The New Palgrave Dictionary of Economics

2018 Edition
| Editors: Macmillan Publishers Ltd

Okun, Arthur M. (1928–1980)

  • James Tobin
Reference work entry
DOI: https://doi.org/10.1057/978-1-349-95189-5_1409

Abstract

Okun was born in Jersey City, New Jersey, on 28 November 1928. He died suddenly in Washington, DC, on 23 March 1980.

Keywords

Budget deficits Equality of opportunity Implicit contracts Inequality Leaky bucket New classical macroeconomics Okun, A. M. Okun’s Law Output gap Potential GNP Redistribution of income and wealth Unemployment–inflation trade-off 

JEL Classifications

B31 

Okun was born in Jersey City, New Jersey, on 28 November 1928. He died suddenly in Washington, DC, on 23 March 1980.

Okun received his BA, ranked first in his college class, in 1949 and his Ph.D. in economics in 1956, both from Columbia University. He started teaching at Yale as Instructor in 1952, and advanced up the ladder to the rank of Professor in 1963. From September 1961 to January 1969 Okun was, except for two academic years 1962–4, on leave from Yale at the President’s Council of Economic Advisers (CEA) in Washington, first as a staff member, then as a Council Member 1964–8, and finally as Chairman 1968–9. When Administrations changed in 1969, Okun joined the Brookings Institution as a Senior Fellow, an appointment he held the rest of his life.

Prior to his public service in the 1960s Okun was not well known outside Yale. Those who knew him personally appreciated his extraordinary talents and virtues. He was a great and generous teacher, both in the classroom and out. His open-door office was the place for students and colleagues to get things straight, confusions dispelled, errors corrected, models repaired. A thinker of natural integrity and inexhaustible curiosity, he pursued matters in depth, unsatisfied until logic was tight and facts fell into place. His teachings of policy-oriented macroeconomics created an oral tradition that many beneficiaries remember with deep gratitude. But little of it was published, because Art Okun was unduly modest and perfectionist about putting his wisdom into print.

At the CEA Okun found another metier, macroeconomic analysis directly related to the policy issues of the day. It began when President Kennedy’s Council, of which one member was from Yale, enlisted Okun as a consultant. The Council wanted to convince the President, his White House staff, the Congress and the public that reduction of unemployment from seven per cent to four per cent would yield economy-wide benefits much greater than moving from 93 to 96 per cent employment superficially suggested. Okun was asked to estimate the gains of real Gross National Product associated with unemployment reduction. The answer became famous as Okun’s Law, one of the most reliable empirical regularities of macroeconomics. Okun found that a reduction of one percentage point of unemployment was associated with a gain of three per cent in real GNP. His research, later published (1962), also provided a methodology for estimating potential GNP, the real output the economy can produce at a full-employment or ‘natural’ rate of unemployment, and the ‘Gap’ between actual and potential output.

These concepts are central to estimates of the ‘high-employment’ or ‘structural’ federal budget deficits implied by tax and spending policies, as distinguished from actual deficits, which depend also on the performance of the economy as indicated by the Gap. The entire apparatus was displayed in the 1962 Economic Report of the President, and was a mainstay of subsequent Reports for 20 years. Okun himself was a major contributor to all the Reports 1962–70.

Okun was the Council’s principal forecaster and estimator of the consequences of alternative policies. As he won the confidence of Council chairmen, White House staff, presidents, and even Treasury secretaries, he became the obvious choice for President Johnson to appoint Council Member and then Chairman. The period 1966–9 was difficult for the CEA and for Okun personally. The four per cent unemployment target had been achieved in 1965, with negligible cost in higher inflation. Then came the acceleration of Vietnam spending, overheating the economy and lifting the inflation rate three percentage points by 1969. At the beginning of 1966 Gardner Ackley, CEA Chairman, and Okun urged President Johnson to ask Congress to raise taxes. He would not do so until too late, and even then the temporary income surtax of 1968 had disappointingly small effects. When Okun left the government in 1969, the unemployment–inflation nexus became the foremost problem on his research agenda for the rest of his career.

From 1969 much of his energy and leadership went into his brainchild, the Brookings Panel on Economic Activity, which enlisted able economists from Brookings and elsewhere for research on the major macroeconomic developments and policies of the times. The papers are published in Brookings Papers on Economic Activity, which under the painstaking editorship of Okun and George Perry quickly became one of the most admired professional journals in economics. The editors put the contents of every issue in perspective with their analytical summaries of the papers and discussions.

