Index of Memorial Resolutions and Biographical Sketches

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Professor Stephen Lee McDonald, mainstay of the economics department at The University of Texas at Austin for many years, died on February 12, 2006, at age 81. A consummate family man, Steve is survived by his beloved wife of 60 years, Betty; daughter Martha and her husband Harvey; daughter Kathryn; grandchildren Jenna and Michael; sister Martha; and many students who will always fondly remember him. He served as the glue that held the economics department together, and he provided guidance in the College of Liberal Arts over several rocky periods.

He was able to achieve many goals because he was recognized equally highly as a scholar, teacher, and administrator. His scholarly work spanned several areas including monetary economics, energy and natural resources, public finance, and the history of economic thought. He was an inspiration to his students and supervised 35 Ph.D. dissertations and 29 M.A. theses. These students, especially, are unanimous in praise of his guidance and encouragement. As department chair on three occasions, his fairness in all faculty matters was acknowledged and greatly appreciated. Although he had to make tough and sometimes unpopular decisions, he was always attentive to the concerns of other faculty who might have disagreed along the way. There was no doubt about his integrity, and faculty and staff worked together harmoniously under his leadership. Thus, he was exemplary as a scholar, teacher, and public servant.

The Scholar
As a new assistant professor in the Department of Economics at The University of Texas, Stephen McDonald jumped off to a fast start and showed his versatility as an economist by publishing in three diverse areas. His work in agricultural economics might have been anticipated as it was the subject of his doctoral dissertation, and he had gained an interest in agriculture by working on his grandfather’s farm during the summers of his youth.

In 1953, “The Process of Integration and Agricultural Problems” appeared in The Journal of Farm Economics, the premier journal for research in agricultural economics. This article brought a fresh perspective to “the agricultural problem.” The problem, once viewed as insufficient farm incomes, McDonald noted, could not be solved using a static approach to economics. Rather it must be considered dynamically. The problem, as he saw it, was due to the lack of historical integration of agriculture into the whole of the economy; and, as he restated it, “agriculture has never really ‘belonged’ to the whole.” Agriculture lagged behind the rest of the economy both technically and adaptively. At the time, it still depended on animate and biotic power, inhibited by the time-consuming processes of reproduction, and subject to uncontrollable weather. Institutionally, farmers’ habits of thought, attitudes, and reliance on self-sufficiency were far apart from attitudes required in the modern world for success in business. Significant changes on both fronts were needed before agriculture could be fully integrated into the rest of the economy; thinking about solutions to farm problems in conventional terms would not lead to policies that would cure what ailed agriculture.

McDonald returned to this theme in an article two years later in “Farm Outmigration as an Integrative Adjustment to Economic Growth,” published in Social Forces. Low incomes and wages in agriculture were due to rural population growth outstripping farm productivity. The cure to this problem was to speed up the process of integration. The integrative adjustment needed was faster migration of unsuccessful farmers and, especially, family members and workers out of farming. McDonald noted that the insufficient out-migration at the time was not due to any lack of jobs in other sectors of the economy. Rather it had “origins in the historical economic development of the country and the changing relationship of agriculture to the remainder of the economy.” Since technical adjustment is easier than institutional adjustment, income disparities arise out of economic growth, and he made a telling point that there was a “special burden of adjustment on agriculture.” To aid in this adjustment, McDonald thought government programs were needed to change attitudes and uncertainties felt by farm (family) workers to increase their willingness to leave the farm, and he said, “such assistance must look forward toward adaptation, not protection.”

Along with his interest in agricultural economics, McDonald was developing an interest in monetary economics. We say “developing” because it seems unlikely that he charted his course as a monetary economist. We speculate that his interest came from reading Keynes’ famous book, The General Theory of Employment Interest and Money and teaching money and banking as a young assistant professor after receiving his Ph.D. In any event, he published his first professional article in the leading journal of finance, The Journal of Finance, in 1953. Money and banking textbooks had noted that when people withdraw currency from banks, as around Christmastime, banks lose reserves, which then affects their ability to make loans in a fractional reserve banking system. The money supply equation had ignored this effect by assuming that the ratio of currency in circulation to deposits was constant. In the 1953 article mentioned above, “The Internal Drain and Bank Credit Expansion,” McDonald showed empirically that this ratio varied considerably over long periods of time. He explained how this fact might be taken into account in the money supply equation, but he cautioned that the Federal Reserve would not be able to use the adjustment in setting money supply unless it could predict how the ratio would change from period to period. As it turns out for new ideas, there existed no published work on this subject. Also, as it turned out, McDonald’s work stimulated interest in the subject.

