Trashing JFK's Tax Cuts, One of the Greatest Policy Successes of All Time

Brian DomitrovicContributor

3/12/2013 @ 12:15AM

The most cherished era in American economic history remains “postwar prosperity”—the heady run in the generation after World War II in which growth abounded, jobs were plentiful, the baby boomers were raised in plenty, and the vast middle class emerged living the high life.

JFK's tax cuts caused the boom, LBJ's
spending the bust (Photo credit:
Wikipedia)

In the popular mind, the locus classicus of postwar prosperity is the decade of the 1950s. “The Haunted ’50s,” as commentator I.F. Stone once called them. Maybe they were a little repressed and paranoid, maybe a little go-slow on civil rights, but without question the 1950s were a time of rocketing economic performance.

You don’t have to dig too deeply into popular culture, say the movies, to start asking how we ever came up with this cliché. Gregory Peck couldn’t afford a washing machine in The Man in the Grey Flannel Suit (1956), a theme of the intensely discussed Peyton Place (1957) was the mirage of economic opportunity in this country, and critics agreed that the ineffable queerness ofVertigo correlated to the bewildering recession into which the film was released in 1958.

Moving to statistics, the story stays the same. From 1944 to 1960, the U.S. economy expanded at the sorry rate of 2.1% per year. The only boom was from 1947 to 1953, when output surged by 4.6% per annum. But even there, the latter-years growth represented little more than Korean-war expenditures. All the while in the ’50s, labor-force participation (the proportion of the population working) stayed above the World-War II peak, when Rosie the Riveter was on the job, with nothing to show for it. At 2.4% per year, Dwight Eisenhower supervised (from 1953 to 1960) the worst growth of any postwar president until George W. Bush and Barack Obama came along.

They sure were the Haunted ’50s. The economy had the slows. By the election of 1960, there was no sense that the country had shed for good the experience of the Great Depression of the 1930s. All that had followed, at least in peacetime, was economic sluggishness.

John F. Kennedy beat Ike’s vice president (Richard Nixon) in 1960. JFK’s pitch in that legendary campaign was to “get this country moving again.” He was talking about economic growth. And that growth would get unleashed via tax policy, namely two big tax cuts, one on business and the other on personal income.

These tax cuts became law, the business ones in 1962 and the personal ones early in 1964, a few months after the assassination. The economic results that anticipated and accompanied these tax cuts remain among the most whopping ever recorded.

The eight-year expansion from 1961 to 1969 saw growth of 48%, a third more in an eight-year period than in the sixteen years ending in 1960. 1944-69, the “postwar prosperity” quarter century, saw growth at the nice peak-to-peak rate of 3% per year, but only because the 1960s lifted everything up.

Further statistics show more of the same. Unemployment was stuck around 6% in the 1950s, and then settled below 4% in the 1960s. 13 million jobs were created in the 1960s, 7 million in the 1950s. And how about federal receipts: they went up more than the epic rate of economic growth, rising by 55% in real terms in the seven years after 1961.

Why go over this? At some point, we have to start the work of dislodging in public memory the fairy tale about 1950s prosperity which has been current for several decades. More immediately, we have to gainsay the outlandish word that the Washington Post is putting out there on the JFK tax cuts.

Last week, the Post’s venerable Robert Samuelson had a bad moment and wrote a column called “How JFK’s Mistake Led to the Sequester Mess.” Samuelson called the 1964 tax cut “the biggest mistake of domestic policy since World War II.” His argument was that that tax cut paved the way for three big and bad things, inflation, instability, and budget deficits.

The first happened because “an initial boom” (i.e., the boom that gave postwar prosperity its name) “spawned a wage-price spiral” resulting in 13% inflation in 1980. Next, “from 1969 to 1982, there were four recessions.” And last, “before Kennedy’s tax cut, it was assumed that, in ordinary times, Americans would strive to balance the federal budget.” After JFK, “debt became benign.”

The obvious flaw in all this is the chronology. Hanging the 1980 inflation rate on a 1964 tax act lacks proximity. There were indeed four recessions from 1969-82—just as there was a 106-month expansion after 1961. And the federal budget went into statistical balance in 1965, the year after the JFK rate cut.

Three major things went unsaid in Samuelson’s column. First was the greatness of 1960s growth, the sine qua non of postwar prosperity. Second was the federal spending explosion in the wake of the receipts boom coincident with the tax cuts.

As I put it in my book, Econoclasts: “From 1962 to 1965, federal outlays increased by 10.7% total, or 3.4% a year. Taking inflation into account, real outlays increased 2% annually over these three years. These are small numbers. From 1965 to 1969, in contrast, federal outlays increased by 55% total, or 11% per year—7% annually, in real terms. These are large numbers.”

JFK’s successor, Lyndon B. Johnson, was such a spend-a-holic that the real 5% increases in federal receipts thanks to the JFK tax policy were not enough to cover his Great Society/Vietnam ambitions. That’s where budget deficits came from.

And finally, no mention of the certified biggest mistake of domestic (not to mention foreign) policy since World War II. Which would be President Nixon’s taking the dollar off gold in 1971, telegraphed as it was by LBJ as early as 1968.

The great inflation of the 1970s (price level up
150%, gold 20 times, oil 14) is attributable to
the rise of fiat money and not much else.  Also,
budget deficits got easy to finance in the absence
of dollar convertibility, so you can hang their
permanence on 1971 as well. Ditto the serial
recessions of the stagflation period. For some
scholarly perspective, see the recent forum about
all this in the Journal of Policy History.

Today, the President extols the virtues of tax
hikes as growth creeps along at a long-term rate
of 1.5%. If we ever want to get back to being the
land of opportunity again, a place to start is
getting clear on the greatest boom of the
20th century and its efficient cause in the JFK
tax cuts.