the 1950s, they no longer did so in the later years of the 1970s.
The data presented to support this contention are not suitable for analysis for the Vietnam
period since only selected years are supplied, and the most important years of the war,
1965-67 are missing.
20. Stevens, Vain Hopes, Grim Realities, 109.
21. Cornell University Air War Study Group, Air War, 105.
22. Ibid., 104.
23. Stevens, Vain Hopes, Grim Realities, 158.
24. Ibid., 161.
25. Ibid., no.
26. For more discussion of these concerns and some attempt at formulating a
methodology see Bruce M. Russett, “The Price of War,” in The War Economy of The
United States edkedhy Seymour Melman (New York: St. Martin’s Press, 1971), 152-60;
Jerry Hollenhorst and Gary Ault, “An Alternative Answer to: Who Pays for Defense?,”
American Political Science Review 65 (September 1971): 760-63; See also J. S. Grant,
A. G. Moss, and J. Unger, Cambodia: The Widening War in Indochina: A Primer (New
York: Washington Square Press, 1971).
27. Larry A. Sjaastad, “The Conscription Tax” in The President’s Commission on an
All-Volunteer Armed Force, Part IV, 1-11.
28. For example see Seymour Melman, “Who Decides Technology?, in The War
Economy of the United States, edited by Seymour Melman, 149. Among many others see,
Robert B. Reich, The Next American Frontier (New York: Times Books, 1983), 190-93.
29. Seymour Melman, The Permanent War Economy (New York: Simon and Schuster,
1974), 266.
30. It is important to note that all the data are given in current dollars—just actual
amounts without regard to time. This is clearly inappropriate for costs that extend well
into the future. Such costs should be discounted to the present so that they can be properly
viewed and compared with the costs as of now. (The costs should be reduced to their
present value; failure to do so would deny that a rate of interest exists.) While technically
correct in regard to future costs, there are several problems with present values in this
situation. First, the Department of Defense and many others quoted in this book, use
absolute dollars to describe costs, and it would be misleading to compare their data.
Second, what discount rate to use would be arbitrary, especially when the costs are spread
out over many years. Third, even if a proper rate of discount could be agreed upon, our
concern is not with the costs of the war at a certain date, but with total estimated costs.
Present values in this case would be misleading rather than enlightening. Fourth, we are
not interested in how the costs will be repaid, or in future budgetary problems. Inter-
generational shifts of resources are not our immediate concern.
31. Stanley Kamow, Vietnam (New York: Viking Press, 1983), 11.
7 THE POST-VIETNAM
SOCIETY
When the U.S. involvement in the war ended in January 1973, attention
shifted to the release of American prisoners of war. In February the first
group of them landed on Clark Field in the Philippines. Gradually more
of them were freed and by April, all of them were. With their release, U.S.
interest in Vietnam seemed to wane, and the ongoing war seemed even
farther away than it did when U.S. troops were fighting.
The war, of course, was turned over to the South Vietnamese who were
at first highly spirited, but gradually the deteriorating economy, the lack
of training and materiel, the absence of U.S. support, the official corrup¬
tion, the lack of leadership, and so on, were too much for their armed
forces, and the war was quickly lost. On April 30, 1975 the North
Vietnamese captured Saigon and accepted the surrender of the South
Vietnamese forces. Earlier in April, Cambodia fell to the Khmer Rouge,
and another period of repression and turmoil began in Southeast Asia.
Thus the war drifted on, and the upheaval spread into neighboring
Cambodia; but even as the fighting became more fierce and brutal, as
refugees wandered in search of a stable area, and as the savagery toward
rival groups, civilians, refugees, and prisoners became unspeakable, the
war faded into the background of American consciousness. The nation
turned its back on a long and painful adventure and was anxious to forget
the whole thing and relegate it to historians. To some, the United States
lost a war against a far inferior enemy; the cause was noble but the United
States abandoned its principles and surrendered to popular sentiment. Yet
to others, the cause was ignoble and unworthy of a great nation; to these
people, the U.S. involvement was wrong to begin with and losing or
winning was irrelevant. There were, as usual, all shades of opinion in
between and all shades of bewilderment over the whole affair. In short, the
war’s conclusion left no one happy with either the outcome or the after-
math. Relief over the war’s end was mixed with bitterness and sorrow, and
for many, shame, either because we entered into it or because we failed to
win it.
On the domestic scene, Richard Nixon facing impeachment had
resigned on August 9, 1974, and was replaced by Vice President Gerald
Ford who had replaced Spiro Agnew who was forced out as Nixon’s vice
president. President Ford, in a very controversial action, promptly par¬
doned Nixon for all federal crimes he “committed or may have com¬
mitted.” This rapid and unprecedented turnover at the top of government
was accomplished with a minimum of disorder, attesting more to the
stability of U.S. political institutions than to the lack of moral indignation.
STAGFLATION
So mid-1974 was not a happy time for the country, and it was not a very
propitious time for Ford to become president. The economy was sliding
into another recession, but that would not be recognized until late in the
year. With the removal of price controls, inflation could no longer be
suppressed and prices “bulged” as everyone scrambled to restore past
relations. Inflation quickly became the number one concern of the ad¬
ministration, and Ford set about trying to combat it by proposing a tax
increase and a “whip inflation now” (WIN) program, complete with
button, whose aims were as questionable as the button was ludicrous.
Inflation was indeed a problem but the policies used to combat it did not
recognize the causes. A series of events led to the growth of inflation, and
they became cumulative. The dollar was devalued in 1973 causing import
prices to rise; food prices rose following crop failures in 1972-74; energy
prices, especially oil prices, increased as the oil producing countries
demanded higher prices; and price controls were removed sending
everyone scrambling to recover lost market positions.* These essentially
one-time price increases were allowed to become part of the core inflation
and became cumulative.
Thus, for instance, when the price of oil rose following the OPEC
embargo on shipments to the United States sending the CPI to double digits
in 1974, aggregate demand was reduced. Interest rates rose with a tight
monetary policy to their highest rates in modem times, cmshing the
housing market. The prime rate rose to nearly 12 percent, mortgage rates
to over 10 percent, and the Federal Reserve’s discount rate increased to 8
The Post-Vietnam Society 115
percent. Preoccupied with inflation, the Ford administration proposed a

tax increase and restricted the growth of government expenditures. As a
result inventories piled up, production and output fell drastically, and
unemployment rose steadily, reaching 8.8 percent in the second quarter of
1975. In short the economy entered into the sharpest recession since the
1930s. It was a brief but sharp recession.lasting from November 1973 to
March 1975. Real GNP fell by 6.6 percent over the decline, but prices
continued to rise as the CPI increased by 14.7 percent in the downturn. Of
course, capacity usage declined, and the utilization rate of our productive
capacity fell to 68 percent from 83 percent. Stagflation, high unemploy¬
ment combined with inflation, was painfully evident in this period. Again
tight money and fiscal restraint were employed to fight inflation and
instead brought on this sharp recession.
The economy recovered as the private sector led the way, but monetary
policy was erratic, and fiscal policy was expansionary thanks to the tax
cuts of 1975 taking effect. Again treating price shocks to the system by the
usual monetary and fiscal policies made things even worse and contributed
to the recession that followed.
The administration did reverse itself, proposed a tax decrease, and did
try to reduce government spending. The problem is that monetary and
fiscal policies are not effective in fighting stagflation. The oil embargo was
lifted, and the economy did recover somewhat but was still stagnating in
1976. Ford lost the election of 1976 to Carter, but the economic problems
remained regardless of who was in the White House.
More price shocks hit the Carter administration with much the same
effect. Again food prices and oil prices rose, interest rates increased, and
the revolution in Iran cut off oil supplies from that nation. Inflation
accelerated as the CPI rose from 6.8 percent in 1977, to 13.3 percent in
1979, and 12.4 percent in 1980. Meanwhile, unemployment remained
around 7 percent, falling slightly in 1978 and 1979 but returning to 7.1
percent in 1980. President Carter even resurrected a form of wage
guideposts in the effort to slow inflation. He resorted to voluntary wage
guidelines as the Kennedy administration had done in 1962. The program
called for labor to limit its demands to 7 percent (later increased to a range
from 7.5 to 9.5 percent, hoping for a average wage settlement of 8.5
percent) and for firms to limit their price increases to 0.5 percent below
past average increases. This time the policy was much less successful. Real
wages fell in the 1970s, and it was not the time to ask labor to make
sacrifices in the national interest. Later he asked for and received some
credit controls^ that might have worked for a while to curb consumer
spending, but the effects were short-lived and ended up merely irritating
everyone opposed to government regulations of the economy.
The Carter administration thus found itself in the same bind that
confined the Ford administration. It took office wanting to pursue policies
that would encourage growth, advocating tax decreases and expenditure
increases. Monetary policy had been expected to be accommodating as
well. But energy and food price increases put anêpd to unequivocal
macroeconomic policies. The administration became cautious, and
monetary policy became erratic in the face of inflation and the changing
monetary conditions outlined earlier. More tax reductions were sought to
combat stagflation but inflation made some sort of controls appear neces¬
sary. The voluntary controls were meant to signal the administration’s
concern for inflation while it attempted to pump up the economy.
In 1979 the second wave of severe energy price shocks forced a reversal
of economic policies. Government expenditures were restrained, and
monetary policy became very tight. In October 1979, the Federal Reserve
turned to monetarists’ policies and concentrated on restricting the growth
of the money supply and let interest rates react to market conditions.
Interest rates surpassed all earlier ones and recession threatened. Again the
administration fought inflation with tight money and tight budgets. The
result was another recession in 1980 with consumer prices increasing by
double digits and with interest rates approaching 20 percent. The un¬
employment rate stood at over 7 percent.
In summary, lacking any alternatives to traditional fiscal and monetary
policies, the administration turned to fighting stagflation with methods that
did not confront the problems causing great discontent among the elec¬
torate. In 1980 the voters showed their displeasure as they turned to
different solutions to their perceived economic problems.
SUMMARY OF POLICY RESPONSES

As we have seen, price shocks and energy problems in general plagued
both the Ford and Carter administrations. The tendencies toward stagna¬
tion were evident throughout the 1970s, and the attempts to solve the
problems through traditional monetary and fiscal policies were ineffective.
Tax cuts did relieve some of the political pressure caused by higher taxes
on inflated incomes. Inflation pushed people into higher tax brackets, and
this “bracket creep” caused much consternation among taxpayers who
were forced to pay higher taxes on inflated money incomes without feeling
better off. Cutting taxes acted as an escape valve for taxpayer discontent;
the tax reductions were a crude way of adjusting the tax code for inflation
(indexing it), something which the Congress was unwilling to do as a
matter of policy.
Tight monetary policies did not work either, as the stop-and-go policies
of the Federal Reserve System gave off conflicting signals and helped
cause recessions in order to fight inflation. In the end, the higher food and
energy prices found their way into higher wage demands and into further
inflation—the price shocks were allowed to become part of the core
inflation. At the same time, labor costs mounted as the rate of growth of
labor productivity began to decline, slowly at first and then dramatically
in 1973. In the 1970s, the problem of stagflation seemed intractable.
But a review of the macroeconomic policies of the 1970s, however brief,
is not the purpose of this section, and that analysis can readily be found in
other sources.Thus without a thorough examination, I will assume that the
major problem in the immediate post-Vietnam War period was stagflation
caused in part by one-time events, such as food and energy price shocks
and by reactions in the post-price control period. The question then
becomes: What has this to do with the Vietnam War?
INFLATION AND WAGE AND PRICE CONTROLS

