Hellerious Economics

March 11, 1963

What is the rationale behind Mr. Kennedy’s extraordinary proposal that, in the face of a huge deficit of nearly $9 billion in the current fiscal year, we should increase spending, drastically cut taxes, and bring about still another deficit of nearly $12 billion in fiscal 1964, plus an indefinite number of deficits thereafter? On its face, this program seems the height of fiscal irresponsibility. How can it be defended?

The most elaborate defense of it is to be found in the President’s annual Economic Report published on Jan. 21. The report consists of a twenty-page message to Congress signed by the President and a 268-page report of the Council of Economic Advisers (164 pages of text, 104 pages of tables) signed by Walter W. Heller as chairman. It is impossible to say how much Mr. Kennedy’s policies are based on chairman Heller’s economic theories, or how much the theories are an attempt to rationalize the policies that Mr. Kennedy has decided to adopt. In either case the outlook is ominous.

For the theories set forth in the full report, and summarized in the President’s message, are utterly fallacious. And if policies based on them are persisted in, they must imperil the dollar and ultimately lead to a disastrous inflation.

WAGE DISTORTIONS

Mr. Kennedy, laudably, wants to cure unemployment. But he never mentions, and the whole Economic Report never mentions, the main cause of unemployment, which is the excessive wage rates successfully insisted on by some unions in key lines. Practically all unemployment is attributed by the President to “insufficient demand.” And insufficient demand is always interpreted to mean insufficient money supply. So unemployment is always to be cured by more government spending and more money, while wage-rate distortions are systematically ignored.

The way to cure unemployment and give zip to the economy, on this theory, is to have huge and continuous deficits, to increase spending, and to cut taxes. “The main block to full employment,” says the President, “is an unrealistically heavy burden of taxation. The time has come to remove it.” The President speaks as if the burden of taxation had nothing to do with the amount of government spending. This spending, in fact, is to be increased. The question may well arise in the reader’s mind: why not abolish taxes altogether? Then there would be no block to full employment whatever.

‘DEFICITS FOR STRENGTH’

Indeed, Mr. Kennedy is not daunted by paradox. He tells us that if we fail to cut taxes, we will slide into recession, and then “the cash deficit for next year would be larger without the tax reduction than the estimated deficit with tax reduction.” We have entered the world of Alice in Wonderland, where the “prudent” and “responsible” thing is planned deficits, and where “if we were to try to force budget balance by drastic cuts in expenditures . . . we would not only endanger the security of the country, we would so depress demand, production, and employment that tax revenues would fall and leave the government budget still in deficit.”

But what if the Heller theory fails? What if heavy unemployment persists (as in the ’30s) even with constant huge deficits? What if the vague hope is not realized that some miraculous prosperity will balance the budget in spite of reduced taxes? Mr. Kennedy himself concedes that “if we were currently straining the limits of our productive capacity . . . tax reduction would be an open invitation to inflation, to a renewed price-wage spiral.” What if this inflation occurs (as is altogether probable) even under present conditions of more than 94 percent employment?

It would be flattering to call this Heller-Kennedy budget theory Keynesism. It carries the logic of deficits to lengths that would have appalled Keynes himself. For Keynes (as Per Jacobsson has just reminded us) at least recognized that excessive real wage rates make full employment impossible.

The Heller-Kennedy spend-more-and-tax-less theory can lead only toward fiscal and monetary chaos.