In his second article in The Journal of Finance (1956), “Some Factors Affecting the Increased Relative Use of Currency Since 1939,” McDonald explained why the currency ratio had fluctuated over the period of 1939-1953. He uncovered three factors to account for the fluctuations in the ratio over the 14-year period of his study: changes in the relative importance of military wages and salaries (soldiers moving around find it convenient to hold more currency and less checkbook money), size and redistribution of income, and a time lag in readjusting money-using habits to conform to new levels of income. The significant rise in the currency ratio to 1945 was due to all factors but mainly to the relative rise in the importance of military wages and salaries brought about when the United States entered World War II. The fall in the ratio to 1949 was due to the declining importance of military wages and salaries, although that factor was offset some by a return to prewar levels of income distribution. Then, with the breakout of the Korean War and the large increase in military personnel, the ratio rose again to 1953.

We speculate that McDonald’s interest in the history of economic thought was stimulated in a required graduate course taught by Professor Everett Hale and subsequently in Hale’s popular course on Keynes. McDonald’s article, “Boisguilbert: A Neglected Precursor of Aggregate Demand Theorists,” (The Quarterly Journal of Economics, 1954) is a neat tying of history of thought to the best known of the aggregate demand theorists, John Maynard Keynes. In this essay, McDonald synthesized discursive material from five different books written by Pierre le Pesant de Boisguilbert between 1695-1707 into a coherent theory of underconsumption (and economic fluctuations) about a hundred years before Malthus formulated it. This is an amazing article for several reasons. Keynes, who knew about the French writer, did not relate Boisguibert’s work to his own; but perhaps Keynes might be excused of this oversight because no one else had found the gold mine in Boisguilbert until McDonald came along. It is to McDonald’s credit that two famous historians of economic thought, Joseph Schumpeter and Lionel Robbins, did not see what he saw. Evidently, they (and others) did not spend enough time to distill the mysterious writings of a highly intelligent French bureaucrat into a coherent theory of aggregate demand, and, thus, overlooked the precursor of all in the chain of underconsumptionist economists including the great Malthus and the greater Keynes. In view of this accolade, it is interesting to note that McDonald never taught a course on the history of economic thought until just before he retired, and many graduate students will attest that it was a very enjoyable and informative course.

For most of McDonald’s career, a principal research interest was energy/resource economics with special reference to the petroleum industry. This interest was readily understandable in the light of his Louisiana/Texas background. However, the way he explored and contributed to this field, which was of exceptional importance to those states and to the nation during his lifetime, was characteristic of a man whose special enjoyment in matters musical came from the works of Mozart: crisp and to the point with a clear narrative development, a virtuosity in conceptualization and analytical method, and, in an especially Mozartian touch, an elegance in the application of theory to practice.

Setting aside for the moment a number of publications that explored the fiscal aspects of the industry; we note several publications that demonstrated McDonald’s mastery in this area. Key items in a very rich scholarly record are: “Petroleum Conservation in Theory and Practice,” co-authored with James W. McKie and published in the prestigious Quarterly Journal of Economics (QJE) in 1962; Petroleum Conservation in the United States: An Economic Analysis a Resources for the Future (RFF) publication that appeared in 1971; “Conservation Regulation and the Elements of a National Energy Policy,” in Edward Erikson and Leonard Waverman, eds, The Energy Question: an International Failure of Policy, Vol 2, North America (University of Toronto Press, 1974); The Leasing of Federal Lands for Fossil Fuels Production, another RFF publication, this time from 1979; The Role of Natural Gas in Environmental Policy, a compilation co-edited with Mina Mohammadioun and published by the UT Bureau of Business Research in 1993; and “The Hotelling Principle and In-Ground Values of Oil Reserves,” published in The Energy Journal in 1994.