Earlier it was suggested that the wage and price control system of the
Nixon administration was mainly politically inspired, and its real
economic content was directed at international trade conditions. That
assertion remains unchanged, but it is necessary to understand that the
controls were greeted with relief—stemming from the belief that some¬
thing was being done about inflation at last. Many were growing weary of
continued price increases and welcomed the attempt to control them. Firms
wanted to restrain the demands of labor, while labor and consumers wanted
to control price increases. Those price increases were the result of the
Vietnam war buildup that produced excess demand inflation and later
supply side inflation. Thus had there been no inflation, there would not
have been the excuse for wage and price controls. The rise in prices allowed
the administration to impose controls to accomplish its purposes—preelec¬
tion—as well as deal with the international problems that required a crisis
atmosphere to resolve.
The inflation caused by the war can thus be held responsible for a whole
string of actions starting with controls, flexible exchange rates rather than
the fixed rates, removal of gold from trade settlements, devaluations of the
dollar, and so on. However, it is not wise to extend the list into areas that
are too far removed from the actual events of the war, and it is always
difficult to separate those actions that would have taken place anyway from
those that were war-induced. For example, as part of the controls system,
protectionist measures (repeal of the excise taxes) for the auto and trucking
industries were inserted, but these might have been in process before, and
the controls merely offered a convenient vehicle to accomplish the policy
in the shadow of more dramatic actions. , ^
INFLATION AND OIL PRICES

Similarly, the increases in the price of oil of 1973-74 and 1979-80 were
largely the result of inflation in the Western nations, particularly the United
States. Oil revenues of the OPEC countries are used for economic develop¬
ment and represent for some nations the main avenue for economic and
social progress. These nations import a wide array of goods from other,
more developed, countries. The imports include not only the capital goods
necessary for development but manufactured goods of all kinds, as well
as raw materials and foodstuffs. Yet these oil-producing nations watched
as inflation eroded the purchasing power of their oil revenues. To make
matters even worse for the oil producing countries, the oil contracts were
denominated in dollars. With inflation in the United States, the dollar was
depreciating against Western European currencies, and thus the oil produc¬
ing countries were hit twice. If they purchased goods from the United
States, their dollars did not buy as much due to inflation in the United
States; if they bought goods from Western Europe, their dollars also did
not buy as much due to the depreciating dollar.
Moreover, from 1950 to 1970, the price of oil was either stable or falling
while the prices of imports continued to rise; from 1965 on the increase in
import prices accelerated and the real incomes of the oil producers fell
more rapidly.^
Thus the oil producing countries attempted to recover the loss of real
income by raising prices, but these price increases were forced on the
economies already staggering from recessions and tending toward stagna¬
tion. In the words of my colleague Abbas Alnasrawi:
The OPEC oil-price increases of 1973-74 and 1979-80 represented

serious shocks to the economies of the industrialized countries. These
external shocks were superimposed on economies that had already
entered a period of slow growth or of no growth or that were already
experiencing a serious decline in output. These changes in output
were also associated with high rates of unemployment and persistent

inflation, giving rise to conditions of stagflation."*
It is certainly true that the Arab members of OPEC did use oil as a foreign
policy weapon when they imposed an oil embargo to punish the United
States for its support of Israel in the Arab-Israeli conflict of 1973. The fall
in purchasing power of oil revenues was clearly not the only impetus for
the push for higher oil prices. Still without the inflation in industrialized
countries, there would have been less pressure to increase oil revenues to
support economic development. The common enemy, Israel, served to
make their oil policies more acceptable to the participating Arab states and
gave their plans more cohesion and unity than might otherwise have been
the case; but the embargo was meant more to send a message to the United
States to exert pressure on Israel than to threaten the United States directly.
Oil price increases alone would not have sent this message. The price
increases have to be separated from the foreign policy aspects since they
were sincere attempts to recover some of the lost real income caused by
the rising prices of imports, and the rising prices of imports can be largely
traced, at least since 1965, to the overheated economy caused by the
Vietnam War.
The consequences of the energy problems of the 1970s are many. Autos
were redesigned, homes were better insulated, appliances were made more
energy efficient, nuclear power became more acceptable, coal was used
more causing air pollution problems, conservation of energy sources began
in earnest, population shifts from the North to the Sunbelt occurred, and
the manufacturing process turned more to energy-saving, labor-using
technology. Too many adjustments were made in the economy to tabulate,
and while not all of them can be traced to the oil problems of the 1970s,
there is no question that many of them were initiated as a result of oil price
increases, and the embargo, and the threats of their recurrence. To some
extent, these reactions can be attributed to the inflation of the late 1960s
and early 1970s, although a precise accounting is impossible.
INFLATION, HOUSING, AND SAVING

Once the origins of inflation are identified (and it is assumed that the
Vietnam War is one of them), it is tempting to trace the repercussions on
other markets that are seemingly unrelated to the immediate causes. The
economic system is a giant labyrinth and events in one area interact with
those in another to cause reactions of a third kind. Inflation is a good
example of the type of disturbance that can set off chain reactions of
various kinds in disparate areas. It would be interesting for example to see
some of the effects on the housing market and on household saving.
Attributing all the reactions to the inflation induced by the Vietnam War
would be stretching things, of course, but some of the repercussions in
these markets can be traced back to that original source of the inflation and
its effects in the 1970s. v v
A large part of the housing boom in the 1970s can be attributed to
inflation and the housing subsidy supplied by the tax code. In the 1970s,
inflation averaged 7.4 percent and mortgage interest rates 8.8 percent.
For someone in the 40 percent tax bracket this meant that the mortgage
interest rate was really 5.3 percent (60 percent of 8.8 percent) since
mortgage interest is deductible for tax purposes. However since inflation
was rising at 7.4 percent, the real mortgage rate was -1.9 percent. This
represents a nice subsidy for home buyers, but that is not the primary
issue here.^ It is inflation that reduces the cost of home ownership and
induces more investment into housing than into other types of invest¬
ment. While the investment in housing may not have been all that bad,
the decision to invest more in this sector should have been made on other
than tax considerations. Particularly since low-income, public housing
did not benefit from these subsidies, and that is where the need for
housing probably was the greatest.
Since housing competes for saving with all other types of invest¬
ment, the more resources devoted to housing, the less will be available
for other investment. Thus inflation and the tax code steer investment
into certain channels and away from others. Moreover the saving rate
in the United States has never been very high and has actually been
falling in the 1980s.^ The competition for the limited funds may
adversely affect business investment and limit economic growth.
Together with the huge federal deficits in the 1980s, the savings
consumed by the housing market had diminished the funds available
to increase the capital stock of the nation.^
Investment in housing is also encouraged by the expectations of con¬
tinued inflation that assumes housing prices would continue to rise as well.
In fact if housing prices rise faster than the rate of inflation, the homeowner
benefits again with capital gains that are not taxed and when they are taxed
have special provisions attached to them. Indeed inflationary expectations
may well encourage consumption at the expense of saving. The huge
increase in personal debt may well be attesting to this condition as well as
to the reduction in the saving rate.
This is not the place to pursue these issues since they take us farther
away from the main topic. These points are made to suggest the many
ramifications of inflation as it makes its way through the economic system.
So when an inflationary period begins, it is not sufficient to identify only
the immediate effects on the economy but one must look to longer mn
consequences as well. Thus, long after the Vietnam War can be blamed for
the immediate inflation, it can still be blamed for instituting the inflation
and its subsequent reactions. Long after the pebble thrown into a pool has
sunk to the bottom and out of sight, the ripples continue.
OTHER ECONOMIC DEVELOPMENTS

It would be interesting to see how a few of the structural changes
suggested in Chapter 4 affected the economy in the 1970s. The stagnation
of the 1970s, already discussed, can be seen in some of the elements of the
structural change.
The productivity of labor continued to decline from past growth rates.
Output per'hour of all persons, one measure of productivity, declined
dramatically in 1973 to a growth rate of 1.8 percent and the rate of growth
actually turned negative in 1974 to -2.2 percent and did not recover to the
previous rate for the remainder of the decade. The rate of growth of labor
productivity did not begin to return to historical averages until 1983, and
then it fell off again. There was no unique explanation for the decline then,
and even now, too many explanations have been offered to be credible to
everyone.
The utilization of our productive capacity also continued to decline in
the 1970s. For the decade, the average usage of capacity for all industries
was 82 percent but the rate for manufacturing was only 80 percent. No
great change can be found in the 1980s with the all-industry and manufac¬
turing categories both averaging around 81 percent. More disturbing
perhaps is the rate for durable goods manufacturing which remained at 78
percent, far below the rates of the 1960s. In the latter half of the decade,
however, all capacity utilization rates were slowly increasing. Much
discussion in recent years over the decline of manufacturing and the rise
of the service sector in the United States has followed the analysis of data
like these.® If these and other data are indicative of areal shift in the product
mix of U.S. output, it would represent a profound structural change of the
U.S. economy, a change that may have begun in the 1960s.
The fall in the rate of growth of corporate profits appears to have been
arrested. The observed decline in the late 1960s and early 1970s was
reversed later in the decade. However, the 1980s again showed a decline
in the rate of growth of corporate profits. Evidently there is more to this
complex variable than can be discussed here. Measurement problems
abound, but even if these could be overcome, much more study is required
before much can be determined about the extent of structural change and
corporate profits.
In the social area, the 1970s saw a retreat from the social programs of
the 1960s. These were found to be too expensive, unworkable, self-defeat¬
ing, unnecessary, and wasteful. In short, in the decade of inflation and
stagnation, the American public became unwilling to finance social
programs, and the experiments were largely abandoned. With real wages
declining, interest rates soaring, and the prices of energy and food escalat¬
ing, the public was in no mood to pay for programs they deemed undeserv¬
ing. The war on poverty was reduced to skirmishes as the nation looked
the other way.
One need only look at the tax revolt that started in California in 1978 to
see the culmination of the years of frustration in paying taxes. The desire
to limit taxes, in that case property taxes, was indicative of the feeling that
taxes were “too high,” and since property taxes furnished the revenue of
localities to pay for education and welfare benefits, it is not too much to
infer that some connection is plausible. Soon the idea of limiting taxes
spread to other states and eventually to the nation in the Kemp-Roth federal
income tax cut proposal in 1980. People were simply tired of paying taxes
in general and for social programs in particular. When politicians told the
public that such social programs were wasteful and unnecessary, and that
the public was not getting its money’s worth, it was easy to justify cutting
them out by limiting revenues to pay for them.
When Ronald Reagan asked people if they were better off in 1980 than
they were in 1976, many replied, “No.” Their income gains, which they
identified as well-earned, were eroded by inflation and rising taxes. Even
if they were actually better off in real terms—their income gains exceeded
inflation—they felt worse off. They felt they deserved the entire monetary
income gains and felt cheated when inflation took some of the gains away.
If someone’s income increased by $1000 (which he or she regards as due
to merit, conveniently forgetting that inflation boosts people’s incomes as
well) and rising prices take away $500 of the $1000, the person is still
better off but feels cheated anyway for $1000 at the old prices would have
meant a significant improvement in living standards.
Some of this feeling led to frustration over the lack of economic
progress (each succeeding generation ought to have a higher living
standard than the previous one) in the 1970s, and some is reflected in the
swing toward more conservative ideas and away from experimentation. In
economics this is seen by the succession of fiscally conservative leaders—
Nixon, Ford, Carter, Reagan, and finally Bush. Fiscal policy continued to
be found untrustworthy. The disenchantment with government and its
ability to control the economy led many to reject the manipulation of the
economy by altering taxes and expenditures. Monetary policy fared no
better. The stop and go policy of the Federal Reserve, expansionary and
then contractionary, produced many critics of discretionary actions.
Of course, it became evident to all, even if they would not admit it, that
traditional monetary and fiscal policy could not fight stagflation. Still the
traditional policies were pursued—there was nothing else to do now that
policy experiments, such as another incomes policy, were ruled out.
Inflation just continued as the economy was staggering. Since the govern¬
ment could not control the economy, it was one step away from concluding
that maybe government was part (or all) of the problem.
Hence more calls for a balanced budget and more calls for a shift in
monetary policy were heard. The pronouncements merely reflected the
conservatives’ desire for rules and the rejection of discretionary acts of
bureaucrats. The balanced budget idea gained adherents, but was not
enacted, although many states voted for a constitutional convention to
consider one. The shift in monetary policy was accepted as the
monetarists finally convinced the Fed to adopt its agenda. In October
1979, the Fed began to attempt to control the money supply instead of
interest rates. The attempt lasted until 1982, when the Fed, in the face of
the recession of 1980 and the recession of 1981-82, retreated from the
experiment. Using mainly monetary policy to fight stagflation resulted
in extremely high interest rates and helped bring on two recessions in a
very short time. Monetarist influence remained after 1982 but gradually
fell out of favor.
In 1980, the voters rejected whatever was left of Keynesian economics
and elected Ronald Reagan, who promised a conservative revolution in
policy-making. Liberalism, and liberal economic policies, not really in
evidence in the 1970s, were rejected in favor of something new—supply
side economics. In practice, this supply side economics that involved
massive tax cuts to stimulate saving, investment, and GNP turned out to
be more Keynesian than even Keynesian economists had advocated. The
massive federal deficit that followed surely altered the economic agenda
in the 1980s and may well have altered the economic structure in ways not
fully realized at this time.
POST-VIETNAM MILITARY CHANGES

