WASHINGTON, Nov. 10 (UPI) -- The 40th anniversary of President John F. Kennedy's assassination later this month is bringing the inevitable slew of retrospectives, either polishing the halo or belittling the achievements, according to taste. However, in the economic area, Kennedy's greatest achievement was an anomalous one: he was the true father of the supply-side economic revolution.
The economic policymakers of Kennedy's era lived in a very different world to our own. On the one hand, the U.S. economy was far more dominant than it is today, with European competition only beginning to recover from the ravages of war and Japan clearly an infant "emerging market" (a term that had not yet been coined.) On the other hand, they faced -- or thought they did -- threats of a magnitude we simply don't consider. A major article in Fortune magazine for November 1961 was titled "The economy can survive nuclear attack," and proceeded to advocate a heavily stepped-up program of fallout shelter construction. Both al-Qaida head Osama bin Laden and North Korean leader Kim Jong Il may have dreams of major terrorist atrocities against the United States, but neither of them credibly have the ability to knock out the U.S. economy altogether.
Nor did Soviet premier Nikita Khrushchev, as it turned out, but in 1961 they didn't know that -- another Fortune article (October 1961) claimed that Soviet output of metal cutting machine tools in 1960 was three times that of the United States, a "strategic gap" between the two economies that was presumably as illusory as that in nuclear missiles.
Structurally, too, the U.S. economy of the 1960s was different -- another Fortune article (March 1962) was titled "The mammoth and red-hot auto parts market" -- not probably top on business magazines' story lists today! Services were considerably less important than today, manufacturing more important. Within industry, large companies were dominant, and entrepreneurship was relatively rare -- companies like Polaroid, Xerox and Texas Instruments were celebrated because of their scarcity value, and were anomalous in the overall industrial structure.
Top managers made much less money too -- Joseph C. Wilson, the mastermind of Xerox, never owned more than a few percent of the company, and was worth well under $10 million when he died in 1971. The family GINI coefficient of inequality, measured by the Census Bureau, which was around 0.36 in the early 1960s, had by 2001 increased to 0.44, with most of the increase coming in the 1980s (0.365 to 0.396) and, still more, the 1990s (0.396 to 0.433 in 2000.)
In government finance, paradoxically, government was somewhat smaller than today, while taxes on high incomes were considerably higher. According to Organization for Economic Cooperation and Development statistics, U.S. federal, state and local government spending was 26.94 percent of gross domestic product in 1962 and 31.92 percent of GDP in 2002. Within that total, however, defense spending played a much larger role -- about 7 percent of GDP, or more than a third of the federal budget -- while deficits were more or less unknown. Government as a whole ran a current surplus of around 1 percent of gross domestic product, but then invested around 1.5 percent of GDP (net of depreciation) in fixed capital, thus borrowing a net 0.5 percent of GDP each year. Today, government as a whole has a deficit of around 4 percent of GDP, while net investment is approximately zero -- thus the potholes in the roads!
As for taxation, it is extraordinary to recollect that the Republicans controlled the White House for eight years of the Dwight Eisenhower administration, and Congress explicitly for the first two of those eight years and implicitly (with their Southern Democrat allies) for the first six of them, and yet throughout the period the top marginal rate of U.S. income tax remained at the startlingly high level of 91 percent.
Modern economists may disagree, even sharply disagree, with the Bush administration's occasional contention that reducing the top rate of tax from 39.6 percent to 35 percent will produce enough extra economic activity to pay for itself, but there are few if any economists today who would contend that a top marginal rate of 91 percent is not wholly counterproductive, in terms of both revenue to the Treasury and economic activity as a whole. Even in the "axis of weasels" of France and Germany, top rates of personal income tax, including local taxes, are generally below 60 percent.
It was Kennedy, or rather his Chairman of the Council of Economic Advisers Arthur Okun, who changed all this. The tax cut proposed by Kennedy in 1963, and passed by President Lyndon Johnson in 1964 after Kennedy's assassination, cut the top rate of federal income tax from 91 percent to 70 percent. While budget scoring of the period suggested that the tax cut would lose revenue for the government, Okun was a firm in his belief that it would not only stimulate economic activity, but do so to an extent that the government gained revenue, as tax shelters (primarily at that date through Texas oil drilling, which attracted a 27.5 percent per annum depletion allowance on investment, whether or not any oil was found) would be wound up and income redirected to the formal economy.
The tax cut worked spectacularly. Federal personal income tax receipts increased from fiscal 1964 (ending June 1964, before the tax cut arrived) to fiscal year 1966 from $46.0 billion to $58.7 billion, a rise of 27.6 percent in two years when nominal GDP increased by only 17.9 percent (and real GDP by 13.5 percent -- it was a very good couple of years.) Of course, Johnson blew it, by expanding social services and the Vietnam War simultaneously, thus providing an economically deflationary expansion of government while running a monetarily inflationary budget deficit. But Kennedy cannot be blamed for that; he was already a legend, not a president.
Ronald Reagan, in his tax reform of 1981, took Kennedy's tax reform of 1963-64 as an example, and extended the principle further, bringing the top rate of tax down first to 50 percent and then (briefly, in 1986) to 28 percent. But it was Kennedy who first moved the United States away from confiscatory taxation for its own sake, and he did so largely via a supply-side, not a demand-side rationale. Traditional Keynesian demand-side economics would have stimulated the economy through additional government spending, not through tax cuts, which Keynes believed to be wasteful, as some of the money would be saved.
Kennedy was far from the greatest president of the 20th century, as many Americans, too young to remember him and indoctrinated by liberal public schools, now appear to believe. Even on the economic front, some of his actions, such as his attempt in 1962 to impose price controls on steel, were to modern eyes counterproductive. Yet the move to lower rates of taxation on high incomes was probably the most important fiscal reform of the past half-century, allowing the drag effect of government on economic activity to be greatly reduced, and the level of entrepreneurship in the U.S. economy to be greatly increased. It was Kennedy, not Reagan, who pioneered it.
Now if only we could combine a modern understanding of incentives with a Kennedy-era level of fiscal responsibility, we might really be on to something!
(The Bear's Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that, in the long '90s boom, the proportion of "sell" recommendations put out by Wall Street houses declined from 9 percent of all research reports to 1 percent and has only modestly rebounded since. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)
