The economy was a major issue in the election of 1960. Democrat John F. Kennedy promised to get the economy moving, placing more emphasis on full employment and economic growth and (presumably) less on price stability. Although the recession in 1959 and 1960 was mild and short, it was an important factor in Kennedy’s narrow victory over Vice President Richard Nixon.
The economy began its resurgence in February 1961 but at a rate that disappointed the Kennedy team. Therefore, the Council of Economic Advisers, under the guidance of Chairman Walter Heller, laid plans for an experimental tax cut in 1964. After Kennedy’s shocking assassination in November 1963, the politically astute Lyndon B. Johnson assumed the presidency and promptly guided the tax cut through Congress. This tax cut was historic. The federal budget was then in deficit; orthodox economic theory called for tax increases to balance the budget, but President Kennedy’s advisers believed in the “new economics” of John Maynard Keynes. They argued that as long as the economy was operating at less than full employment, a tax cut was justified because it would leave more income in the hands of the public, creating more demand for goods and services. A budget that was in deficit when the economy was at less than full employment, they pointed out, might turn out to be balanced or in surplus at full employment because tax revenues rise and certain categories of Federal spending (e. g., unemployment benefits) fall as the economy approaches full employment.
In an often-quoted passage from The General Theory, Keynes had written the following:
The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back. I am sure that the power of vested interest is vastly exaggerated compared with the gradual encroachment of ideas. (1936, 383)114
Less than 30 years after the publication of The General Theory, Keynes’s ideas were having a profound effect on U. S. fiscal policies. The Kennedy tax cut was widely regarded as a great success. Unemployment fell from 5 percent of the labor force in 1964 to 4.4 percent in 1965 and to 3.7 percent in 1966. The Vietnam War buildup that followed on the heels of the tax cut, however, had not been part of the calculations, when Kennedy’s advisers had planned a tax cut. The change in conditions prompted Walter Heller and other advocates of the tax cut to urge President Johnson to raise taxes. But he did not take this advice. An important political weakness of the Keynesian system was now apparent. Cutting taxes is easy; raising them is hard. At the time, it was thought that the Kennedy tax cut had ushered in a new era of active fiscal policy; as it turned out, the Kennedy tax cut was the last example of a major change in fiscal policy based on Keynesian ideas until the economic Stimulus package of 2009.
For a time, the Kennedy administration relied on “wage-price guideposts” to control inflation. In an early and controversial test, President Kennedy publicly castigated the steel industry when it raised prices more than the guideposts allowed, threatening a transfer of federal purchases to companies that remained within the guideposts and other sanctions. Eventually, the steel industry backed down, but the government could not, of course, treat every price increase that violated the guideposts as a major crisis. When inflation accelerated in 1965, the guideposts fell into disuse.
World History
