Kennedy’s New Economics in Action

Although Kennedy had not completely digested the lessons of the new economics until at least a year after his inauguration, he began to profess its basic principles almost immediately upon assuming the presidency.[75] In his State of the Union address of January 1961, he was already referring to the new economic doctrines on GNP gap and fiscal drag, when he declared in a famous statement: “The present state of our economy is disturbing. We take office in the wake of seven months of recession, three and one-half years of slack, seven years of diminished economic growth, and nine years of falling farm income.”[76] In the same month, he urged Heller, his appointee as chairman of the CEA, “to use the White House as a pulpit for public education in economics, especially on the desirable effects of a federal deficit in a recession.”[77] Heller and the other new economists heeded this exhortation with great enthusiasm, constantly touting to one and all the benefits of deliberate budget deficits.

In July 1961, during the Berlin crisis, Kennedy’s adherence to the new economics, specifically its doctrine of military Keynesianism, was tested. Responding to the Soviet threat to deny the western Allies access to West Berlin, Kennedy sought to increase military expenditures by $3.25 billion, which he initially planned to finance by an increase in taxes.[78] His “Berlin surcharge,” which would have raised taxes by $3 billion, was reflexively and vigorously opposed by the new economists. Arguing that the tax increase would abort the incipient recovery from the 1960–61 recession, Heller, Samuelson, and Seymour Harris prevailed upon Kennedy to drop the idea and to accept the resulting deficit as a contribution toward strengthening the fragile recovery.[79] Early in 1962, Samuelson hailed the stabilization results of military Keynesianism, declaring that,

as a result of two or three upward revisions of our defense budget, and not as a result of a cool decision on the part of the New Team to disregard ideology [of balanced budgets] and prescribe for the nation what its sound economic health required, fiscal 1962 looks to end up with the sizable deficit designed to promote a healthy rate of recovery and expansion.[80]

The Keynesian view of military spending as an engine of economic recovery was recognized and embraced by Kennedy himself in the letter that he wrote for inclusion in the Economic Report of the President for 1962. Wrote Kennedy:

The Federal Budget played its proper role as a powerful instrument for promoting economic recovery . . . major increases in expenditures for national security and space programs became necessary. In a fully employed economy, these increases would have required new tax revenues to match. But I did not recommend tax increases at this point because they would have cut into private purchasing power and retarded the recovery.[81]

The hand of the new economists could also be seen in the revenue-neutral tax bill aimed at stimulating business investment in new capital equipment proposed by the Kennedy administration in the spring of 1961.[82] This bill was an attempt to induce a more rapid rate of economic growth via macroeconomic planning that would be “costless” in terms of lost revenue to the Treasury. The gist of the bill was that business firms would be given a tax credit for investment in excess of their depreciation allowances, while the tax loopholes on expense account deductions would be closed and the partial tax exemptions on dividends would be repealed. It was also proposed that dividends and interest be subject to withholding and that a limit be imposed on the credit for foreign taxes. Business opposed this attempt at macro-economic planning because it offered no tax relief and also “seemed capricious and likely to favor limited segments of industry.”[83] Needless to say investors and retirees also vociferously objected to the withholding provisions of the bill, which was only passed in 1962 after thoroughgoing congressional modifications had gutted its “revenue enhancing” provisions and its restriction of the investment tax credit to new investment only. Nevertheless, the bill as initially proposed served to demonstrate the extent of influence of the new economics in the Kennedy administration. Thus, as Makin and Ornstein point out, “The proposal to accelerate economic growth by inducing the increased purchase of specific forms of capital represented a remarkably rapid adoption by government policymakers of ideas that had appeared only five years earlier in esoteric economic journals.”[84]