The image of the military was tarnished in the Vietnam War. Living up
to the cliche that generals fight the last war in the latest one, the military
establishment could not cope with the type of guerrilla warfare in Viemam.
Their forecasts for an early and complete victory by using men and materiel
as they were used in World War II, or even Korea, brought the military
establishment first approval, then disillusionment, then scorn, and finally
ridicule.
Despite the large amount of resources employed in Southeast Asia, the
armed forces accomplished very little. With no conquests of land, success
was measured by macabre body counts that no one believed. With the use
of defoliants, more disturbing questions were asked. All the reports of
massacres, of drug use among the troops, of morale problems, and of heavy
bombings and widespread destruction, did not endear very many to the
conduct of the war.
So it is not surprising to find a postwar distrust in the military and
military solutions. Many thought the war should have been fought until
won; others were content to end it quickly and get out. Whatever the origin,
there arose a caution about ever getting involved in such a conflict again.
Politicians and generals alike came to recognize that this unpopular war
had put a restraint on future military activities that no amount of discus¬
sions on diplomacy could accomplish. A modicum of humility (shame?)
was allowed to penetrate the facade of invincibility. It was called the
Vietnam syndrome.
Indeed, the intense opposition to the quagmire of Viemam led to the
enactment of the War Powers Act that severely restrained the president
from engaging in military operations where U.S. lives might be en¬
dangered unless such actions were sanctioned by Congress. Presidential
actions in the Viemam War, such as Nixon’s secret bombing of Cambodia,
dismrbed many in Congress and galvanized them into action. This, of
course, was just one more manifestation of the conflict between the
executive and legislative branches over who should control foreign policy.
But clearly the irritation over the origin and conduct of the war convinced
many in Congress that formal restrictions on future presidents were
necessary.
The formal restraints of the law and informal constraints of the society
placed on the executive branch were sufficient to deter military adventures
for a decade after the war had ended. Both the Ford and Carter administra¬
tions felt the pressure, and while not free of disturbances in the world.
managed to avoid the type of entanglements that Vietnam provided. The

Ford administration was tested in the Mayaquez affair, when the U.S.
merchant ship, Mayaquez, was seized by Cambodian forces in the Gulf of
Siam and retrieved by U.S. forces, and when North Korea killed two
American officers and wounded four others at the boundary line. The
Carter administration had its problems in the Soviet invasion of Afghan¬
istan and in the Middle East, Iran in particular. Yet none of these provoca¬
tive situations resulted in the type of military action that would have
required congressional approval. Both administrations felt the constraints
and limited their responses.
When the Reagan administration took over, one of its principle foreign
policy aims was to rid the nation of this Vietnam syndrome. Its large and
rapid military buildup and its belligerent attitude toward the Soviet Union
clearly signaled the desire for change in foreign affairs. A strong defense,
it was felt, would not only deter communist aggression but would even
reverse some previous gains, or at any rate, force concessions at the
bargaining table. The Reagan Doctrine was bom.
However to reverse the Vietnam syndrome and demonstrate the nation’s
resolve, more direct evidence was needed. The administration’s interven¬
tion in Central America in general and in Nicaragua in particular provided
the necessary opportunity. Its initial covert activities in Nicaragua followed
by open involvement in supporting the U.S. backed and financed contras
certainly demonstrated that the administration did not fear the type of
engagement that could have led to another Vietnam and did not feel
constrained by the Vietnam syndrome. All over Central America, the
United States risked involvements that could have resulted in protracted
entanglements. In Nicaragua, it found another quagmire, another military
adventure not supported by the American public. But the Vietnam
syndrome had been broken.
To emphasize the exorcism of the Vietnam nightmare, the administra¬
tion embarked on a series of foreign policy moves that would prove to the
world that the United States was ready to resume its role as an international
policeman. The United States sent a peacekeeping force to Lebanon that
actually took sides in the conflict; in 1983, the United States invaded
Grenada with flimsy excuses to root out the socialist government; in 1986,
the United States bombed Libya in order to retaliate for alleged terrorism
against the United States; in 1987, the United States decided to protect
shipping in the Persian Gulf against attacks from Iran or Iraq. In 1989, the
United States invaded Panama to overthrow the dictator and alleged drug
trafficker General Manuel Noreiga who had refused to recognize an

election that put the opposition in power.
The pattern was clear; demonstrate America’s resolve to intervene in
trouble areas even if the United States was not directly affected. In addition
to casting aside the Viemam syndrome, another pattern was emerging.
Note in the foregoing list that the United States has been increasingly
involved in third world conflicts. It appears that -the United States is
altering its worldwide strategy. Now that the tensions between the United
States and the Soviet Union have relaxed and nuclear treaties have been
signed or are in the making, the evil empire of the early Reagan administra¬
tion no longer poses the threat that was relied upon in order to furnish the
excuse for the massive military buildup. The administration can now safely
let its military alliances, such as NATO, be concerned with the old
adversaries while the United States can concentrate on third world disrup¬
tions. The Pentagon’s new doctrine has been labeled “low-intensity con¬
flict” or (L.I.C.), and it is being applied to military adventures in third
world countries. “As now conceived, L.I.C. as a doctrine has stretched to
the point that it embraces almost any sort of short-term military activity
that a President might seek to undertake—War Powers Act or no.”^
The Reagan administration has thus succeeded in twisting the Vietnam
syndrome to the extent that the public has generally supported its actions.
Still the victory was not complete because the civil war in Nicaragua did
not elicit public support, and remnants of the Viemam syndrome remained.
THE RETURNING VETERAN

The society was forced to undergo other adjustments caused by the war.
Many returning veterans of the war found a frigid welcome. An unpopular
war generated little respect for those who fought it. But the guerilla war,
with all its horrors, left many veterans with physical and mental problems
which required special treatment. Physical problems were not new but
more mental problems developed than were anticipated. Some of them
surfaced long after the war’s conclusion and became apparent in some
bizarre behavior, often involving violence, sometimes to themselves,
sometimes to others. Many veterans suffered from a set of symptoms that
came to be known as “post-traumatic stress disorder.” Its manifestations
include guilt, depression, and paranoia, and these disorders often led to
crime, suicide, and substance abuse.'®
Drug addiction among veterans has caused problems not found in
previous war veterans. Drugs were readily available in Southeast Asia, and
those who had to endure the daily horrors of the war found solace in the
escape offered by mind altering substances. Since many of the veterans
were also black, poor, or from poor areas, their return only added to local
drug problems that had emerged in the 1960s. Many other social problems
ranging from child or wife abuse to alcoholism and crime could be traced
to veterans unable to adjust to civilian life. These vets felt used by a
thankless society, and their feelings of alienation emerged in various ways,
some decidedly unsocial.
Where shall we find a calculus to measure these costs? Their omission
from Chapter 6 is just another reminder that all the costs of this adventure
can never be known, and perhaps the most devastating ones not even
imagined.
Yet the returning veteran had to find a place in the society. Of course
there were efforts to help him reenter civilian life. (They were mostly male,
about 98 percent, as only 257,000 women were in the armed services
during the Vietnam era, and of these, only 33,000 were involved in the
Vietnam theater.) One of the earliest was Project Transition, designed to
provide training or education or to help them find jobs. Priority was given
to those who were disabled or who lacked transferable skills for the private
sector. Most of the training was vocational in content, preparing veterans
for post office work, and on the job training experience was provided by
private industry. In terms of occupations, 29 percent were prepared for
clerical and sales work, 22 percent in machine trades, 19 percent in
structural work, 14 percent in managerial jobs, 6 percent in services and
the remainder in farming, bench work, and other skills.'* Yet neither
employers nor the veterans themselves thought the Veterans Administra¬
tion (VA) did a very good job in training veterans or in finding them jobs.
Only 41 percent of employers gave the VA positive ratings, and only 8
percent of veterans rated the VA’s job as excellent, and 33 percent as pretty
good.
In addition, veterans had some reemployment rights with their previous
employers providing certain conditions were met. If these conditions were
met (minimum time in service, maintained qualifications for job) then the
employer had to reinstate the veteran with appropriate status and pay as if
he/she had never left the job. This program worked reasonably well with
the VA resolving about 98 percent of the disputes without litigation.'^
Moreover, local and state employment offices were instructed to give
preferential assistance to veterans looking for a job. And while they were
looking for work, veterans were entitled to unemployment compensation
if they met state requirements. Thus there were programs in effect to aid
the returning veteran, and if they did not always work to everyone’s
satisfaction, they were at least available.
Finally returning veterans were entitled, as veterans before them, to
educational benefits. The GI Bill, passed in 1944, paid for the education
and living expenses of veterans. Most of the veterans were using the benefit
at the college level, but in the immediate years after the war, fewer veterans
were taking advantage of the program than veterans of previous wars. One
complaint of the Vietnam veterans was the delay in receiving funds while
the educators felt that benefits were too low. Few thought that veterans
were abusing the program.*'*
THE EMPLOYMENT EXPERIENCE