Petroleum Conservation in the United States is a masterfully comprehensive overview, richly informed by a skillful and creative use of economic theory, which addressed a set of issues that were growing steadily more critical as the domestic oil patch was being superseded by newer and/or richer fields located abroad. The issues nested in this conjunction of declining output and rapidly accelerating demand were taking on heightened importance while the study was under way and seemed still distant from resolution as the research appeared in print. As Orris Herfindahl, associate director for the Energy and Minerals Program at RFF, states at the very outset of this volume, “The system by which petroleum is ‘conserved’ in the United States is far more complex than is generally realized.” Not the least source of the complexities came from the decentralized nature of both production and the governmental base of the regulatory environment, thanks to which each producing state had developed its own regulatory regime. In addition, as McDonald notes, the industry itself displays unique characteristics in petroleum production and marketing, which set it apart from other business organizations; both positively and negatively, externalities of different kinds are very much part of the picture. (“Externalities” are costs or benefits borne by persons external to the firm or other entity causing them.) Given that petroleum and natural gas are stock or non-renewable resources, albeit resources that have been strongly conditioned in their magnitude and cost structures by technological changes and changes in competing supply sources abroad, the challenge to interpreting the conservation problems of the industry in an analytically satisfying way and rendering them lucid to both professional economists and policy makers was a formidable one. Appended to the text is a useful chronology of key legislative/regulatory stepping stones through the jungle of policymaking, a mapping that itself helps the layman immensely through the industrial tangles.

The basic analytical tools of the profession were pressed into service to make sense of the rich empirical evidentiary base McDonald assembled. For those unfamiliar with the oil industry, he is careful to identify and make sense of the special terms that are used; this made the study more accessible to a larger group of readers, including economists who have little or no knowledge of the particularities of the petroleum industry and how these have conditioned the optimizing processes therein. Lastly, rather than run the risk of leaving the reader at sea, slogging through the detailed analysis to come up with ideas for remediation of the policy predicament, McDonald advanced a well thought out and understandable set of proposals for fundamental changes in conservation regulation. Altogether, considering the complicated nature of the topic, the work is not only impressive but well nigh definitive, and this was amply acknowledged in the favorable reviews the book received.

The article “Conservation Regulation and the Elements of a National Energy Policy” makes very good reading even today, when, indeed, the necessity is greater by far than it was during the oil shocks of the 1970s, and when unutilized domestic production capacity, then a recent memory, has faded even further into the mists of history. Thanks to fundamental changes in the petroleum and natural gas markets, the issues that today dominate the agenda of national concern are radically different, but McDonald’s down-to-earth survey of the elements of public policy still provides a useful starting framework for exploring the evolving economic issues.

Equally magisterial to the first RFF book was the second study, which focused on the federal government’s leasing practices in respect of both offshore and onshore lands in the public domain, practices that cover deposits of oil, gas, oil shale, and coal. This exemplary interdisciplinary analysis begins with a thorough examination of the changing legal basis for leasing practices and then explores the question of the economic rents involved, economically efficient extraction practices, environmentally protective methods, methods of leasing and auction systems, and conservation and environmental regulation desiderata. Leasing practices had by then come back into examination (having earlier come into particular prominence when the importance, and accessibility, of offshore oil production had surfaced as a major topic of concern), and environmental protection was a far hotter topic than it had been ever before. The writing was both rigorous and transparent, which lent a desirable level of intelligibility and persuasiveness to this scholarly inquiry. This book, too, enjoyed a warm reception among experts in the fields of economics and government policy. Indeed, this work would still serve as an excellent reference book for a course in environmental economics.

The quality of these two important studies was anticipated in the McKie-McDonald article in the 1962 volume of the QJE, which even today reads as a fine introduction to the economics of conservation. Moreover, since “Petroleum Conservation” came out at about the time that the second great wave of conservation concern was cresting, thanks to Rachel Carson’s 1951 influential book, The Sea around Us, the article was unusually timely.

Although McDonald’s earliest work was mainly in monetary economics, he became best known as a scholar in the field of energy economics. As in any academic discipline, recognition may come to a young professor when he challenges the work of already established scholars. The academic battle was over the percentage depletion allowance for the oil and gas industry. Established scholars were of a mind that permitting the oil and gas industry to write off percentage depletion of resources used against taxes would lead to misallocation of resources in the economy. Specifically, the oil and gas industry would attract more capital and other industries less capital than is optimal for society.

