JFK on Government's Role in the Economy

JFK was assassinated 45 years ago today. Eleven months earlier he gave a speech on the economy at the Economic Club of New York (December 14, 1962, Waldorf-Astoria Hotel). The text and audio of the speech are here.

As Obama ranges from tweaking to re-engineering the economy, He may want to reflect more on Kennedy’s thoughts that on FDR’s. Our situation is similar to both periods, but as a UCLA pointed out four years ago, FDR’s policies extended the Great Depression for 7 years.

What did FDR do? Quoting from the UCLA link:

"President Roosevelt believed that excessive competition was responsible for the Depression by reducing prices and wages, and by extension reducing employment and demand for goods and services," said Cole, also a UCLA professor of economics. "So he came up with a recovery package that would be unimaginable today, allowing businesses in every industry to collude without the threat of antitrust prosecution and workers to demand salaries about 25 percent above where they ought to have been, given market forces. The economy was poised for a beautiful recovery, but that recovery was stalled by these misguided policies."

In short, he introduced the government directly into the economy. Just like Clinton did when he compelled the granting of subprime mortgages. Just like the democrat Congress did when they refused to compel Fannie and Freddie to publicly report their finances like every other company has to. Just like the democrat Congress did when they allowed labor unions to have special organizing rights. How long is the list of government intervention in the economy?

The length is not important, it is the players. The same ones that took over $600 million in labor union donations over the past 10 years. The same ones that took donations from Freddie and Frannie, and placed their friends (or themselves) on the boards or in lucrative positions in those companies. The same ones that deny that they received special privileges from Countrywide Mortgage – even though a person reporting to the president of the company has stated that it was his full-time job to inform these recipients (you reading Sen. Dodd?) that they were receiving special privileges. The same people that are accused of taking bribes, have $70,000 in cash found in their freezer, and then cry racism.

The issue is this: The democrat party took a significant blow when JFK was killed; it died when Bobby was killed. The party lost its core. It became a collection of interest groups. Bill Clinton did not redefine or reconstitute the party – he was just a superb maestro. The party has driven towards socialism without deviance since LBJ entered office. Bobby could have changed that but was denied.

Let’s spend some time with what the democrat party used to be.

A quick overview of the economy when JFK entered office is in this forward to Economic Events, Ideas, and Policies. The 1960s and After, Perry and Tobin (Brookings Inst. Press, 2000). Two excerpts:

As Kennedy was being inaugurated, the economy was at the bottom of a recession, the third since 1953. The unemployment rate was 7 percent, compared to 3 percent at the end of the Korean War and 4 percent at the peak of the expansion in the mid- 1950s. Improving the disappointing performance of the economy was the most urgent challenge to the new administration.

Some observers today credit the New Economics and its influence on the policies of the Kennedy-Johnson years for the sustained prosperity of the 1960s, and thus regard them as an example worth emulating. Others see the legacy of those policies in the 6 percent inflation rate at the end of the decade, when unemployment fell to 3.5 percent-a level too low for stability.

Bottom of a recession and high unemployment going in; high inflation going out. Clearly a mix of good and bad outcomes. It took until Reagan to get Inflation under control. But the economy did get back to work, even absorbed LBJ’s Great Society, and didn’t crash land until Carter got his hands on it.

Kennedy set the tone when at the opening:

I am glad to have a chance to talk to you tonight about the advantages of the free enterprise system.

“Free enterprise” is private business. It is not government ownership of banks and automobile companies and equity in private homes. “Free” means free from government intervention.

To Kennedy, free enterprise was not limited to our shores:

But a leading nation, a nation upon which all depend not only in this country but around the world, cannot afford to be satisfied, to look back or to pause. On our strength and growth depend the strength of others, the spread of free world trade and unity, and continued confidence in our leadership and our currency. The underdeveloped countries are dependent upon us for the sale of their primary commodities and for aid to their struggling economies. In short, a prosperous and growing America is important not only to Americans--it is, as the spokesman for 20 Western nations in the Organization for Economic Cooperation and Development, as he stressed this week, of vital importance to the entire Western World.

Kennedy supported what we now recognize as “free-trade agreements,” those agreements that Presidents Clinton and Bush have put into place, but that Senator Reid refers to those yet to receive approval as “dead on arrival.” Columbia is the most recent example.

Kennedy understood – or at least could talk the talk – the issues that drive our economy:
This economy is capable of producing without strain $30 to $40 billion more than we are producing today. Business earnings could be $7 to $8 billion higher than they are today. Utilization of existing plant and equipment could be much higher; and if it were, investment would rise. We need not accept an unemployment rate Of (sic) 5 percent or more, such as we have had for 60 out of the last 61 months. There is no need for us to be satisfied with a rate of growth that keeps good men out of work and good capacity out of use.
The important issues are production, earnings, P&E utilization, and rates of growth.