Okun had nearly completed a major treatise on macroeconomics (1981) when he died; it was edited and finished by his colleagues at Brookings. The book is a culmination of his thinking and writing over many years, his search for a coherent model of an advanced capitalist economy in a democratic society, based on his understanding of how businesses, workers and consumers behave and relate to one another. Okun did not believe that the economists’ favourite paradigm, purely competitive markets cleared by flexible prices – Adam Smith’s ‘invisible hand’ – provided realistic foundations for macroeconomics. He was impressed by the informal reciprocal expectations and obligations that characterize repeated dealings between sellers and customers or employers and workers. A creative phrase-maker, Okun called this web of implicit contracts the ‘invisible handshake’. His ‘customer markets’ are in many ways efficient substitutes for price-cleared auction markets, but they are also the source of endemic macroeconomic difficulties.

Okun saw no easy resolution of the cruel dilemma policymakers face in the trade-off between unemployment and inflation. All too often, and especially in the 1970s, fiscal and monetary demand management could achieve acceptable outcomes in one of these two dimensions only at the cost of unacceptable results in the other. Okun had no use for the monetarist view that inflation could be easily prevented or conquered if only the central bank mustered sufficient will and wisdom. Nor did he share the simplistic view of some theorists of various schools that inflations are neutral and innocuous, devoid of real consequences. He advocated structural anti-inflation policies, including wage and price guideposts strengthened by tax-based incentives for compliance, to diminish the unemployment costs of anti-inflationary monetary and fiscal measures (1978).

The intellectual climate of professional macroeconomics was inhospitable to Prices and Quantities when it was published. ‘New classical’ models relying on ‘invisible hand’ micro-foundations were the dominant fashion. They are theoretically appealing but have trouble explaining the commonly observed facts of business fluctuations. No one knew those facts better than Okun, whose last published paper (1980) is a masterful litany of the many ways new classical business cycle theories fail to fit them. Fashions change and controversies fade. Okun’s macroeconomics will be an important component of whatever new synthesis emerges from contemporary debate.

Arthur Okun was not only an effective adviser and participant in the making of economic policy; he was also a scholar and scientist of political economy – the ancient name for our discipline suggests a broader scope of inquiry and concern that most economists essay today. Okun’s reflections on the role of the academic policy adviser in government and on the politics and economics of macroeconomic management, published shortly after he returned to private life, are the most thoughtful of the genre (1970).

For his Godkin Lectures at Harvard (1975) Okun chose the broadest and most basic question of political economy: how democratic societies do, can, and should balance the ethical desirability of mitigating inequalities of well-being against the practical utility of the inequalities arising in free markets as incentives for efficient economic performance. Okun coined the metaphor ‘leaky bucket’ for losses in aggregate wealth incident to government interventions to transfer wealth from rich to poor. Citizens will disagree on the tolerable degree of leakage, he says, but both liberals and conservatives should face the trade-offs realistically. They should be able to agree on measures to plug leaks, exploiting opportunities to diminish inequality without impairing incentives (even if such reforms are not Pareto optimal). Okun suggests an agenda of such opportunities, focusing on measures to assure greater equality of opportunity. The book has already become a classic. In its erudition, logic, lucidity, and wisdom, and above all in its humanity, it truly reflects the qualities of its author.

Selected Works

  • 1962. Potential GNP: its measurement and significance. In Proceedings of the business and economic statistics section, American Statistical Association, 98–103. Reprinted in (1983).

  • 1970. The political economy of prosperity. Washington, DC: Brookings Institution.

  • 1975. Equality and efficiency: The big tradeoff. Washington, DC: Brookings Institution.

  • 1978. A reward TIP. In Senate, Banking, Housing and Urban Affairs, Anti-inflation proposals, Hearings, 95 Congress 2 Session, Washington, DC: Government Printing Office. Reprinted in (1983).

  • 1980. Rational-expectations-with-misperceptions as a theory of the business cycle. Journal of Money, Credit and Banking Part 2, 12: 817–25. Reprinted in (1983).

  • 1981. Prices and quantities: A macroeconomic analysis. Washington, DC: Brookings Institution.

  • 1983. Economics for policymaking: Selected essays of Arthur M. Okun, ed. J.A. Pechman, with editor’s preface. Cambridge, MA: MIT Press.

Copyright information

© Macmillan Publishers Ltd. 2018

Authors and Affiliations

  • James Tobin
    • 1
  1. 1.