McDonald, who had worked with Humble Oil and Refining Company (Exxon today), contested this view with an important paper, “Percentage Depletion and the Allocation of Resources: The Case of Oil and Gas,” that appeared in the National Tax Journal (NTJ), 1961. Allowing that normal rates of return and normal capital turnover rates vary by industry due to differences in risk and technical requirements, McDonald concluded that a seemingly neutral flat rate tax on corporate income would actually distort resource use. Furthermore, he found that the current percentage depletion rate (about 22% of capital consumption at that time) resulted in reasonable neutrality for a manufacturing industry like mineral extraction and production.

McDonald’s surprising findings sparked considerable controversy at an academic conference devoted to the federal tax treatment of income from oil and gas, which was held at the Brookings Institution, a prestigious think tank in Washington, D.C., in 1962. Even though McDonald held the contrary view, he was chosen to write the background paper and the conference summary. The latter grew into an influential book, Federal Tax Treatment of Income from Oil and Gas (Brookings, 1963). The conference participants included such intellectual giants in the field of public finance as Arnold Harberger of the University of Chicago, Carl Shoup of Columbia University, and Richard Musgrave of Princeton University. McDonald was in great company.

In a lively debate in the literature, Musgrave provided a theoretical critique (NTJ, 1962) to McDonald’s original paper. Musgrave contended that McDonald had overstated his case for a neutral profits tax (or more narrowly a percentage depletion allowance) and that McDonald had instead provided support for a general tax on all input costs. McDonald deftly countered that Musgrave had embellished, not overturned, his intended analytical contribution, and he presented a fresh analysis of risk and loss offsets that challenged many of the criticisms advanced by Musgrave. In the same issue Douglas Eldridge of the U.S. Treasury Department gave an empirical critique. McDonald blunted Eldridge’s theoretical arguments but conceded that his empirical findings on the normal rate of return in oil and gas production had been tempered by the extra data that Eldridge had been able to access. McDonald brilliantly held his ground throughout this classic scholarly debate.

McDonald subsequently extended his contributions to the field of energy economics with a series of papers on U.S. tax policy. In “Depreciability of Assets and the Taxation of Capital Gains” (NTJ, 1979), he argued that the capital gains tax rate falls harder on the sales of nondepreciable assets and therefore concluded that the neutral rate should be lower for these assets. In “The Energy Tax Act of 1978" (NTJ, 1979), he carefully analyzed the major provisions of the Act, which were intended to encourage conservation and the substitution of new energy sources for oil and gas. While these tax incentives might have some of the desired effects, McDonald argued that this benefit would come at a significant cost to allocative efficiency. Ideally, the government should internalize the external cost of insecure supply and allow free oil and gas prices to provide the proper economic incentives.

In “The Incidence of an American Oil Severance Tax Under World Pricing by OPEC: A Note” (NRJ, 1980), McDonald challenged the widely held view that the burden of an oil severance tax would be borne almost entirely by domestic consumers in the form of higher prices. While this inference is correct when an economy is insulated from oil imports, McDonald showed that it is not correct when an outside entity, such as OPEC, continues to price in its own interests independent of the U.S. tax. Some of the tax burden will fall on the landowners in a state accounting for a large share of a nation’s oil-producing capacity. In the long run, the tax reduces rents and increases imports, without any effect on price. Along similar lines, in “The Incidence and Effects of the Crude Oil Windfall Profit Tax” (NRJ, 1981), McDonald compared prices and output in the U.S. with price regulation to those without price regulation. He concluded that the economic incidence of the tax falls on operators and landowners, with the latter bearing an increasing burden as time passes. Price regulation perversely leads to reduced domestic output and increased imports of oil.

In conclusion, Stephen McDonald made many important contributions to the field of energy economics, with special reference to the oil and gas industry. His widely-read works influenced the thinking about government policy in this vital area of national concern. He was a prolific scholar who achieved great distinction in his field.

The Teacher
Professor McDonald was an outstanding mentor of graduate students. He supervised a remarkable number of Ph.D. dissertations, 35 in all, and Master’s theses, 29 in all. The topics ranged over the fields of monetary economics, public finance, energy economics, and economic development. He inspired students to pursue their research interests, instilled confidence in their abilities to complete their research agenda, and helped them to learn how to think and write clearly. His many students went on to successful careers in academia, government, and business.