By the beginning of 1962, the economic recovery was still intact, and, according to the CEA, the GNP gap had narrowed from $51 billion in the first quarter of 1961 to $28 billion in the fourth quarter of the year. This was partly due to the fact that the full-employment surplus had fallen from $12.5 billion to $8.25 billion from the latter half of 1960 to the latter half of 1961 as a result of the $4 billion budget deficit in 1961.[85] However, the recovery began to lag early in 1962, and toward the summer the perception among the new economists was that a new recession threatened. They began to actively plump for a substantial cut in taxes that would further reduce the full employment surplus.[86] On June 11, 1962, in a commencement address at Yale University, Kennedy announced his public conversion to the new economics. His speech also marked the initiation of a concerted effort to proselytize the American public into accepting this doctrine.[87]

The theme of the speech was the pernicious influence of entrenched myths on the formulation of public policy particularly national economic policy What Kennedy meant by myths was a coherent ideology and specifically the classical-liberal or limited-government ideology that called for tight constraints on government action in the economic realm. He referred to the tenets and rules of application of this ideology as “the clichés of our forebears” and “a prefabricated set of interpretations.”[88] In attacking the myth that “government is big, and bad—and steadily getting bigger and worse,” Kennedy argued that “generalities in regard to federal expenditures . . . can be misleading.”[89] Hence, federal expenditures may be appropriate in any sector and for any given purpose, and each expenditure must be evaluated on its own merits. Turning to fiscal policy Kennedy opined that “myths are legion and the truth hard to find.”[90] He challenged the “persistent” myth that “federal deficits create inflation and budget surpluses prevent it.” He conceded that deficits were sometimes “dangerous” but warned that the same was true for surpluses, and concluded that “honest assessment plainly requires a more sophisticated view than the old and automatic cliché that deficits automatically bring inflation.”[91] Last, Kennedy discussed the “problem of confidence,” mainly the lack of confidence manifested in the stock market in response to the economic policies of his administration. But according to Kennedy these “speculative turns of the speculative wheel” are a “false issue.”[92] In proclaiming what he perceived as the “simple reality” Kennedy also revealed the fascist vision of a partnership of the various economic sectors under government tutelage underlying his new economics of government-led growth: “The solid ground of mutual confidence is the necessary partnership of government with all of the sectors of our society in the steady quest for economic progress.”[93] Kennedy concluded that economic decisions should no longer be based on ideological considerations but on the requirements for “the practical management of a modern economy.”[94]

Kennedy’s speech thus went beyond the standard Keynesian appeal for use of the budget for anti-cyclical purposes to a call for functional finance to promote comprehensive macroeconomic planning of the economy.[95] Thus the speech that Heller hailed as “[Kennedy’s] own call for economic independence” was precisely that: a call for the independence of politicians, and particularly those manning the executive branch, from the Constitutional restraints that prevented them from using their coercive power to override the economic plans and choices of individual American citizens that were expressed and coordinated in the outcomes of the market economy. Indeed, Kennedy was intensely interested in applying western European indicative planning techniques to the American economy. In his speech, he noted that western European governments, which are “prepared to face technical problems without ideological preconceptions, can coordinate the elements of a national economy and bring about growth and prosperity.” Kennedy went on to urge “the start of a serious dialog [in the U.S.] of the kind which has led in Europe to such fruitful collaboration among all the elements of economic society and to a decade of unrivaled economic progress.”[96] And so we are informed by one of his court historians, Arthur M. Schlesinger, Jr., that this observation on Europe in Kennedy’s speech

reflected his marked interest in the performance of the western European economies. Early in his administration he had charged Heller on his transatlantic trips to report on European planning methods, and he used to cross-examine European visitors to learn the secret of their success. He soon discovered that western Europe was happily free of the American budgetary obsession. . . . The president learned too about European planning of the indirect or “indicative” sort—not centralized physical direction of the economy but the technique of laying down projections for major industries and then persuading everybody to do what was necessary to make the projections come true.