Veterans began entering the civilian labor force in 1969 when President
Nixon began withdrawing troops from Southeast Asia. The withdrawals
continued until 1975 when the last of the troops were evacuated. For the
years 1969-71, the data show that the unemployment rate was higher for
veterans than non veterans. The younger veteran (20-24 years of age) had
an even greater unemployment rate than the older veteran (25-29 years
old). For example in the second quarter of 1971, the younger veteran had
an unemployment rate of 12.4 percent compared to the older veteran’s rate
of 5.1 percent. The older veteran would, of course, be more experienced,
possibly have more training, etc. For comparison, the nonveteran’s un¬
employment rates for the same period and same age groups were 9.5
percent and 4.0 percent.*^
These early data do provide evidence that the Vietnam veteran was
having more difficulty finding employment than the nonveteran. The same
is tme throughout the period in question, 1969-71, and the higher rates do
not depend upon the state of the economy. These data are for all veterans
in the Vietnam war period regardless of whether they were in Southeast
Asia or had served somewhere else. Perhaps it would be instructive to
separate the Veterans into these two groups (Vietnam theater veterans and
Vietnam-era veterans) and see if there are any significant differences
between them, and between the experience 15 years or so after they began
entering the labor force.
Two surveys of veterans were made by Sharon R. Cohany of the Bureau
of Labor Statistics: one in April 1985, and one in November 1987.*^ Since
the results are similar, the November 1987 data will be used in the
following discussion. Briefly Cohany found that those who did not serve
in Southeast Asia fared no worse than nonveterans in the labor market. The
other group, the Vietnam theater veteran, and particularly the disabled of
that group, were apparently at a disadvantage in the labor market.
Of the 7.9 million male veterans who served during the Vietnam War
period, 93 percent are now between the ages of 30 and 54, with 67 percent
being between the ages of 35-44. This is the age group of maximum
participation in the labor force, and thus it is not surprising to find that 92
percent of Vietnam veterans are in the labor force. This high participation rate
is very close to the rate of the nonveteran. However as soon as disability and
service in Southeast Asia are considered, differences begin to appear.
Table 7.1 shows the employment status of Vietnam veterans by dis¬
ability and location of service. About 10 percent (811,000) of those who
served in the Vietnam era reported some degree of disability. Those with
less severe disabilities (less than 30 percent rating) were participating in
the labor force in much the same way as the nondisabled. As the degree of
disability rises, the participation in the labor market falls until the most
severely disabled leave the labor force altogether. This negative correlation
is to be expected, as is the positive one relating unemployment with the
severity of disability. The unemployment rate for the disabled was 6.2
percent compared to 4.7 percent for those without disability. For those with
60 percent disability, the veterans ascribed their difficulties to their physi¬
cal condition; below 30 percent few attributed their employment problems
to physical impairment.
The disabled, at least, were receiving compensation from the federal
government depending on the degree of disability, and this fact must also
be considered when looking at labor force participation rates. What of
those who were not disabled? Some 300,000 veterans were looking for
work in this period, or 4.7 percent of the total. The unemployment rate for
nonveterans for the same period was 4.3 percent. For those who served in
the Vietnam theater, the unemployment rate was 5.2 percent, while those
who did not serve in Southeast Asia experienced a rate of 4.3 percent, the
same rate as the nonveteran experienced.
Why the difference between those who served in the Vietnam theater
and those who did not? Some of the difference can be explained by the
educational attainment prior to entering the military. One study found that
high school dropouts were one and one-half times more likely to serve in
the war zones than were college graduates.*^ It follows that college
graduates are more likely to be employed than are high school dropouts.
Again we are reminded of the unequal burden of the war on income and
social groups. In response to the charge that blacks and Spanish-sumame
soldiers experienced disproportionately high casualty rates in the war (e.g..
Table 7.1
Employment Status of Male Vietnam-Era Veterans Age 25 and Over,^ by Period of
Service, Presence of Service-Connected Disability, and Disability Rating, November
1987 (Not Seasonally Adjusted)
S
3
c
3
1
O
civilian Not
noninstitutlonal In
1
■8
5
sI
K
o
8
population
II
1i
ill
811 78.1 594 39

469 92.1 404 27
<D CO <6
170 70.6 112 e

129 32.6 41 1
(M «*) K' S g
43 PI 36 3
^
CD
6,798 94.3 6,107 302
csi
Rsass’gR
293 87.4 250 6
420 395
o» CO
®
P8
276 257
ui <b cJ
60 79
9
36 34
28 24
2.966 2.629
^
|a5;i«''g2
8 a>
pg h. CO
g g cc <6
108 106
282 213 198 69

CO u>
165 156 147 10

67 40 34 28
38 7 7 32
JOXOgg
11 11 11 81
^
3,610 3.424 3.278 186

CM
CO to g g g B ®
175 146 144 27

r*.
I
S
I
$
Source: Sharon R. Cohany, “Employment and Unemployment among Vietnam-Era Veterans,” Monthly
Labor Review 113 (April 1990): 24.
blacks constituted 9.3 percent of personnel, they suffered 12.6 percent of

the deaths), the VA concluded:
Our sense of the data, however, is that while minority Americans may
have suffered a disproportionate share of the exposure to combat and
combat fatalities, their suffering was not the product of racial dis¬
crimination, but of discrimination against the poor, the uneducated,
the young, regardless of their racial or ethnic heritage.**
Such candor is rarely found emanating from public agencies. Without

dwelling on the issue, it is clear that many undocumented costs are
associated with this disclosure, costs that cannot be measured perhaps, but
costs nevertheless.
Where are the Vietnam veterans likely to be employed? Nearly two
decades after the first reduction of armed forces, the distribution of
veterans among industries is similar to that of nonveterans. There is,
however, one striking exception: public service employment. Table 7.2
presents these interesting data: 21.5 percent of the Vietnam veterans were
employed in the public sector, 9 percent at the federal level, and 12.5
percent at the state and local level. Compare these ratios with the non¬
veteran of 12.3 percent in total with only 2.1 percent at the federal level.
For the disabled, the proportion is much higher: 23.1 percent (30 percent
for the seriously disabled) of the Vietnam-era veterans are employed by
the federal government. The federal government has clearly been in the
forefront in giving preference to and seeking out the disabled veteran.
Vietnam veterans were distributed among occupations in much the same
way as nonveterans. Table 7.3 shows the general distribution of veterans
by broad occupational groups. Veterans appear more heavily represented
in the clerical fields, protective services, and managerial areas and un¬
represented in the professions and machine operators.
The problems and challenges forced upon the returning veteran were
many and diverse. A few of these problems, bearing mainly on the economic
factors, have been suggested here. To continue the discussion would only
serve to create additional frustration caused by the inability to complete the
accounting for costs that could be attributed to the Vietnam war.*^
THE PEACE DIVIDEND

Recall that the end of the war was supposed to result in a peace dividend.
Funds no longer needed to finance the war could have resulted in a
Table 7.2
Employed Male VIetnam-Era Veterans Age 25 and Over, by Class of
Worker and Disability Status, November 1987 (Not Seasonally Adjusted)
[Pefconi distribution)
Waga and aalary workara
Total Government Self-employed

Pwtod of MTVlC* amployad and unpaid
and dltabllHy atatua^ Prtvata family worfcera
(thouaanda) State
Total Federal artd
local
Vietnam efa. 6,951 68.6 21.5 9.0 • 12.5 9.9

Disabiod, total . 594 56.1 35.9 23.1 12.8 7,9
Less than 30 percent. 404 58.7 34.4 21.0 13.6 6.9
30 percent Of more . 154 46.8 44.2 31.2 12.3 9.0
Not disabled. 6,107 69.9 20.1 7.7 12,4 10.0
Vietnam theater. 3,331 66.8 22.4 9.9 12.5 10.7

Disabled, total . 395 57.5 33.9 21.3 12.4 8.6
30 percent or more. 113 46.9 40.7 26,5 14.2 12.4
Not disabled. 2,629 68.2 21.0 8.4 12.6 10.8
Outside Vietnam theater. 3,620 70.3 20.6 8.1 12.5 9.1

Disabled, total . 198 53.0 39.9 26.8 13.1 6.6
30 percent or irwe. 40 (3) P) m P) (3)
Not disabled. 3,278 71.5 19.3 7,1 12.2 9.2
Nonvelerans, 25 years and over . 35,313 75.8 12.3 2.1 10.2 11.9
' Because of the aging of the population, there were no longer presence and degree of disability was not repotted lor some veter-
any Vietnam-era veterans under 25 years of age. ans.
2 Categories may not sum to totals, because Information on 3 Data not shown where base is less than 75,000.
Source: Sharon R. Cohany, “Employment and Unemployment among Vietnam-Era Veterans,”

Monthly Labor Review 113 (April 1990): 26.
reduction in defense spending that could have been made available to the
American public for alternative uses. It could have been possible to return
the funds to the private sector by reducing taxes; or alternatively, govern¬
ment expenditures could have been increased in other areas, or social
programs could have been enhanced. Choices had to be made, of course,
since the funds that would be made available would not suffice to satisfy
everyone’s wish list of things to do.
In March 1967, the president created the Cabinet Coordinating
Committee on Economic Planning for the End of Vietnam Hostilities
to study the economic consequences of the ending of the war in
Southeast Asia.^® Its report, issued as part of The Economic Report of
the President, 1969, examined the macroeconomic policies that would
be required when the war ended. Depending on just how the war ended,
the proper monetary and fiscal policies were suggested that would
Table 7.3
Employed Male Vietnam-Era Veterans and Nonveterans Age 25 and
Over, by Occupation, November 1987 (Not Seasonally Adjusted)
[Percent distribution)
VMnam-era
veterans
Occupation Nonvetarans
OutsMe
Vietnam
ToM Vietnam
theater
theater
Total, 25 years arxl over (in thousands) . 6,951 3,331 3,620 35,313
Percent. 100.0 100.0 100.0 100.0
Managerial and professional spedatty. 27.3 25.5 29.0 28.2
Executive, administrative, and mariagerial. 16.8 16.4 17.2 14.3
Professional specialty . 10.4 9.0 11.7 13.9
Technical, sales, and administrative support. 21.3 21.6 21.0 19.0
Technicians and related support. 3.6 3.4 4.3 2.8
Sales occupations . 10.4 10.1 10.6 11.1
Administrative support, including clerical . 7.1 8.1 6.1 5.1
Service occupations . 6.4 8.3 8.5 7.7
Protective service. 4.6 4.7 4.6 2.3
Other service occupations. 3.6 3.6 3.9 5.5
Precision production, craft, and repair . 22.1 21.6 22.7 20.4
Mechanics and repairers. 6.3 8.0 8.6 —
Construction trades . 7.9 7.5 8.2 —
Other precision production, craft, and repair . 5.9 6.1 5.8 —
Operators, fabricators, and laborers. 18.7 20.5 17.1 20.1
Machine operators, assemblers, and inspectors . 6,9 7.4 6.5 7.9
Transportation and material moving occupations . 8.0 9.1 6.9 7.1
Handlers, equipment cleaners, helpers, and laborers. 3.9 4.0 3.7 5.1
Farming, forestry, and fishing. 2.2 2.6 1.8 4.6
' Because of the aging of the population, there were no longer any Vietnam-era veterans under 25 years of age.
Note: Dashes indicate data not available.
Source: Sharon R. Cohany, “Employment and Unemployment among \êtnam-Era Veterans,”

Monthly Labor Review 113 (April 1990): 26.
Stabilize the economy from any shocks caused by the cessation of hos¬
tilities.^* As interesting as a discussion of these macroeconomic
policies might be, they must remain for the more curious since actual
events have made them irrelevant.
Concentrating on the peace dividend, the Committee’s estimate of
the peace dividend with an allowance for growth was about $22 billion
for fiscal year 1972. This amount was calculated assuming no new
defense programs would be initiated and defense spending would
return to baseline expenditures without Vietnam.^^ The committee had
many suggestions for alternative uses of the dividend, and even
provided a list of programs totalling some $40 billion that could serve
as an illustration of the possible uses to which the additional funds
could be put. The programs included more expenditures on education,
health, environment, urban development, and so on. There appeared to
be quite a list of unmet social needs that could absorb the peace dividend
and more.
But the peace dividend was not to be. It vanished before any new
expenditures or tax reductions could be even debated. Where did it go?
The Department of Defense provided the answer—it remained in defense
spending. The DOD calculated that reductions in defense spending would
have made available some $24 billion but that military pay increases for
the remaining personnel and added cost of military retirements used up
$16.3 billion, and purchase inflation of 22 percent used up $6.2 billion.
The reductions of $24 billion in manpower and purchases were absorbed
by increases in defense costs of $22.5 billion leaving only $1.5 billion in
net reductions of defense spending.^^
So much for the peace dividend, and all the pains taken and confusion
created in calculating incremental costs that were to be available for
peacetime uses at the conclusion of the war. The unmet social needs would
remain unmet, more casualties of the war that nobody wanted.