McDonald’s primary teaching fields were monetary economics and macroeconomics. At the graduate level he taught monetary theory, a seminar in money and banking, and macroeconomic theory (a core requirement in the graduate program). He was known as a caring, knowledgeable, and clear instructor. In addition to teaching at UT, he also taught a summer seminar for 21 years to bankers at the elite Stonier Graduate School of Banking at Rutgers University. The American Banking Association awarded him a Citation for Excellence in 1986.

Towards the end of his career at UT, McDonald taught a seminar on the history of economic thought, which resonated with graduate students. The course provided a broad survey of economic ideas, starting with Adam Smith and other social philosophers in the 17th and 18th centuries and ending with John Maynard Keynes and other intellectual giants of the 20th century. This stimulating course placed the students’ specialized programs of graduate study into an historical and methodological perspective.

The following testimonies from former students, upon his passing, are representative of the special way in which Professor McDonald touched students’ minds and hearts.
“My experience with Steve McDonald spanned not only years but a broad swath of academic life, and he was outstanding in all of it. I took Professor McDonald’s graduate courses in macroeconomics and monetary theory and seminar course in money and banking. He was a wonderfully organized and careful lecturer. On a more personal note Steve McDonald saved my doctorate for me. ... He was very clear on how I ought to focus my research and how to organize the dissertation as an expression of it. ... I couldn’t have done it without him.” (William Gruben, Vice President and Senior Economist, Federal Reserve Bank of Dallas)

“My ear can still hear his soft southern drawl. Professor Stephen McDonald taught me intermediate macroeconomics at the undergrad level and monetary theory at the graduate level in the 1970s. He was also kind enough to supervise my Ph.D. dissertation on Federal Reserve Strategy in 1974. He was the student’s friend, an excellent classroom instructor and a cheerful supporter of students. He combined kindness and integrity. You knew immediately that he cared about you and about economics.” (William Dugger, Professor of Economics, University of Tulsa)

“I will always remember Dr. McDonald as a very skillful teacher who had the ability to keep the students’ interest in his lectures and transmit his knowledge in a very professional manner.” (Jesus Gutierrez, Financial Advisor, A.G. Edwards & Sons, Inc.)

“I would like to thank my professor and mentor, Dr. Steve McDonald for his teaching, advising and guidance during those important years of my life.” (Arturo Garza-Rodriguez, Professor, Monterrey Tech, Mexico)

“I learned a lot from him, and I am glad to have been one of his students. I will always appreciate his help and guidance. I have stayed in touch with him over the years through my Christmas letters, and I am glad that we didn’t lose contact.” (John Garrett, Statistician, Capital One Bank)
Even when McDonald was not the dissertation supervisor of record, he greatly influenced the intellectual development of graduate students.
“Stephen McDonald has had a profound impact on my life as a scholar. He is not only the main reason why I decided to pursue a career in the history of economic thought, he also provided me with an example of how to conduct myself in the classroom as a professor. ... Although I wrote a dissertation that he might not have agreed with fully, he was always helpful and encouraging. He also invited me to his home a number of times where we spent long afternoons talking widely about history and economics. ... I greatly appreciate all the gifts he gave me and will remember him for the rest of my life as a great inspiration.” (Carl Wennerlind, Assistant Professor of History, Barnard College)

“After I completed my dissertation I wrote an article on it and sent it to the Quarterly Journal of Economics. To my delight, it was accepted. (It was largely because of this, I think, that I secured the job I continued to hold for the next 40 years.) After the paper had been accepted, but before it was published, I sent a copy to Steve. He wrote back that I had made an error — a step that puzzled him, as he put it. He was right, of course, and I was obliged to write the editor and ask that it be returned. The story ends happily; I made the correction and it remained acceptable.” (Dudley Luckett, Distinguished Professor in Liberal Arts and Sciences and Emeritus Professor of Economics, Iowa State University)
Professor McDonald also was dedicated to undergraduate teaching. His course offerings included money and banking, intermediate macroeconomic theory, and the economics of oil and gas production. He respected every student and took great care to deliver well-prepared lectures. In 1982, he received the special honor of a President’s Associates Teaching Award for Excellence in the Teaching of Economics.