Lacking a principled belief in the sanctity of balanced budgets or of unregulated markets, Kennedy found all this a perfectly rational way to run a modern economy.[97]

The new economists continued to ratchet up the pressure on their protégé for implementation of their expansionary fiscal program. At the end of June 1962, a few weeks after Kennedy’s clarion call for corporate statist planning of the economy, Samuelson, reacting to the slowdown of the recovery, “raised the odds on a 1962 recession from 20 percent to even.” By mid-July, Samuelson and Solow were calling for temporary emergency tax cuts on top of the existing budget deficit to counteract “the developing recession,” and Heller warned of a downturn “before the snow melts.”[98] Kennedy, having now fully digested the teachings of the new economics, began to enthusiastically parrot its dogmas in private and in public. In August, Kennedy confided to an old crony, Chattanooga Times Washington Correspondent Charles Bartlett: “Everybody talks about our deficit. Everyone wants us to cut spending. They don’t seem to understand that it’s the deficit, the spending that’s keeping the economy pumped up. I love that deficit.”[99]

At the end of 1962, Kennedy gave a speech to six hundred assembled businessmen and Wall Street financiers at the Economic Club of New York. There, he unveiled his plan for a tax cut despite the existence of a budget deficit. But Kennedy did not try to justify his planned expansion of the budget deficit as a standard anti-recession device because, by December 1962, he realized the pace of the recovery had picked up again and recession no longer loomed.[100] Instead, he defended this plan by invoking the “topsy-turvy” principles of the new economics[101]:

Surely, the lesson of the last decade is that budget deficits are not caused by wild-eyed spenders but by slow economic growth and periodic recessions. . . . 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 lower the rates now.[102]

Afterward, Kennedy reveled in the success of his selling effort on behalf of the new economics: “I gave them straight Heller and Keynes and they loved it. If I can sell it to those guys, I can sell it to anyone.”[103] In mid-January 1963, during his State of the Union Address, Kennedy informed Congress of his intention to propose a tax-cut bill. This proposal called for “a revenue cut equal to almost 15 percent of the federal budget” without compensating spending cuts and while the budget was already in deficit.[104] Ted Sorensen, Kennedy’s special assistant and another of his court historians, revealed insight into the profound politico-economic implications of the tax cut plan when he chortled that it was

one of the boldest and most far-reaching domestic economic measures ever proposed—the $10 billion tax cut bill of 1963, [was] offered without experiencing or even predicting for the immediate future any of the three traditional occasions for a tax cut: a budget surplus, a reduction in spending or a recession.[105]

In the words of Richard Reeves, “The thoughts of Heller and Samuelson were now proposed as the law of the land.”[106]

This tax-cut bill, introduced in January 1963, was passed by the House in October but was not enacted as law until it was passed by the Senate in February 1964, after Kennedy had been assassinated. In stumping for its passage, Kennedy hammered home the point that the new-economic revolution he was seeking to orchestrate in economic policy was closely related to the enhancement of U.S. military might and its successful projection abroad.[107] Indeed, Kennedy was now publicly espousing the military Keynesianism propounded by Tobin and the new economists according to which an unbalanced budget would be used to siphon resources out of civilian uses for the aggrandizement of a permanent military establishment. Thus Kennedy’s proposed fiscal 1964 budget totaled $98.9 billion, $5 billion more than the fiscal 1963 budget, and this proposed spending increase was coming on the heels of the previous year’s budget deficit. Of the $98.9 billion, $55.4 billion would go to the military and another $5.7 billion to the space race and to the funding of covert CIA operations.[108] During his first year in office, Kennedy had exhorted the American people to sacrifice to implement his expanded military agenda, including the militarization of many aspects of social and economic life and of foreign relations: to “pay the price for these programs . . . accept a long struggle . . . share their resources with less fortunate people . . . exercise self-restraint rather than push up wages and prices . . . strive for excellence in their schools, in their cities, in their physical fitness.”[109] Wielding the new tool of macroeconomic planning via budget deficits, Kennedy was now able to impose these sacrifices upon them without their informed consent.

Kennedy had finally and fully grasped that the new economics was indeed the economics of power: the power to vastly increase the resources, scope, and stature of the federal government. This was exemplified by Kennedy’s attitude toward an American moon landing, a pet project he intended to complete at all costs as a manifestation to the entire world of the unchallenged technological and military predominance of the American mega-state. Thus when questioned by his Treasury Secretary in 1963 concerning the projected date of the landing, Kennedy replied, “1967. I’d rather unbalance my budget and all the rest.”[110]