Another argument for prefering budget spending to tax cuts

Richard Parker writes HT Mark Thoma .

It’s easier to unwind. 

 

Dear Mr. President, 
In a future two-volume work, I intend to deal with the relation of a President to economists. I will naturally urge that he listen to them attentively, and indeed with a certain respect and awe. But in times of economic challenge, the President must have a sense of what the people want. Economists only know what people should want – or sometimes what they used to want. 
– John Kenneth Galbraith to President Kennedy, 
August 1962

TREASURY Secretary Timothy Geithner’s debut last week of his $2.5 trillion rescue plan sent Wall Street into a tailspin – and raised new concerns about the Obama administration’s savvy – when it became apparent that this was The Plan That Wasn’t One.

The Plan – clearly crafted by the Larry Summers-led economic team – had been fiercely opposed by top White House political advisers (including David Axelrod). The political people apparently feared The Plan, however sketchy, made the White House look like it was bringing back last year’s arsonists to be this year’s firefighters – while doing too little for the millions trapped in our still-burning economy.

To Ken Galbraith, all this would have been eerily familiar (and alarming) had he not died three years ago. The 6-foot-8 Harvard professor had been the nation’s most famous liberal economist from World War II until his death. He served in the Roosevelt, Truman, Kennedy, and Johnson administrations, and knew about the intersection of economics and politics.

For Galbraith, the Geithner Plan would have recalled haunting memories of what happened when he was a top adviser to John F. Kennedy.

Kennedy entered office in 1961, during what was then the worst downturn since the Depression. JFK was a new, young, and untested president, uncertain in economics, a leader attuned to bipartisanship (he chose a Republican investment banker as treasury secretary). His economists were all Keynesians and eager to put their blackboard models to work. But they disagreed about what to do.

Pay close attention.

One camp was led by White House chief economist Walter Heller, a tax specialist who favored a big stimulus package based on deep tax cuts. Ken Galbraith, FDR’s man in charge of price controls in World War II (a job at least as tough as the one facing Geithner), led the second camp. Galbraith wanted spending – deficit spending – that focused on building schools, roads, and parks, and creating public jobs

It wasn’t a dispute about theory. But Galbraith had a second worry: Kennedy was coming under heavy pressure because of a little war in Southeast Asia. Costs for such a war weren’t in Heller’s economic models. If war came in Vietnam, he knew spending would soar but that Congress would put off raising taxes to pay for it.

The “wrong” stimulus strategy would be a recipe for disaster. It might destroy the New Frontier if the package was mismanaged, and decided only by the economists and their models.

Finally, after months of argument, Kennedy imposed a compromise: Heller’s tax cuts first, then Galbraith’s major public spending. JFK was unsure of his decision, but some sort of stimulus was clearly needed. Getting tax cuts passed first by a conservative Congress would be easier.

Kennedy was killed before his tax cuts became law, so they went into effect in 1964 under Lyndon Johnson. Initally, the economy soared – but then LBJ plunged deeper into Vietnam, and war costs soon drove heavy deficits that in turn triggered inflation. Congress dragged its feet about raising taxes quickly enough to curb inflation.

Soon enough, an angry and disheartened public began to hate the Democrats, hate liberals, and hate government. A faltering economy, along with a worsening war, brought Richard Nixon to the White House.

Galbraith’s warnings had proved right, because reality had proved more complex than the economists’ models.

It’s an important lesson to ponder 40 years later: In times of economic crisis, presidents should listen to economists. But then they must listen to the American people, because the stakes aren’t just economic.

 

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pedro
pedro
12 years ago

Well, yes, but surely the take away from that articles is that the tax cuts worked and were only a problem because of an election to get into an expensive war.

Not that big an argument for public spending I should have thought.

derrida derider
derrida derider
12 years ago

Indeed, the right moral here is surely to avoid creeping entanglements in expensive wars. Vide Afghanistan.

Michael Kalecki
Michael Kalecki
12 years ago

In a Depression spending via infrastructure not only generates more demand than tax cuts it should involve enabling the economy to grow faster once things come back to normality.

As Nick says spending should be finite tax cuts are not.

Tax cuts are unlikely to generate much demand when an economy is in a depression or even approaching one.

As it is Kennedy’s advisers should have told him to do neither as in a recession monetary policy is a much better toll or at least that is what Keynes would have told him.

Tel_
Tel_
12 years ago

Easier to unwind?

As soon as you set up a special Department for Stimulating Something, the primary purpose of that group of people is forever to maintain their own income stream. That means maintaining the importance of their own department. The bigger the “temporary” income stream, the more determined they will be to keep it flowing.

Soon enough, an angry and disheartened public began to hate the Democrats, hate liberals, and hate government. A faltering economy, along with a worsening war, brought Richard Nixon to the White House.

To be fair, they also hated war, and the majority of them had no interest whatsoever in whether Vietnam had a communist government or not. I would argue that many Americans voted against GWB because they didn’t like getting involved in expensive foreign wars, didn’t feel comfortable with the idea of sponsoring systematic torture, and didn’t appreciate the way government was steadily taking over their lives. They also figured that Obama could hardly do a worse job of the economy and any change was better than more of the McSame.

JM
JM
12 years ago

“As soon as you set up a special Department for Stimulating Something ….”

Yes, but if you set up the Department for Building the Interstate Highway System the spending has a definable end (unless you want to pave.the.earth and even then you have an end point)

Also if you set up the Department for Lifting Blue Eyed Blondes out of poverty there comes a point where Blue Eyed Blondes are sufficiently wealthy that the rest of the electorate resents their benefits and outvotes them. In fact, generally speaking minorities have a hell of a time getting support from the general populace at all whereas (because tax cuts are across the board) it is much harder to get the general populace to see beyond their wallet.

I think the concern re. the “welfare piggy bank” is misplaced. The middle class welfare of tax breaks from here to eternity is a much more suitable target for concern.

Jarrah
Jarrah
12 years ago

Firstly, what derrida derider said.

Secondly, it’s not easy to unwind. Governments don’t have a great track record in reducing their spending. The incentives are wrong.

Lastly, tax cuts don’t have to be unwound. You can always reduce spending further if deficits are a problem! ;-)

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Tel_
Tel_
12 years ago

Yes, but if you set up the Department for Building the Interstate Highway System the spending has a definable end (unless you want to pave.the.earth and even then you have an end point)

The original promise was that the Harbour Bridge toll would stay in place just long enough to pay for the construction of the Bridge (fair enough), then they decided to keep it and pay “for maintenance” but then they had a bit of surplus so they tweaked the “Sydney Harbour Bridge (Administration) Act 1932” to allow them to spend it on other expressways and finally it just went into revenue to be spent on whatever. Also, it keeps going up faster than inflation… you do the math.

I think that I can safely predict that when the privately operated tollways move over into government hands the toll collection infrastructure will remain perfectly intact and operational. Dunno if anyone is willing to cover a bet on that one :-) we can haggle over which excuse they will use.

Definable end is absolutely irrelevant.