The Public Servant
Professor McDonald’s illustrious career at UT Austin spanned four decades, during which he served as assistant professor, professor, acting director for economic development, chairman, chairman ad interim twice, graduate advisor twice, chair of the Graduate Studies Committee, and a member of the executive committee several times. He was a model citizen of the economics department, who could always be counted on to exercise good judgment and lend his shoulder to the effort. Under his able leadership, the department took great strides.

McDonald held the Jack S. Josey Professor of Energy Studies (joint appointment with the College of Business) from 1982-84 and the Addison Baker Duncan Centennial Professor in Economics from 1986-1994. In a striking act of devotion to his department, he relinquished the Duncan Professorship early in order to help in the recruitment of a top scholar in public finance.

Steve was always forthright and reasonable in his dealings. As Professor Dan Morgan recalls,
“Though Steve McDonald was famous and successful, one would have never known it. He was supremely modest, every colleague’s best friend, and someone whose office was open for as long as the colleague wished. If a colleague were ill, Steve would volunteer to teach his class. He never said a bad word about a colleague in his four decades at The University of Texas at Austin.”
No wonder that his colleagues trusted him and followed his lead.

McDonald made other contributions on the campus. In 1990, he became the first senior research fellow in the UT Bureau of Business Research. There, he continued to perform research in the area of energy economics, including an evaluation of auctioned tradable permits and substitutable taxes as instruments of environmental policy. This work is very timely, especially for the development of government policies that address global climate change.

McDonald gave freely of his time for public service to the state of Texas. In 1988, he wrote an invited report for the Select Committee on Tax Equity on a touchy subject, “A State Personal Income Tax: An Economic Analysis.” Billy Hamilton, executive director of the committee shared the report with Lieutenant Governor Hobby and thanked McDonald for “this exceptional contribution to our work” (Memo, April 1, 1988). In 1994, McDonald wrote a report, “Investment in Human and Knowledge Capital,” for Chancellor William Cunningham on the economic contributions of the UT System to the well being of Texas. As always, McDonald was penetrating and lucid.

Outside of UT, McDonald served in the U.S. Navy with rank at discharge: Lt. (j. g.), worked with Humble Oil and Refining Company (Exxon USA), and served both as associate professor and head and then professor and head of the Department of Finance at Louisiana State University. Industry, government, labor, and educational leaders sought his services as a consultant. Some of these associations included Exxon Corporation firms (Humble Oil and Refining Company, Standard Oil of New Jersey, Exxon Pipeline Company), Columbia-Southern Chemical Corporation, Motorola, Texaco, Louisiana Bankers Association, Independent Petroleum Association of America, Louisiana State Department of Administration, Texas General Land Office, U.S. Office of Science and Technology, U.S. Department of Interior, U.S. Department of Energy, U.S. Senate and House committees, Texas Federation of Labor, Texas State CIO Council, Joint Council on Economic Education, Texas Economic Education Council, Public Affairs Research Council of Louisiana, Resources for the Future, Inc., Texas Committee for Economic Development, and the National Academy of Science. Shortly before his death, the Central Texas Association for Energy Economics, honored him for his lifetime achievements.

Sensitive to the human suffering created by the Great Depression, McDonald saw economics as a profession that could help society and joined it with enthusiasm after serving the nation in World War II. He focused his research on public policy issues concerning the monetary system, energy, and the environment. His numerous scholarly publications were influential, and he passed along his knowledge to many students who have carried on in his intellectual spirit.

McDonald was always a gentleman. While determined in purpose, he persuaded and taught others in a rational, soft-spoken way, and he cared about everyone with whom he came into contact. Mina Dioun, a former student and co-author, wrote after his passing:
“Professor McDonald was the most generous, humble, and kind person I have ever known. He was my mentor, professor, colleague, but above all, a great family friend. ... Everyone whose life has been touched by his kindness and his humility will miss him.”
Steve McDonald will always remain in our thoughts.


William Powers Jr., President
The University of Texas at Austin


Sue Alexander Greninger, Secretary
The General Faculty

This memorial resolution was prepared by a special committee consisting of Professors Vincent J. Geraci (chair), Douglas Dacy, and William Glade.