The post-Vietnam society was certainly a different one from the one that
existed in the mid-1960s. The structure of the economy changed the
operation of the economic system in many ways as inflation forced
everyone to adjust plans where possible and learn to adapt to rapidly
changing conditions. Inflation and war are eternal paitners but the situation
in this period is different from past wartime episodes. This was not an
all-out war where the entire society was involved and resources for the
consumer sector had to be sacrificed. The burden on the private sector was
minimal with the main effect being that some individuals had to adjust
their portfolios as inflation continued. Others, mainly workers, saw their
real incomes fall, but the increase in employment over the period lifted
many others who might have suffered unemployment The redistributions
of income are thus difficult to determine, and who won or lost in the
inflationary spiral is not all that clear. Creditors lost and debtors gained, at
least until new contracts were written or the old ones rewritten.
The situation was complicated by the problem of energy sources,
usually taken for granted, becoming uncertain with firms having to adapt
their production processes to avoid interruptions. Then with rising energy
and food prices and declining real wages, family living standards dropped,
and to protect them, secondary workers were necessary. Secondary
workers meant mainly wives, and this led to further problems. Family
relations had to change, day care for children became a problem, and so
on. Again one should not attribute these changes entirely to the war and
inflation, but clearly some part of change in participation rates in the labor
force can be traced to economic conditions that were the result of a long
chain of reactions.
Macroeconomic policy-making in response to these conditions were
basically inappropriate. Traditional monetary and fiscal policies simply
could not work against stagflation. The price shocks of oil and food could
not be controlled by orthodox macroeconomic policies. In fact, they only
made matters worse, driving up interest rates or resorting to recessions in
order to moderate prices. Of course, faith in macroeconomic policy¬
making plummeted and with it the liberalism that fostered it. Government
became the problem for many and when Ronald Reagan made this a slogan
in his campaign of 1980, many could agree with the accusation.
In conclusion, it is apparent that the nation would never be the same
following the Vietnam War. Parts of its economic structure were altered,
segments of its society were alienated, third parties suffered from manifes¬
tations of that alienation, military strategies were gradually changed, and
government as a solver of problems was questioned. Macroeconomic
policy-making was made suspect, and liberalism was reeling. These
conditions set the stage for a different approach to government, and the
criticisms made by conservatives found more and more acceptance cul¬
minating in the Reagan victory in 1980.
The long chain of events before and after the war changed the economy
and society along the way, but the precise accounting for them may never
be accomplished. It is never possible to know what would have happened
anyway, and the war may have just hastened the changes, but surely some
of the postwar changes suggested here can be attributed to the aftermath
of war giving us this painful period.
NOTES
1. See Alan S. Blinder, Economic Policy and the Great Stagflation (New York:
Academic Press, 1979).
2. From March to July, the Federal Reserve required all lenders to maintain a deposit
at a Federal Reserve Bank equal to a percentage of credit-card loans and unsecured
consumer credit. These reserves were supposed to curb consumer lending and thereby
provide some restraint on consumer spending.
3. Abbas Alnasrawi, OPEC in a Changing Wirld Economy (Baltimore: Johns Hop¬
kins University Press, 1985), 65-67.
4. Ibid., 97.
5. For more on the housing issue see, Lawrence B. Smith, Kenneth T. Rosen, and
George Fallis, “Recent Developments in Economic Models of Housing Markets,” in
Journal of Economic Literature, American Economic Association 26 (March 1988):
29-64, and Dwight R. Lee, “More Costly Housing No Cause for Alarm,” Wall Street
Journal, August 10,1988, 16. Professor Lee also suggests that in addition to spending
more on housing due to the subsidies involved, we built larger houses than would have
been the case without the housing distortions.
6. For a useful discussion on the saving rate in the United States see Lawrence
Summers and Chris Carroll, “Why is U.S. National Saving So Low?” in Brookings Papers
on Economic Activity 2 (1987): 607-42.
7. Dwight Lee, “More Costly Housing No Cause for Alarm.” He cites a study that
found that if the true social rate of return had governed investment, 25 percent less would
have been devoted to housing, and other capital stock would have grown by 12 percent
with the result that the GNP would have been larger in the years studied.
8. See for instance Ira C. Magaziner and Robert B. Reich, Minding America's
Business (New York: Vintage Books, 1983); and Barry Bluestone and Bennett Harrison,
The Deindustrialization of America (New York: Basic Books, 1982).
9. Michael T. Klare, “A Blueprint for Endless Intervention,” Nation, July 30/August
6,1988,77,95-98.
10. There are many books that discuss the problems of the returning Vietnam War
veteran. For a case study approach see, Murray Polner, No Victory Parades: The Return
of the Vietnam Veteran (New York: Holt, Rinehart and Winston, 1971); and the analysis
of Herbert Hendin and Ann Pollinger Haas, Wounds of War: The Psychological Aftermath
of Combat in Vietnam (New York: Basic Books, 1984); for a clinical approach, John P.
Wilson, Identity, Ideology and Crisis: The Vietnam Veteran in Transition, Part II
(Cleveland, Ohio: Cleveland State University, 1978); for attitudes and perceptions about
the war see Ellen Frey-Wouters and Robert S. Laufer, Legacy of a War (Armonk, NY: M.
E. Sharpe, 1986).
11. Elizabeth Waldman and Kathryn R. Cover, “Employment Situation of Vietnam
EtdiNciicxm^f Monthly Labor Review 9A (September 1971): 3-11.
12. Veterans Administration, Myths and Realities: A Study of Attitudes Toward Viet¬
nam Era Veterans, submitted to U.S. House of Representatives, 96th Congress, 2d
Session, July 1980,237,239.
13. Waldman and Cover, 9.
14. For more on the GI Bill, see Myths and Realities, 192-97.
15. Waldman and Cover, 5.
16. Sharon R. Cohany, “Labor Force Status of Vietnam-era Veterans,” Monthly Labor
Review 110 (February 1987): 11-17; and “Employment and Unemployment among
Vietnam-era Veterans,” Mo/jt/z/y 113 (April 1990): 22-29.
17. Myths and Realities, 10.
18. Ibid., 7.
19. For more detailed analysis of the problems faced by, or are still facing, the Vietnam
Veteran, see Myths and Realities.
20. The committee was composed of the secretaries of Treasury, Defense, Commerce,
and Labor, along with the director of the Budget, and the chairman of the Council of
Economic Advisors.
21. The report is an appendix to the Economic Report of the President, 1969,187-211.
The monetary and fiscal policies suggested during demobilization can be found in pages
191-98.
22. Ibid., 200-206.
23. U.S. Department of Defense (Comptroller), The Economics of Defense Spending:
A Look at the Realities (Washington D.C.: U.S. Government Printing Office, July 1972),
150.
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8 SUMMARY AND
CONCLUSIONS
The September 1988 issue of Newsweek carried the headline, We Ever

Get over the ’60s?” The article referred to much more than the economic
consequences—the drug culture, the participation in the war, and all other
elements of the radicalism of the period—but adapting that headline to our
analysis would find that there is no unambiguous answer to that question.
The immediate economic consequences of the war have long since been
registered. They were recorded in price statistics, GNPdata, unemployment
rates, interest rates, and the like. This is not to infer that we recognized all
the costs and benefits of the war, only that they became part of the record,
whether or not they were perceived as war-induced.
Yet there may still be strands remaining from the period that continue
to influence the present. Like a partially destroyed but still intricate
cobweb, there may remain portions that cling to the host structure. Unlike
the cobweb that is now dormant, however, the remaining strands of earlier
economic actions may be strong enough to change the host structure itself.
So in this final chapter, it is necessary to pull together some of the
immediate economic consequences and distinguish them from the longer
run consequences.
LONG-RUN ECONOMIC CONSEQUENCES

Inflation was clearly a short-run consequence of the war. No one doubts
that fact. There is some question, however, as to whether or not inflation
over a longer-run period can be attributed to the war. The view expressed
here is that the original demand side inflation was allowed to permeate the
economic system and become cost push inflation. That is, sellers of output
or labor began to demand higher rewards as a result of inflation that they
did not create. Seeing no remedy for the inflation, and no commitment by
government to curtail it, many began to protect themselves from its effects.
Inflationary expectations developed and grew unchecked in an atmosphere
of confusion and uncertainty.
In response some institutional changes were made over the long term.
The banking sector clearly recognized the need for protection from future
bouts of inflation. Variable interest rates on mortgages soon made their
appearance, certificates of deposit were established, off-shore banking
increased, and Eurodollars grew in importance—all in response to pre¬
vious credit crunches designed to curb inflation. As soon as the govern¬
ment revealed its desire to fight inflation, the banking sector was not far
behind in proposing ways to circumvent those policies. The move toward
monetarism merely confirmed the suspicions of the banking community
that means had to be found to avoid the possible harsher consequences of
the fervent application of its principles.
The banking sector responses to inflation were not isolated as others
sought to protect themselves as well. Escalator clauses in labor contracts
that insured that wages would be adjusted for inflation became more
popular, and even Social Security recipients were rewarded in 1975 by
Congress when their benefits were tied to the inflation rate. The
guideposts of the Kennedy administration were an early victim of inflation,
but another scheme was instituted by the Carter administration. There was
continued interest in new approaches to control prices and wages, includ¬
ing indexing all rewards by the rate of inflation, tax-based incomes
policies, and so on. None of these schemes were ever enacted, but they
do show the extent of the concern for inflation, and the readiness of many
to combat it with institutional changes. While there was much interest in
incomes policies, the actual experience with controls, either direct or
voluntary, has made any attempt to reimpose any scheme highly unlikely.
In the fight against inflation, so feared by so many, one of the most
powerful weapons to use against it was surrendered in past battles that used
inept programs. The guideposts, the wage and price controls of the Nixon
administration, and the Carter experimentation with voluntary controls, all
were regarded as failures, and likely to do more harm than good. Despite
their considerable flaws, these incomes policies were judged on how they
worked in practice and not how they would have worked had they been
designed better and administered with care and enthusiasm. Past incomes
policies were ill-conceived, ill-designed, and ill-administered, and in the
Summary and Conclusions 141
case of the Nixon controls system, designed to achieve other noneconomic

