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.