Blame it on JFK.
Fifty years ago, President Kennedy made a decision that, with hindsight, ranks as the biggest mistake of domestic policy since World War II. In many ways, it led directly to today’s “sequester” debacle.
What Kennedy did was this: In early 1963, he proposed a $13.6 billion tax cut (today: about $320 billion) even though the economy was not in recession and the tax cut would enlarge the budget deficit. Kennedy adopted the theory that government could, by manipulating its budgets, increase economic growth, reach “full employment” (then a 4 percent unemployment rate) and reduce — or eliminate — recessions.
It was a disaster.
High inflation was the first shock. An initial boom (by 1969, unemployment was 3.5 percent) spawned a wage-price spiral. With government seeming to guarantee 4 percent unemployment, workers and businesses had little reason to restrain wages and prices. In 1960, inflation was 1 percent; by 1980, it was 13 percent. The economy became less stable. From 1969 to 1982, there were four recessions, as the Federal Reserve alternated between trying to push unemployment down and prevent inflation from going up. Only in the early 1980s did the Fed, under Paul Volcker and with Ronald Reagan’s support, crush inflationary psychology.
We are now suffering from — and have for decades — the second defect of JFK’s decision: the loss of budgetary discipline.
Since Kennedy’s tax cut passed in 1964 — after his assassination — there have been 43 budget deficits and only five surpluses (1969, 1998, 1999, 2000 and 2001). Even the surpluses reflected luck more than policy. The last four resulted mostly from the 1990s economic boom, boosting tax revenue, and the end of the Cold War, lowering military spending.
Balancing a budget compels choice. Pleasurable spending must be weighed against painful taxes. Before Kennedy’s tax cut, it was assumed that, in ordinary times, Americans would strive to balance the federal budget. They might not have always succeeded, but they often came close. Wars and economic slumps were exceptions when borrowing became a practical necessity. The government consistently ran deficits in the Great Depression of the 1930s.
But debt was generally bad. In the Civil War, the federal debt rose 42 times to a then-astounding $2.8 billion. Repaying it became a “national obsession,” writes political scientist James Savage in his “Balanced Budgets & American Politics.” One English diplomat observed that most Americans “appear disposed to endure any amount of sacrifice rather than bequeath a portion of their debt to future generations.”
Kennedy himself initially accepted the virtue of balanced budgets and had to be converted to Keynesian economic doctrines (after John Maynard Keynes, 1883-1946). In 1962, his advisers urged a big tax cut; Kennedy rejected it. Led by Walter Heller, the economists peppered Kennedy with more than 300 memos in his thousand-day presidency. By 1963, he’d come around.
Debt became benign. The promise of Kennedy’s tax cuts was that, by promoting faster and more stable economic growth, government could afford more because the economy would perform better. When Republicans proposed “supply side” tax cuts in the 1980s, they made similar arguments and referred admiringly to Kennedy. Over time, what was politically convenient — higher spending, lower taxes — became habit-forming. It pleased the public, which deplored deficits in the abstract but rejected specific (unpopular) measures to control them.
Without pressure to balance the budget, choices were delayed or denied. Discipline diminished. When politicians needed to “do something” about deficits, they resorted to obtuse, often ineffective formulas that fudged choices by making across-the-board changes to both good and bad programs. Think: “budget caps,” “spending recessions” and “continuing resolutions.” The sequester is the latest and most grotesque example of this approach.
To be sure, deficits are sometimes desirable. In a recession, the “automatic stabilizers” (the tendency of taxes to fall and spending to rise) help revive the economy. A deep downturn, such as the Great Recession, may justify extra borrowing, spending or tax cuts. The irony is that the careless use of deficits, by piling up unnecessary debt, has compromised this legitimate role. It’s one unnoticed consequence of downgrading the budget as an instrument to force decisions about government’s size and role. (A constitutional balanced-budget amendment is not a solution. Even if ratified — doubtful — it could ruinously turn every budget dispute into a legal crisis.)
Kennedy and his advisers, overconfident of their ability to control the economy, damaged long-standing national norms and customs. They didn’t know what they were doing. It is hard to think of another policy decision in recent decades that has caused so much havoc for so long. Deficits became routine events rather than emergency reactions. Keynes said “in the long run we are all dead”; but others are alive and suffer from distant blunders.
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