purposes. That they failed is not a surprise but with their failure we
surrendered incomes policies in general as a means to control inflation.
Presumably they had been tried and found wanting.
The nation’s responses to the energy crisis have been outlined earlier.
The inflationary period of the 1960s in the United States precipitated the
response of OPEC that caused the energy problems of the 1970s. The
immediate types of reactions can easily be recounted—more insulation,
more efficient apphances, more fuel efficient, smaller autos, and so on but
the longer-run reactions of firms to changes in their operations are not as
clear and remain to be examined. With the disappearance of the oil problem
in the 1980s went the immediate concern for energy as a national problem.
National attention was directed at the safety and operation of nuclear
energy plants, and shifted away from longer-run issues. Problems with the
ozone layers, greenhouse effects, and acid rain may bring long-run con¬
cerns back to the forefront of national concerns, but simply reacting to
crises is not conducive to rational solutions.
In the area of macroeconomic policy, the main legacy of the inflation
of the 1960s and 70s is the rejection of government policies because they
may either cause or exacerbate inflation. This fear is due first to the
erroneous belief that government spending always causes deficits and
second that budget deficits cause inflation. Neither of these beliefs are
necessarily true, but they became part of the conventional wisdom until
the 1980s. A more Machiavellian view would suggest that these beliefs
were deliberately fostered by conservatives to support the argument for
less government spending. When the link between deficits and inflation
was severed in the 1980s, fear of increasing the budget deficit took its place
as the rationale for not creating new programs or adequately funding the
old ones.
The practical effect, however, regardless of the origin of the beliefs
about government spending and inflation is that many programs were
forestalled for fear of causing or reigniting inflation. Many social programs
were not initiated because of inflation, and many were not pursued once
they were begun. Again the fear of inflation is a convenient excuse for not
doing something about social concerns. Even as these concerns, inade¬
quate and insufficient housing, health care, drug abuse, and so on, became
public and caused a public outcry, budgetary effects took precedence over
compassion.
In addition, the use of fiscal policy, long identified with liberalism, was
downgraded. Government attempts to employ its powers to manage the
economy by altering its budget were deemed too risky. Inflation might
result. Consequently in a recession, when the proper fiscal policy might
be to increase public spending or reduce taxation, there was a reluctance
even then to use the available methods. Instead monetary policy with its
selective effectiveness was used. It is not wise to abandon the use of one
element of macroeconomic policy and rely solely on the other. Not only
will the method employed be less effective having to dq the job alone, but
many will recognize the reliance on the one policy and make adjustments
to free themselves from its effects. The result is much less effective
macroeconomic policy in general, and selective impacts on segments of
the economy in particular. Those who can avail themselves of protection
will do so, and those who cannot will bear the brunt of the policy.
An illustration of the latter group would be those who expected the
society to address their needs, and who were bitterly disappointed when it
did not. The war on poverty presumably could no longer be afforded in an
inflationary period when more urgent expenditures on the other war were
required. Many disadvantaged saw their hopes dashed as the promises
made to them went unfulfilled. The blacks too saw their expectations for
advancement and for greater participation in the economy sacrificed as
well. The continued social problems associated with these groups attests
to the longer-run consequences of failure to confront the problems ear¬
lier—inflation or no. The Great Society became the Indifferent Society,
more concerned with price stability than human advancement and dignity.
Whether or not the funds used in the war effort would have been
redirected to social programs is problematical; there is no assurance that
there was a direct shift of funds away from social concerns to defense
needs. In other words, had there been no war, would we have spent the
funds used in Southeast Asia on domestic programs that would have aided
the disadvantaged and extended the New Deal as Johnson wished? Ob¬
viously, much would depend on the willingness of Congress to allocate
more funds to the Great Society. Many people had a list of unmet social
needs where the funds could be absorbed easily, and these were known at
the time of the military buildup.'
There is no way to replay history, and thus no answer to the question of
how Congress would have reacted to requests for additional funds for the
war on poverty. All that can be inferred is that with the prevailing attitude
at the time toward redressing some of society’s ills, it is likely that Congress
would have gone along with additional funding requests. It is not at all
clear that it would have been willing to spend over $140 billion on such
efforts. Sooner or later, Mr. Johnson’s magic with Congress would have
disappeared, and the early triumphs would not have been repeated. The
conclusion is a weak one, then, since all that can be suggested is that some
of the funds spent on the war might have been redirected toward social
programs, but not to the extent of the actual amounts spent in Southeast
Asia. Our generosity in peace is never matched by our fervor in war.
The greater tragedy, however, may not be in what was left undone, but
in the belief that we had done all we could do and failed. We tried to fight
poverty and lost, so why keep trying. From this view it is easy to blame
the victim and absolve society or the economic system. Inadequate
funding would not be seen as the reason for failure, nor would com¬
parisons between the amounts spent on the war and on domestic
problems be deemed relevant. In the end we lost both wars, but would
admit to neither. While the Vietnam War had its own aftermath, the war
on poverty could take comfort in the Biblical admonition—the poor will
always be with us.
BENEFITS VERSUS COSTS

Inflation costs are easy to measure compared with the costs of disrupted
lives. The costs during the war and after, both to those who participated
directly and to those who remained behind, are too often ignored. Yet so
many lives were touched, that some acknowledgment of the burden is
imperative.
For those who remained behind, the task is virtually impossible. We
simply cannot know what plans were postponed, what plans were can¬
celled, or what plans were reconsidered. Some jobs were taken, for
example, that were not really wanted and some jobs were passed up
because they conflicted with travel plans; some women moved to be near
members of the armed forces, and others remained at home but were
awaiting news of future homes, and were reluctant to enter into long-run
commitments. How many women postponed their education and careers,
and how many undertook careers while waiting for their loved ones to
return, careers they may not have pursued, except that time was available?
When families were reunited, how many lives of women and children were
destroyed by veterans who could not adjust to civilian life? Surely some
of these decisions must have involved economic costs but the question is
how to identify them, and even more difficult, how to evaluate and measure
them. There is no calculus for these disruptions, and no way to quantify
them, but they were real nevertheless. Yet it is interesting to note that
women's views on the war and its aftermath are seldom solicited. It is
almost as if we dare not expose the degree of indirect and intangible costs
of the war to greater scrutiny.
For those who served more directly in the armed forces, similar costs
are involved. Some postponed their education or careers and were
prevented from getting started in the fulfillment of their long-run plans.
Those who were drafted received lower incomes and paid a special tax
in the form of delayed entrance into the workforce and reduced earn¬
ings in the long run. When they returned, they paid again with a host
of adjustment problems ranging from drug addiction and crime to
suicide and alcoholism. All of these problems are potential destroyers
of life, and all have an economic cost attached to them, whether
measurable or not.
Not all members of the armed forces saw combat, of course, and
adjustment problems may not apply to them. Still some of them
postponed educational opportunities and career choices, and economic
costs are applicable. Others, however, may have benefited from their
experience in the armed forces if they received training they otherwise
would not have had. Training and skills learned in the armed forces could
carry over into civilian life and enable the person to earn a higher reward
or be eligible for a better job. In these cases, the benefits may outweigh
the costs.
Still others would register neither extensive costs or benefits. Such
individuals lived through their experience without severe disruption or
beneficial opportunities. Some even found the military suitable for a career
after their exposure to it.
In sum, the longer-run economic costs of participation in the war can
never be known with precision. For what it is worth, the only available
evidence suggests that the costs to individuals exceed the benefits.^ There
are no data on the economic costs imposed on those less directly involved;
the data are neither collected nor even deemed relevant. It is not even clear
whether these costs will disappear with the passage of time. Children were
affected as well by problems they did not create, and they could easily
perpetuate them for a long time afterwards. As the war experience recedes
in our memories, the problems may seem unconnected to the original
source and even more difficult to trace and understand. A child beaten by
a returning veteran may beat his children, etc.
Wars, hot or cold, generally stimulate an economic system. The "Vietnam
War was no exception. As the war progressed, the unemployment rate fell,
from 4.5 percent in 1965 to a low of 3.3 percent in early 1969. Falling rates
of unemployment are usually considered desirable, especially when they
record the employment of the long-term unemployed, the disadvantaged,

and minorities. Overheating in the economy is good news for these
groups—the last in, first out, members of the labor force.
Hence the wartime economy must be credited with bringing benefits to
one important segment of the labor force. The war succeeded in creating
employment opportunities that were unavailable in the absence of stimula¬
tion. The question for us is whether or not the post-tax-cut economy of
1964 would have accomplished the same thing. The prewar economy was
showing signs of renewed strength, and employment gains appeared likely
to accompany the economic growth. No answer for this question exists,
and one may not ever be possible.
Still, even if some short-run benefits are assumed, the longer-run
benefits seem to disappear. Once the economy had adjusted and returned
to more stable conditions, unemployment returned to previous levels as
well. The early 1970s saw the rate returned to the 5 percent range, and
even higher rates were recorded as the decade progressed. There do not
appear to be any lasting gains for the labor force as a whole, although
individuals or groups may have received longer-term gains.
In addition to these factors, there is the question of the debt incurred in
order to finance the war. As recounted earlier, the war was not financed by
taxation. What little taxes were collected were not sufficient to cover the
cost of the war. The Revenue and Expenditure Control Act of 1968, the
only real tax measure designed in response to the war, actually produced
only $21 billion dollars in additional revenue.^ Over the period 1965-72,
there were deficits totaling $61.5 billion, and an addition to the public debt
of $85.9 billion. Clearly some of the increase in the debt must be attributed
to the financing of the Vietnam War, although the exact relation cannot be
determined. Again the exact measurement is not the issue; the burden of
this debt is the problem.
Since most of this debt was held internally, the burden of the debt is
generally held to be minimal. When it is repaid, the taxpayers turn over
funds to the bondholders, and while there may be some redistributional
effects, the amounts transferred remain in the country. However the real
question is not the usual burden argument, but what did we get for the
increase in the public debt? If the debt were incurred to stimulate the
economy in a period of recession, the benefits of a thriving economy can
be readily apparent, easily understood, and perhaps even socially accept¬
able. Or some other motivation could have prompted the incurring of debt
to permit spending on other programs deemed desirable. The economy did
not need stimulation at the time of the military buildup, however, and large
deficits were not necessary to revive the economy. So what did we get for
the portion of the debt identified with the war in Southeast Asia? This war
was not socially acceptable, such that people were willing to borrow to
finance it and use resources, men and materiel etc., for the stated objectives
of the conflict. The fact is that even proponents of the involvement in
Southeast Asia would admit that it involved a great deal of waste of
resources. These resources could have been employed in domestic invest¬
ment, so needed for growth, or employed in research, development, or
production of other goods. In short, future generations could well end up
with fewer goods and services, a smaller capital stock, and higher taxes to
pay for a war that produced few benefits.
True the wartime economy boomed, and many benefited at the time.
Some of these people, or their descendants who benefited indirectly, may
also be involved in paying back the debt. For others, however, this will not
be the case, and they may well wonder if the funds used for the war could
not have been put to better use. This is not to deny that similar concerns
might be expressed if the funds used in the war were spent on domestic
social programs instead. These expenditures, however, probably would
have received more widespread approval and social acceptability. Expen¬
ditures made in Southeast Asia were not socially acceptable but indeed,
were very divisive and contentious. The benefits from social expenditures
might also have proved beneficial to future generations, but there is no
way of knowing this in the absence of knowledge of how the funds would
have been spent.
It is likely that the military industrial complex benefited from the war.
The military industrial complex should be understood to include organized
labor and major universities in the United States.'* Many defense contracts
were awarded in which various elements of the complex benefited in
varying degrees. Identifying the exact amounts attributed to just the war
would be difficult, but fortunately that is not the purpose of this section.
It is sufficient to identify the groups who could have benefited from the
existence of war. That defense contractors would be one such group is not
likely to surprise anyone, but large parts of organized labor were behind
the war, and universities and individual professors were also beneficiaries
of government contracts for research and development for the military as
well as social science applications designed to acquaint officials with the
culture, social and economic systems, and history of our opponents.
Student demonstrations at these institutions failed to stop the research, but
they did succeed in calling attention to one aspect of wartime activity
usually ignored—the subversion of the universities and the diversion of
research toward military applications and away from pure or socially

