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Home Publications Blogs Beat the Press Robert Samuelson Identifies the Sequester Culprit: John Kennedy

Robert Samuelson Identifies the Sequester Culprit: John Kennedy

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Monday, 04 March 2013 04:49

I'm not kidding, it's right there in the Washington Post. And we thought Bob Woodward was creative.

But Samuelson's economic history is even more striking than the linking of Kennedy to the sequester. He notes the fiscal stimulus that was sparked by the Kennedy tax cuts (and the Vietnam War and Johnson's Great Society programs) and the boom that resulted, and tells us that "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."

Before looking at Samuelson's horror story here, it is worth noting what happened in the boom, which can be treated as going through 1973, in spite of the recession in 1969. Growth over the 10 years from 1963 to 1973 averaged 4.4 percent, by far the most rapid stretch in the post-World War II era.

The unemployment rate hovered near 4.0 percent for most of this period, as Samuelson complains. This led to large gains in real wages and sharp declines in poverty. The overall poverty rate fell from 19.5 percent in 1963 percent to 11.1 percent in 1973, an all-time low. For African Americans the poverty rate fell from 55.1 percent in 1959 (annual data is not available) to 31.4 percent in 1973. I suspect most folks wouldn't mind a few more disasters like this one.

As far as the recession story, Samuelson might have told readers that we had the same number of recessions in the 13 years following 1969 as we did in the 12 years preceding 1961. I suppose those recessions were also due to the Kennedy tax cut.

It's hard to understand what Samuelson thinks he is saying when he writes:

"With government seeming to guarantee 4 percent unemployment, workers and businesses had little reason to restrain wages and prices."

Let's imagine you're Walmart and you know that the government will keep the unemployment rate at 4.0 percent. If your workers say they want a 20 percent raise would you just write the check? It's not clear how the commitment to keep a high level of employment undermines firms' incentives to make a profit. Walmart makes more money by paying its workers less. That's true whether the unemployment rate is 4.0 percent or 10 percent.

In terms of the rest of Samuelson's history, the OPEC price increases are probably an important factor. These price hikes caused inflation to jump not just in the United States, but around the world. The recessions were also felt worldwide. This is all due to the Kennedy tax cuts according to Samuelson.

Of course in the glory days of the low inflation post Volcker years, workers have seen little of the benefit of productivity growth and the poverty rate has drifted higher. But we all celebrate those low inflation numbers!

The other part of Samuelson's condemnation does not fit the data well either. He tells us:

"We are now suffering from — and have for decades — the second defect of JFK’s decision: the loss of budgetary discipline."

Samuelson complains that in the 50 years following the tax cuts we almost always ran budget deficits. While this is true, the ratio of debt to GDP continued to fall until 1980, dropping from about 43 percent in 1963 to around 25 percent in 1980. The interest burden remained low and the real interest burden of the debt was actually negative through most of this period. (The inflation rate exceeded the average interest rate.) The soaring deficits and rising debt burden began when Ronald Reagan took over in the White House.

But hey, this is the Washington Post. It was obviously the fault of the Kennedy tax cuts.

Comments (7)Add Comment
And Stuff Like That
written by Last Mover, March 04, 2013 5:17
When Samuelson was young he decided he wanted to be an economic historian. And stuff like that.

So he became a columnist who reports on economic cause and effect of historical events. And stuff like that.

It takes a real expert like Samuelson to sort through vast volumes of data and come up with meaningful economic relationships worthy of reporting in a major newspaper column. And stuff like that.
...
written by AndyfromTucson, March 04, 2013 7:11
"It's hard to understand what Samuelson thinks he is saying when he writes:
'With government seeming to guarantee 4 percent unemployment, workers and businesses had little reason to restrain wages and prices.'"

I know exactly what Samuelson was thinking. He was thinking that when unemployment is low employers have to pay competitive wages to retain good employees. When he tried to spin this as a bad thing it just came out incoherent.
Of all the things to pick
written by Jennifer, March 04, 2013 10:17
First, I'm confused, I thought tax cuts were always good? But really, to insist that particular tax cut can explain 40+ years of budgets? Aside from the facts that Dean presents, yes I would take that disaster, wasn't there um, an war that began a few years after that tax cut? Apparently that's not important to the economy because Samuelson never mentions it but I have read that war as an "unpaid" war kind of like the ones we just started. That might have been a budget problem. Agree with @ AndyfromTucson I am pretty sure he was trying to say that paying people good wages is bad but it's hard to have that make sense without sounding like a corporate shill.
what happened to the poverty rate after 1970?
written by pete, March 04, 2013 10:33
1968 was peak income equality. While monetary policy was disastrous in the 70s, it was really the capture of new government programs by big business that was the culprit. More government, more capture...more transfer to the wealthy. Real wages have stagnated since the 70s while capital has done just well, thank you.

Oil embargo did cause an uptick in oil prices, and a recession, which the Fed then accomodated, and then got stuck in a trap of inflationary expectations. All of these led to massive capture of rents by capital. The wealthy are best able to find ways to avoid both regulations and the costs of inflation. Finally Volker pulled the plug. An alternative would have been to return to Bretton Woods.
...
written by Eclectic Observer, March 04, 2013 12:55
I would like to see a fuller discussion of what happened in the 70s wrt cost push inflation and stagflation. I see to recall that the administration at that time was playing both with fiscal policy, monetary policy thru influencing the Fed and with also Wage Price controls once a very high level of inflation had a spiraling effect on wage contracts and other cost of living arrangements which ended up with also causing unemployment at the same time as it not onlly made labor increasingly expensive relative to what could be obtained in the more competitive price markets it also made investment capital and inventory capital (shorter term loans to finance inventory for sale) more costly and thus inhibited the general growth needs necessary to offset natural job losses and population growth.

Still like to see what the analysts have done with this without descending into a "let's blame JM Keynes" mode.
...
written by JDM, March 04, 2013 3:12
I've also always found it interesting how "get the goverment off our backs" conservatives never seem to be able to remember Nixon's Wage and Price Controls.
...
written by urban legend, March 06, 2013 12:32
Besides the oil shocks that kicked off runaway inflation, Carter faced 11 million baby boomers and women entering the labor force in the three year period from 1976 to 1979. Getting them to work demanded expansion, but then expansion kicked off more rounds of inflation. It was not an easy time to manage an economy.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.

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