We are now suffering from — and have for decades — the second defect of JFK’s decision: the loss of budgetary discipline. Since Kennedy’s tax cut passed in 1964 — after his assassination — there have been 43 budget deficits and only five surpluses (1969, 1998, 1999, 2000 and 2001). Even the surpluses reflected luck more than policy. The last four resulted mostly from the 1990s economic boom, boosting tax revenue, and the end of the Cold War, lowering military spending.Dean Baker has already corrected Samuelson on the long-run debt to GDP issue noting that it continued to fall until we had those Reagan tax cuts:
Samuelson complains that in the 50 years following the tax cuts we almost always ran budget deficits. While this is true, the ratio of debt to GDP continued to fall until 1980, dropping from about 43 percent in 1963 to around 25 percent in 1980. The interest burden remained low and the real interest burden of the debt was actually negative through most of this period. (The inflation rate exceeded the average interest rate.) The soaring deficits and rising debt burden began when Ronald Reagan took over in the White House.Let me also add that while the nominal value of Federal debt was rising during the late 1970’s, the real value of this debt was declining. This is a fact noted by even conservative economists such as Milton Friedman and Robert Barro. Did Robert Samuelson forget about their writings on the topic? It seems that Samuelson also forgot that it took a lot of discipline during the Clinton years to have this boost in tax revenues and less defense spending. But hey – the Clinton Administration was about luck and not policy? But let’s turn back to the macroeconomic issues facing us back in 1963. Here is Samuelson’s take:
What Kennedy did was this: In early 1963, he proposed a $13.6 billion tax cut (today: about $320 billion) even though the economy was not in recession and the tax cut would enlarge the budget deficit. Kennedy adopted the theory that government could, by manipulating its budgets, increase economic growth, reach “full employment” (then a 4 percent unemployment rate) and reduce — or eliminate — recessions. It was a disaster.Dean also corrected Samuelson’s claim that the economy turned into a disaster after the 1964 tax cut. But let’s add to Dean’s account that the unemployment rate as of May 1963 was 5.9%, which was seen as far below full employment. And by the end of 1965, the unemployment rate had dropped to 4% without a run up in inflation. And most macroeconomic textbooks will note that this fiscal stimulus led to an increase in real GDP, which in turned actually increased tax revenues. Somehow I suspect Robert Samuelson hasn’t read any of these textbooks. But let me recount something often not noted in these textbooks about what happened in December 1965. The President’s Council of Economic Advisors seeing that we were also getting fiscal stimulus from the Vietnam War as well as the Great Society appropriately warned the President that we needed to scale back this triple whammy of fiscal stimulus lest the Federal Reserve raise interest rate (which they did temporarily) or we see a rise in inflation (which was the great disaster Robert Samuelson notes). In other words, it wasn’t the 1964 tax cut as much as later events that led to the accelerating inflation. Anyone who has bothered to learn even the least about the macroeconomic history of our nation would know this – but apparently Robert Samuelson does not. He also does not know anything about how macroeconomics has evolved since the early 1960’s when he writes:
Kennedy and his advisers, overconfident of their ability to control the economy, damaged long-standing national norms and customs. They didn’t know what they were doing.Actually, the Council of Economic Advisors did know that too much fiscal stimulus could lead to inflation but alas the politicians were not listening in 1966. But we should also note that the economic profession has not been so enamored with the notion that we always need fiscal stimulus to promote growth. We should note two points here. The profession has become more concerned about the possibility that we could repeat the mistakes of the late 1960’s. It has also long recognized that monetary policy is a powerful aggregate demand tool except in exceptional times such as the zero interest rate bound that we’ve been facing for the past few years. In other words, economists may indeed know what we are doing even if Robert Samuelson clearly has no idea what economists discuss on these matters. My only question is why would the Washington Post allow someone so ignorant to write such an incredibly stupid op-ed?