useful applications.
According to radical reasoning, we should look for rationales other
than the stated ones to explain wars. Stopping the spread of communism,
or preventing the dominoes from falling, were the official explanations
for U.S. involvement in Southeast Asia. Containing China was another
reason given for the war, but this seemed less credible then and even less
now.^
However, beneath the surface explanation should be a discernible
rationale that relates to imperialism, and the exploitation of resources or
markets by the dominant power. Again one looks in vain for the im¬
perialism motivation since there were no resources to exploit or markets
to control. Whatever perceived benefits these may have conferred on the
United States, they are not observable in either the short or long run.
Stopping the spread of communism, however questionable or irrational,
appears to be the main impetus for the conflict. Of course, this is nothing
more than an extension of the Truman Doctrine of containment.
Another rationale is much more discernible if one discards the old
excuses for war. It was, to quote Sartre, a “war of example”; “Americans
want to show others that guerilla war does not pay: they want to show all
the oppressed and exploited nations that might be tempted to shake off the
American yoke_In short, they want to show Latin America first of all,
and more generally, all of the Third World.
But the costs of the war became too great. Once it became clear that an
easy victory and a quick end of the war was unattainable, frustration was
inevitable. The public grew impatient, the politicians grew more bel¬
ligerent, and the youth grew more radical. After more troops, more
bombing, and more defoliation were ineffective, disillusionment set in,
and the scramble was on to get out, presumably with honor. No one had
bargained for a long, costly, and protracted war where justification would
be questioned.
So, when the war was lost, there was the utter sense of futility—for
nothing was achieved. No land was annexed, no markets were opened for
exploitation, and no resources were made more readily available. There
were no falling dominoes, no Asian blocks, no China containment (Nixon
would soon be opening up relations), and much worse, no demonstration
effect on Latin America. Nothing was gained, but a great deal was lost.
National pride was wounded, and the society was sharply divided. The
result was the evolution of the Vietnam syndrome—the determination to
avoid such entanglements in the future.
The Vietnam syndrome, the reluctance to repeat the experience, did have
longer-run implications. It lasted until the Reagan administration, as we
have seen, when with concerted effort, it was broken by adventures in
Central America, the Middle East, Grenada, and Libya. Yet is was not
sufficient to break the syndrome, and more observable evidence was
required to restore respect for U.S. military might and the military estab¬
lishment. Apparently the malaise following Vietnam prevented us from
keeping our defenses as strong as needed. We had fallen behind, according
to Reagan, because we were apologetic over the conflict in Vietnam and
foundering in our resolve to be the strongest nation on the globe. We were
not asserting ourselves in world affairs, partly because we lacked the will
(the syndrome), and partly because we lacked the clout.
To remedy these shortcomings, the Reagan administration proceeded to
restore our defenses. It embarked on a long-term plan that would have
committed the United States to spend $1.5 trillion in just five years on
national defense. The United States would outspend the Soviet Union, the
evil empire, and show our willingness to wreck their economy if they chose
to match our efforts. It did not even matter whether or not the weapons
worked or not; it was the expenditure on defense that mattered, not the
expenditure/or defense. The national defense expenditures thus restored
the prestige and pride in the military establishment. Given more than
enough funds (the Pentagon had to scramble around for projects to spend
the funds on) confidence and self-esteem returned to the Pentagon. Distrust
in the military and military solutions began to wane. Again the military-
industrial complex became the beneficiaries of the breakdown of the
Vietnam syndrome; the complex thus gained during the war and by the
delayed reactions to it, many years later.
Still it was necessary to use the military power if any credence was to
be given to the resurrection of our military presence. Hence the second
stage in the treatment for the Vietnam syndrome was the aggressive
exercise of military might, and the active role of the United States in
international affairs. The results of these actions are not all in, but it is clear
that the American public was not always willing to follow the lead of this
more aggressive stance. To continue this discussion, however, would take
us beyond the purpose of this book. Only the economic consequences of
these acts is of concern to us; the resulting budget deficit, caused largely
by defense spending, will continue to affect the domestic economy for
years to come.
It would be naive to suggest that the war was ended because it was
inflicting such a heavy cost on the Vietnamese without inducing surrender.
Still a short discussion of these costs is necessary to suggest the nature of

the war from the other side. The destruction of Vietnam was unparalleled,
but any reasonable estimate must conclude that never before in the
history of mankind has such a magnitude of destruction been wrought
upon any people, at any time, in any single place. Herbicides, free
fire zones, antipersonnel and fragmentation bombs, napalm, ur¬
banization, food denial programs, all together form an unprecedented
strategy of counterinsurgency which relies increasingly upon air
technology rather than ground combat warfare. The current American
destruction of Southeast Asia represents a new and unprecedented
strategy, aimed not at the destruction of an enemy, his territory, a food
crop or a culture but of an entire ecosystem. This is Ecocide. [Ecocide
is the premeditated assault of a nation and its resources against the
individuals, culture, and biological fabric of another country and its
environs.]^
These are strong words, but they are still inadequate to express the utter
devastation of the country. The whole society was affected as so much of
the economic activity was directed to serving the needs of the U.S. military.
Women became prostitutes, young boys became houseboys, local
politicians became corrupted, some became drug dealers while others
became merchants of U.S. made goods on the streets. Civilian casualties
were heavy; an estimated 1,050,000 casualties were reported with 325,000
deaths. Thirty percent of the deaths were children under 13 years of age.*
In addition, some 4-5 million became refugees moving to urban centers
at first, and then later trying to flee the country. Still casualty data and
dislocation estimates cannot tell the human costs of the war. To tell this
story, creative artists of all kinds are needed to remind us of individual
tragedies amid the collective statistics.
The economy of South Vietnam suffered as a result of these dislocations
as well. Land destruction transformed agriculture, and herbicides
threatened not only the current crops but perhaps crops for years after the
war. Rice that had been previously exported now had to be imported.
Inflation soared as prices increased seven fold from 1965 to 1971; the
money supply grew by 150 percent from 1966 to 1970 requiring devalua¬
tion to stabilize monetary conditions; and the GNP grew by only 12 percent
in the period 1966-69. Clearly the economy was in shambles during the
war, and likely to be for years after.’ Similar problems were felt in Laos
and Cambodia as the war expanded into these nations as well. In short the
whole social and economic structure of Southeast Asia was transformed

by this war.
It is in the nature of economics that conclusions are seldom absolute.
So it is with this study. The true economic consequences of the Vietnam
War may never be identified. An event such as the Vietnam War disturbs
an economic and social system in such a traumatic way that all of the
reactions and ramifications that flow from it may never be traceable; and
even if the immediate ones can somehow be cataloged, the repercussions
may extend far into the future long after the initial cause has ceased. It is
a situation appropriate to the pebble in the water metaphor. Still the
admission that any study of the economic consequences of the Vietnam
War may never be complete should not deter the attempts to approach the
task, even if partial answers frustrate the mind.
The main thrust of this study has been to identify some of the immediate
consequences of the war and to show how those consequences led to
adjustments in the economic system that were severe enough to warrant
the claim that the economic structure was transformed. The postwar
economy would never be the same as the prewar economy, and further¬
more, there would be no tendency to return to the earlier economic
structure. There would be no internal mechanisms to steer the economy
back to its original path of development.
For example, inflation was ignited in the early stages of the war, and
economic policies at first were not initiated, and second, when they were,
caused havoc. As a result, economic agents who were severely affected in
either or both stages took actions to protect themselves from similar
occurrences. These reactions erected new institutions that moved the
economy away from the typical reactions of the past. As more and more
agents became affected, more and more ways were discovered to avoid or
minimize government policies or the reactions of other economic agents
who were trying to protect themselves. These institutions were subject to
much experimentation as they evolved, but their main purpose was still to
insulate themselves from the actions of others.
These maneuvers are not specific to any one period of time, of course,
as they have occurred in the past as well. Wars, however, accelerate these
innovations, elevate their sophistication, and condense the time required
for major revisions to occur. The result over a longer time period is the
speeding up of change, sometimes without the participants’ knowledge of
what is happening. Eventually the initial confusion gives way to accep¬
tance, and the change becomes part of the normal system. It may no longer
even be possible to identify why, how, or where the change originated.
The long-term consequences of earlier actions or inactions may now be

evident without revealing their sources. The banking sector, for example,
reacted to the inflationary period and the credit crunches to establish a host
of new monetary instruments, new institutions to deal with the changing
problems, new external relations, new international arrangements, and so
on. Once changes disturb the basic foundation of how things are done,
there is no end to the acceptance of new arrangements. Thus over even a
longer period, additional structural changes can be made that go beyond
the need for self-protection that precipitated the changes in the first place.
There are cumulative, snowballing effects to the acceptance of a modifica¬
tion of past practices or innovation.
It is suggested here that many deviations from the past were brought
about rather quickly by the stresses and strains of the Vietnam War, its
conduct and its financing. Societal changes have been and will continue
to be described by others. Some of the economic consequences, both short
and long-term, have been suggested in this study.
NOTES
1. For instance see the statement of Wassily Leontief in Congress of the United States,
Joint Economic Committee, Hearings, Economic Effects of Vietnam Spending, 90th
Congress, 1st session, April 1967,242-46. See also some later analyses in The Economic
Consequences of Reduced Military Spending edited by Bernard Udis (Lexington, Mass.:
D.C. Heath, 1973).
2. Phillip Cutright, “Achievement, Military Service, and Earnings,” unpublished
manuscript. May 20,1969 (Social Security Administration) cited by Larry A. Sjaastad in
his, “The Conscription Tax: An Empirical Analysis,” in the President’s Commission on
an A// Volunteer Armed Force,'Hos&mb&r 1970.
3. As estimated by the Tax Foundation in its Tax Features, 32, no. 1 (January 1988): 2.
4. Sidney Lens, The Military-Industrial Complex (Philadelphia: Pilgrim Press,
1970).
5. For an articulate explanation of the war’s rationale see, Norman Podhoretz, Why
We Were in Vietnam (New York: Simon and Schuster, 1982).
6. Jean-Paul Sartre, “On Genocide,” in Ecocide in Indochina: The Ecology of War,
edited by Barry Weisberg (San Francisco: Canfield Press, 1970), 39.
7. Orville Schell and Barry Weisberg, “Ecocide in Indochina,” in Ecocide in In¬
dochina edited by Barry Weisberg (San Francisco: Canfield Press, 1970), 17-18.
8. U.S. Congress, U.S. Senate, Committee on Foreign Relations, Impact of the
Vietnam War, 92nd Congress, 1st session, June 30,1971,15.
9. Ibid., 35.
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V
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INDEX
Ackley, Gardner, 34 Council of Economic Advisors, 14,15,

