David R. Henderson  

Charles L. Schultze RIP

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Charlie Schultze, Brookings Institution economist and former economic adviser to President Jimmy Carter has died at age 91.

Charlie was old-school in the best sense of that term. From what I could tell at a distance, he believed in using economic analysis the best way he knew and then giving the information to the politicians he worked under. Like many economists at the Council of Economic Advisers and elsewhere in presidential administrations, he spent a lot of his time arguing against bad ideas.

While not in the government, he was more outspoken against bad ideas, arguing strongly, for example, against industrial policy when that was all the rage in the early 1980s. In the article on Industrial Policy in the first edition of The Concise Encyclopedia of Economics, economist Richard B. McKenzie quoted Schultze's case extensively, writing:

Probably the most outspoken Democratic opponent of industrial policy was Charles Schultze, an economist at Brookings who was chairman of President Carter's Council of Economic Advisers. Schultze, in the Brookings Review, undercut the political and intellectual case for industrial policy with these salient points:

The United States does have some old-line heavy industries with deep-seated structural problems--especially the steel and automobile industries--but they are not typical of American industry generally. There is no evidence that in periods of reasonably normal prosperity, American labor and capital are incapable of making the gradual transitions that are always required in a dynamic economy, as demand and output shift from older industries to newer ones at the forefront of technological advances.

One does not have to be a cynic to forecast that the surest way to multiply unwarranted subsidies and protectionist measures is to legitimize their existence under the rubric of industrial policy. The likely outcome of an industrial policy that encompassed some elements of both "protecting the losers" and "picking the winners" is that the losers would back the subsidies for the winners in return for the latter's support on issues of trade protection.

In an insert to McKenzie's article, "Industrial Policy: Democratic Economists Speak Out," I quoted Schultze as follows:
The first problem for the government in carrying out an industrial policy is that we actually know precious little about identifying, before the fact, a "winning" industrial structure. There does not exist a set of economic criteria that determine what gives different countries preeminence in particular lines of business. Nor is it at all clear what the substantive criteria would be for deciding which older industries to protect or restructure.

Here's what I wrote about economist Ron Hoffman in my book The Joy of Freedom: An Economist's Odyssey, and it's an example of Charlie and his staff working behind the scenes to fight bad policy proposals:
During my summer at the CEA, I met a senior economist at the Council named Ron Hoffman. His short stature and facial features made him look as if he could be Dustin Hoffman's brother. In fact, he is. That summer, Hoffman helped me find a good lawyer when I got in trouble with the Immigration and Naturalization Service. As a result, I kept in touch with him, visiting him a few times in the late 1970s and early 1980s, after he had moved over to the U.S. Treasury. Hoffman told me of an internal fight within the Carter administration in the late 1970s, when Joseph Califano, the secretary of the department of Health, Education, and Welfare, proposed draconian controls on health care spending, an early version of Hillary Clinton's 1993 proposal. Hoffman, working a few layers beneath Treasury Secretary Michael Blumenthal, analyzed Califano's proposal, found it to be a bad one, and argued forcefully within the Treasury that Blumenthal should oppose it. Blumenthal was persuaded and gave Hoffman the job of writing memos on the issue for his signature. Hoffman recounted for me that he formed a triumvirate with an economist in Charles Schultze's CEA and an economist in James Lynn's Office of Management and Budget. Their memos, often written for the signature of Blumenthal, Schultze, and Lynn, became known to their group as the Mike, Jim, and Charlie memos. They were successful. The Califano controls went nowhere, and the country was saved for at least a few years from a major attempt to stifle the health care sector.

I had one interaction with Charlie. I tell here how I maneuvered at the last minute to get on a panel at the American Economic Association meetings in Denver in September 1980, along with Charlie (then chairman of Carter's Council of Economic Advisers), Alan Greenspan (a Reagan advisor), and Hendrik Houthakker (an advisor to John Anderson). Here's my speech.

Charlie wasn't particularly friendly to me (Alan was), but I don't think it was personal. He wasn't that friendly to any of the panelists, especially Alan, and my gut feel was that he was pissed that Ronald Reagan, advocating a close to 30% drop in marginal tax rates, was getting traction in the campaign.

The one thing I remember clearly about my implicit interaction was in Q&A. I had bargained for my 7 minutes (the others had 15 to 20), but neither Leonard Silk, the panel moderator, nor I, had thought through whether I would get to participate in Q&A. When the first question came from the floor, all 3 of the other panelists gave their answers and I started to give mine. Leonard cut in and said that he had not agreed to give me time, a completely legitimate point on his part. But when he cut in, I heard an audience of 700 economists come as close to booing as I've ever heard. So Leonard relented and I decided that I would try to satisfy the audience and me, on the one hand, and Leonard on the other, by keeping my comments short.

This is all prelude to my best comment, at Charlie's expense.

Franco Modigliani, obviously friendly to Charlie but also not friendly to increases in the minimum wage, stood up at the front of the room and asked Charlie, "In light of the high teen unemployment rate, what do you think of Jimmy Carter's increase in the minimum wage?" Carter had signed a bill raising the minimum wage in stages from $2.30 per hour when he took office in January 1977 to $3.35 per hour effective 4 months after those AEA Meetings. Franco knew that Charlie would be stuck. The vast majority of economists then thought it was a bad idea to risk pricing some of the most vulnerable workers out of the labor market. Franco probably knew that Charlie thought that too. But what was Charlie going to do? Call out his boss? Unlikely.

So Charlie answered "That's a question best left for posterity."

I saw my opening and didn't even wait for Alan or Hendrik. I said, "Well right now, Charlie, posterity is out on the street looking for work."

My wife, daughter, and I used to get a kick out of watching Ali G make fools of famous people he interviewed. I remember also wishing, though, for one of the famous people not to get suckered and to have total dignity throughout. In all the episodes I saw, two people succeeded. One was the late Andy Rooney; the other was Charlie Schultze. Notice him patiently explaining at the 1:28 point and the 2:13 point.

COMMENTS (2 to date)
The Original CC writes:

He's really good in that Ali G interview. "He'd say *you're* looking pretty weird with *your* hair." Well done!

Gene Laber writes:

In 1964 Charlie taught a graduate macro course at the University of Maryland. As I recall, at the time he was assistant director of what was then called the Budget Bureau. The class started at 7 pm, so he had been at work all day in Washington by the time the class started. He would spend three hours pacing in front of the class and filling the blackboard with equations, while he illustrated point after point with real world examples. It was an intense, exciting experience. One student in the class described it as similar to getting a drink of water at a fire hydrant. He convincingly demonstrated that excellent scholars can also be excellent teachers.

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