He cited problems that I assert – regardless of the hundreds of billions of dollars spent – targeted – in the 46 year since this speech still exist in eerily the same measure:

You have seen the tragedy of chronically depressed areas upstate, of unemployed young people, and I think this might be one of our most serious national problems, unemployed young people, those under 20, one out of four is unemployed, particularly those in the minority groups, roaming the streets of New York and our other great cities, and others on relief at an early age, with the prospect that in this decade we will have between 7 and 8 million school dropouts, unskilled, coming into the labor market, at a time when the need for unskilled labor is steadily diminishing.

What does this single paragraph instruct us? Nothing that we have tried works. Not the ever expanding social safety, not increased investment in education, not supply-side or demand-side economics. Nothing. Perhaps we need to face a reality: Maybe it’s structural. Maybe it is the same recognition that we have hold of unemployment – somewhere from 3% to 5% of the workforce will always be out of work. If this problem which Kennedy cites is structural, then that is a bitter reality indeed.

Kennedy lays out three paths for government involvement: Bolster education and develop our natural resources; increase government expenditures; and cut taxes on people on businesses. He supports the first and third. He states that the second is not appropriate:

There are a number of ways by which the Federal Government can meet its responsibilities to aid economic growth. We can and must improve American education and technical training. We can and must expand civilian research and technology. One of the great bottlenecks for this country's economic growth in this decade will be the shortage of doctorates in mathematics, engineering, and physics; a serious shortage with a great demand and an under-supply of highly trained manpower. We can and must step up the development of our natural resources.

But the most direct and significant kind of Federal action aiding economic growth is to make possible an increase in private consumption and investment demand--to cut the fetters which hold back private spending. In the past, this could be done in part by the increased use of credit and monetary tools, but our balance of payments situation today places limits on our use of those tools for expansion. It could also be done by increasing Federal expenditures more rapidly than necessary, but such a course would soon demoralize both the Government and our economy. If Government is to retain the confidence of the people, it must not spend more than can be justified on grounds of national need or spent with maximum efficiency. I shall say more on this in a moment.

The final and best means of strengthening demand among consumers and business is to reduce the burden on private income and the deterrents to private initiative which are imposed by our present tax system; and this administration pledged itself last summer to an across-the-board, top-to-bottom cut in personal and corporate income taxes to be enacted and become effective in 1963.

“The final and best means” is a weighty phrase.

Kennedy explains his views of the tax system in more detail:

I am not talking about a "quickie" or a temporary tax cut, which would be more appropriate if a recession were imminent. Nor am I talking about giving the economy a mere shot in the arm, to ease some temporary complaint. I am talking about the accumulated evidence of the last 5 years that our present tax system, developed as it was, in good part, during World War II to restrain growth, exerts too heavy a drag on growth in peace time; that it siphons out of the private economy too large a share of personal and business purchasing power; that it reduces the financial incentives for personal effort, investment, and risk-taking.

Kennedy did not see tax cuts as a manipulative force to be used when economic times warranted. He believed that the path to lasting economic strength lay within them.

Kennedy summarizes the role of government:

In short, to increase demand and lift the economy, the Federal Government's most useful role is not to rush into a program of excessive increases in public expenditures, but to expand the incentives and opportunities for private expenditures.

To whom should tax cuts go?

For all these reasons, next year's tax bill should reduce personal as well as corporate income taxes, for those in the lower brackets, who are certain to spend their additional take-home pay, and for those in the middle and upper brackets, who can thereby be encouraged to undertake additional efforts and enabled to invest more capital.

Everyone and every entity.

Kennedy understood that tax cuts resulted in taking a smaller piece of a larger pie:

In short, it is a paradoxical truth that tax rates are too high today and tax revenues are too low and the soundest way to raise the revenues in the long run is to cut the rates now. The experience of a number of European countries and Japan have borne this out. This country's own experience with tax reduction in 1954 has borne this out. And the reason is that only full employment can balance the budget, and tax reduction can pave the way to that employment. The purpose of cutting taxes now is not to incur a budget deficit, but to achieve the more prosperous, expanding economy which can bring a budget surplus.

I repeat: our practical choice is not between a tax-cut deficit and a budgetary surplus. It is between two kinds of deficits: a chronic deficit of inertia, as the unwanted result of inadequate revenues and a restricted economy; or a temporary deficit of transition, resulting from a tax cut designed to boost the economy, increase tax revenues, and achieve--and I believe this can be done--a budget surplus. The first type of deficit is a sign of waste and weakness; the second reflects an investment in the future.

John Kennedy understood economics. He understood the role of government in the economy.

We lost a great man 45 years ago today.