Agnew, Spiro, 114 34,40,59,60,86
Allies in Vietnam, 97-98 Credit cmnch: of 1966,38-40,68,87;
Alnasrawi, Abbas, 118 of 1969,87
Anthony, Robert N., 5 Cutright, Phillips, 105
Baraka, Imamu Amiri (LeRoi Jones), Dale, Edwin, 34

63 Debt, public, 145-46
Benefits of war, 105-9,143-47 Diem, Ngo Dinh, 13
Bowles, Samuel, 73 Domestic reactions to war, 31-32,51-
Bundy, William, 18 52,81-83
Bums, Arthur, 90 Domino theory, 3,13
Dudley, Leonard, 102-3
Cambodia, 80,82,87,113,124
Capacity utilization, 72-73,74,121 Eckstein, Otto, 67
Carter, Jimmy, 115, 123 Economic aid to Vietnam, 4,97
Carter administration: economic Economic structure, changes in, 68-75,
policies of, 115-16,123,140; and 139^1
War Powers Act, 125 Eisenhower administration, 3,5, 6, 8
Churchill, Winston, 13 Eisner, Robert, 101,102
CIA,10,17,98 Energy problems, 118-19,141
Clayton, James L., 99-100 Equal Opportunity Act, 60,61,62
Cohany, Sharon R., 128 Expectations of blacks, poor, 62-64,142
Connally, John, 89
Core inflation. See Inflation Feldstein, Martin, 74
Cornell University Air War Study Financial innovations, 68-70,140
Group, 101,104 Fiscal drag, 8,9,16,18
Corporate profits, 73-75,121-22 Fiscal policy, 66-67,141^2; in Carter
Costs of Vietnam War, 3-5,10,33-35, administration, 115-16; in Ford ad¬
82-84,95-105; social, 82-83,122- ministration, 115; in Johnson ad¬
23,126-28, 142-44 ministration, 32-35, 38,40-43,
158 Index
66-68; in Kennedy administration, 9, Kennedy, John F., 6,7,8,10,13,15,

14-16; in Nixon administration, 85- 17,60,66
86,90 Kennedy, Robert, 31
Ford, Gerald, 114,123 Kennedy administration: economic con¬
Ford administration: economic policies ditions in, 6-10,14; economic
of, 114-15; and War Powers Act, policies of, 9,14-16; guidepost pro¬
124-25 gram of, 21,37,5^59; and national
Fulbright, William, 98 defense spending, 7,9-10
Kent State incident, 82,121
Gold water, Barry, 17 Kemer Commission, 62
Goodwin, Richard N., 7 Keynesian policies, 8,10,14,15,16,
Gordon, David M., 73 66,67,123
Government, distrust of, 70,135 King, Martin Luther, 31,63
Great Society, 14,18,19, 32, 34, 37, Kissinger, Henry, 80,81
61.105.109.142
Gruening, Earnest, 18 Labor-management relations, 71-72
Guideposts, wage-price, 21,22, 37, Lampman, Robert, 60
58-59, 85; of Carter administra¬ Laos, 10
tion, 140 Liberalism, decline in, 66-68,70,123
Heller, Walter, 14,15,19,34,35, 60,67 Martin, William M., 22

Housing problems, 119-21 McCarthy, Eugene, 31
Humphrey, Hubert, 32, 79 McCarthy, Joseph, 6
McNamara, Robert, 8,13,17,32, 33
Imperialism, 106-7,147 Meany, George, 72
Inflation, 37,41, 52-56,85,89,104, Melman, Seymour, 107
139-41; core, 55-56; and guideposts, Military, distrust of, 70-71,124-26,148
71-73; and housing and saving, 119- Military assistance programs, 4,97
21; and oil prices, 118-19; and stag¬ Military industrial complex, 146,148
nation (stagflation), 114-15; and Mills, Wilbur, 41
wage and price controls, 89-90,117- Monetarism, 68,70,123,140
18,140 Monetary policy, 16,22,69,70,142; in
Inflationary expectations, 56-58,86, Carter administration, 116-17,123;
140 in Ford administration, 114; in
Institutional changes, 70-72,140 Johnson administration, 38-41,67,
Investment tax credit, 15,40,86 68-69; in Nixon administration, 85-
87,90
Johnson, Lyndon B., 13,15,17,18,20, Morse, Wayne, 18
29,30,31,32,34,41,60,61,62, My-Lai, 82
107.142
Johnson administration: economic con¬ National defense spending, 5,7-10,19-
ditions in, 14-16,18-22,35-43; 21; impact on economy, 32-34,44-
financing of war, 32-35,66; military 47,104
buildup in, 29-30; and War on Pover¬ New economists, 7,67
ty, 60-62 Nixon, Richard M., 6,32,79,80, 85,
89,90,107,117,123,147
Kearns, Doris, 14 Nixon administrations, 70,84;
Kemp-Roth tax proposal, 122 economic policies of, 84-90
Index 159
Nixon Doctrine, 80 Strategy of war, 29

Nordhaus, William, 74 Summers, Lawrence, 74
North Vietnam: bombing of, 8,17,18,
30, 31,80; attacks in Tonkin Gulf, 18 Tax cut of 1964,15-16
Tax increase of 1968,40-42,45
Office of Economic Opportunity Tax revolt, 122
(OEO), 60,61,62,63 Taylor, General Maxwell, 8
Oil: embargo of, 118-19; price of, 114, Tet offensive, 30
118-19 Thayer, Thomas, 97
Okun, Arthur, 20,22,34,39,51,66 Tonkin Gulf Resolution, 18
OPEC, 118-19 Troop strength: actual, 17,18,29,30;
cost of, 5,97; decline in, 80-81,90;
Passell, Peter, 102-3 estimates of need, 8
Peace dividend, 131-34 Truman administration, 3
Poverty, 60-62,122
Productivity of labor, 40; decline in, 64- Veterans, problems of, 126-31
66, 86,121; in guidepost program, Vietcong, 17
21, 58-59 Vietnamization, 80,98
Vietnam Syndrome, 71,124-26,147-48
Reagan, Ronald, 122,123,135 Vietnam veterans, 105,126-31
Reagan administration, 4,125; and Vietnam War: in Eisenhower ad¬
defense spending, 148; military ac¬ ministrations, 3-6; and inflation, 52-
tions, 125-26,148 58, 86, 89-90,117-21,139-41; in
Reagan Doctrine, 125 Johnson administrations, 13-14,17-
Reuther, Walter, 72 18,29-30; in Kennedy administra¬
Rostow, W. W., 8,18 tion, 6-9; military buildup for,
17-18,29-30; in Nixon administra¬
Sheahan, John, 59 tions, 80-82. See also Costs of Viet¬
Sihanouk, Prince Norodom, 80 nam War
Sjaastad, Larry A., 101,105
South Vietnam, 13,17,29; bombing of, Wage and price controls, 89-90,118,
17,29; defoliation of, 29,149; 140
destruction of, 149-50; government War on poverty, 60-62,122
of, 17; pacification program for, 29 War Powers Act, 124,126
Soviet Union, 5,6,10,80 Weidenbaum, Murray, 5,19
Sputnik, 5, 6 Weisskopf, Thomas E., 73
Stagflation, 114-16,123 Westmoreland, General William, 29
Stein, Herbert, 79 Wharton School Model (WEFA), 44-48
Stevens, Robert W, 84,101,104 Wilson, Charles E., 3
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About the Author
ANTHONY S. CAMPAGNA is Professor of Economics at the Uni¬

versity of Vermont, where he specializes in macroeconomic theory
and policy. He is the author of three previous books, including U.S.
National Economic Policy, 1917-1985 (Praeger, 1987).
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Campagnai Anthony S.
Economic consaquencXietnam war
NORTH lA AREA COMM COLLEGE LIB
3 2731 99030781 5
973.923 C186e
Campagna, Anthony S.
The economic consequences of
the Vietnam war
DATE DUE
APR 2 a
. 7m
NIACC LIBRARY
500 COLLEGE DRIVE
MASON CIIY, IOWA 50401
DEMCO
of the
Vietnam _
The consequences of the Vietnam War on the United States' economy is the
subject of this work. Campagna provides a chronological study of the war's
identifiable costs and benefits, beginning with the pre-war economy of the
1950s, through the Kennedy and Johnson administrations, and culminating
with Nixon's handling of the war and its aftermath. Both the short-term
impact, including contemporary government and administration policies,
and the long-term effects are examined, as Campagna describes the change
the war has effected in the basic economic structure.
ISBN: 0-275-93388-1
Praeger Publishers
One Madison Avenue
New York, NY 10010

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The Economic Consequences

♦' • ’!•' ii"

Library of Congress Cataloging-in-Publication Data

British Library Cataloguing in Publication Data is available.

Copyright © 1991 by Anthony S. Campagna

All rights reserved. No portion of this book may be

Library of Congress Catalog Card Number 90-45296

First published in 1991

Praeger Publishers, One Madison Avenue, New York, NY 10010

Printed in the United States of America

The paper used in this book complies with the

Part I: Early Involvement in Southeast Asia

1 The Initial Years: The Eisenhower and Kennedy

Part II: The War Years: The Economic Record

3 The Middle Years and the End of the Johnson

Part III: The Economic and Societal Consequences

6 Economic Costs and Benefits of the War 95

Select Bibliography 153

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1.1 Economic Aid for Vietnam 4

6.5 Military Assistance Forces, 1964—70 110

Finally the institutional transformation of the U.S. economy has longer-

pebble in the water metaphor to describe the kinds of repercussions that

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: f.Vx-'r' . jy- ■ '55- iiVn

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U.S. involvement in Vietnam began when the Truman administration

In September 1953, $385 million were allocated to the direct support

United States Air Force transports rushed troop reinforcements from

Additional military assistance was provided under the Military Assis¬

Fiscal Agency for Public Total

1953-57 783.9 39.4 823.3

Total 2,084.5 299.7 2,384.2

Source: Leonard B. Taylor, Financial Management of the Vietnam Conflict, 1962-1972

spending to fend off the encroaching communists in Southeast Asia would

THE KENNEDY ADMINISTRATION

admittedly the line between participation and assistance became

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If I left the woman I really loved—the Great Society—in order to get

THE ECONOMIC SITUATION

THE INTRUDING WAR

Society programs enacted or expanded in this period included: Federal aid

Calendar Defense Defense

1964 I 55.2 51.2

1965 I 51.0 48.6

1966 I 64.6 56.8

In industries where the growth in labor productivity increased by more

Publications of Greenwich, Connecticut in 1973. Chapters 17 and 18 detail the events of

stage Purchases Inventories GNP

Source: Adapted from M. L. Weidenbaum, Economic Impact of the Vietnam War.

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