Domitrovic: JFK Defied Samuelson, Setting Off Boom

JFK Defied Samuelson, Setting Off Boom

By Brian Domitrovic
Investor’s Business Daily
December 16, 2009

Paul Samuelson, the dean of American economists, died last Sunday at 94. An MIT professor and Nobel Prize winner, Samuelson made one major venture into public policy. This was when he advised the John F. Kennedy campaign and economic transition team in 1960 and 1961 and thereafter consulted with the new president’s Council of Economic Advisers.

Obituaries have been quick to credit Samuelson’s advice to JFK for launching the great 1960s expansion. The Boston Globe quoted Samuelson’s recommendation to JFK in 1961 — “a temporary reduction in tax rates on individual incomes can be a powerful weapon against recession” — and then made this observation: “The cut was widely credited with helping foster the 1960s economic boom.”

To be sure, the advice of Samuelson, and of his economics confreres in JFK’s “Camelot,” has been cited far and wide as the cause of the incredible run of growth in the American economy from 1961 to 1968, when GDP increased by 5.1% per year, real federal revenues went up by more than a third, unemployment fell to 4%, and the Dow Jones industrial average hit 1000 for the first time.

But the connection is unwarranted. JFK listened to Samuelson, but aside from enacting popular business tax credits, he did not take his advice. Indeed, JFK did precisely the opposite of what Samuelson had counseled in the transition, and this decision is what sparked the boom.

The paramount matter facing JFK after he won the election of 1960 was, as his own campaign slogan had it, to “get this country moving again.” There had been four recessions in the previous dozen years, and departing President Eisenhower had supervised a yearly growth rate of 2.4% — the worst of any president in the latter half of the century. JFK wanted to eclipse that mark in a big way. He put together a dream team of economic advisers to tell him how, and he chose Samuelson to anchor it.

Samuelson said the government should raise taxes and loosen money. The idea was that Federal Reserve easing would make businesses invest and employ workers, and tax hikes would siphon off any inflationary pressures caused by the loose money. Samuelson called his policy mix the “neo-classical synthesis.”

JFK was puzzled by the advice. After all, the marginal rate of the income tax, at the astronomical level of 91%, had clearly been at the root of the Eisenhower sluggishness. Moreover, foreign investors scared off by that tax rate had been abandoning the dollar, a problem looser money could only exacerbate.

The U.S. already had the neo-classical synthesis, and it wasn’t working. Samuelson told JFK that as a second option he would support a tax cut of 4% “with the clear indication that the reduction will definitely expire” within two years.

The economy continued to teeter in 1961 and early 1962 as JFK considered this advice but enacted no policy. The economy sensed the president’s lack of surety. The Dow lost 28% in a six-month span, and forecasts came out that the Kennedy years were likely to be worse than Eisenhower’s.

JFK ordered his advisers to start taking suggestions from the business community, and a bombshell came from the Chamber of Commerce: a permanent 26% reduction in the marginal rate. Kennedy promptly indicated that this should become law, and it essentially did in the Revenue Act of 1964, which took the top rate down to 70% for good. The Fed, for its part, reacted negatively and tripled the federal funds rate.

The boom started just as JFK indicated that he was dumping the neo-classical synthesis for its opposite. Indeed, one of Samuelson’s former MIT students, Robert Mundell, was at the time a young staffer at the International Monetary Fund and urging just that.

As Mundell wrote years later, in the wake of his own Nobel Prize, “at first (my advice) wasn’t popular. This was because it recommended a complete reversal of the … neo-classical synthesis. . .. Fortunately for the United States (and me), President Kennedy reversed the policy mix to that of tax cuts to spur growth in combination with tight money to protect (the dollar). The result was the longest expansion ever … unmatched until the Reagan expansion of the 1980s.”

Mundell would reiterate his ideas in the 1970s, under the name “supply-side economics,” and see them implemented again the following decade.

The world lost its greatest Keynesian in Paul Samuelson last Sunday. But the historic runs of growth that the United States posted during his career did not derive from his economics.

• Domitrovic teaches at Sam Houston State University in Huntsville, Texas. He is the author of “Econoclasts: The Rebels Who Sparked the Supply-Side Revolution and Restored American Prosperity” (ISI Books, 2009).

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Today’s Brew 12-11-09

Ralph Benko for the San Francisco Examiner:

Interest on the debt will make things interesting

If (!) the economy grows so will tax receipts. Somewhat. But adding in entitlements, the interest on the debt binge will inevitably crowd out all other federal spending.

Bye bye, Health and Human Services! Farewell, Department of Education. Au revoir, Veterans Affairs. So long Housing and Urban Development, State Department, Department of Homeland Security, Energy, Agriculture, Justice, NASA and Treasury. (Wait! We can’t lose Treasury! They collect the taxes and borrow the money! Oh wait. So long Treasury!) And all the rest of the federal government, adieu!

There are limited options, mostly unthinkable.

Raise taxes. It’s politically and economically impossible to raise taxes, certainly not nearly as high as Progressives yearn to do.