Monday, May 26, 2008

The 1950s-1980: Kennedy's boom to Stagflation

Today I'd like to continue my history of American economics that I started a while ago. I reviewed the road to the roaring 1920s and later the New Deal, and left you off with Harry S. Truman as president.

When it came to the economy, Truman basically rode the wave of the post war boom. But he was actually more concerened with other matters around the world, like receiving the unconditional surrender of Germany, the decision to drop the Atom bomb over Japan, and then the reconstruction of Europe.

At this time in American history, where the economy had nowhere to go but up after the Great Depression and WWII, the economy did continue to improve.

Dwight D. Eisenhower was provided an economy that was on the upswing amid a post-war boom. While the highest taxes rate remained at 90%, Eisenhower refused to cut taxes.

But he didn't need to, as his two terms in office, "produced eight years of growth and relative prosperity," according to "Nearly every indicator of economic health -- GNP, capital investments, personal savings and income -- showed substantial upswings."

Eisenhower was given credit for keeping the world at relative peace nationwide for seven years, as well as providing over a pleasant economy.

Yet, by the time John F. Kennedy became president in 1961, the high tax rates were starting to catch up with the economy, and a brief recession ensued.

John F. Kennedy was educated on the benefits of cutting taxes to create an incentive to save and invest and stimulate the economy.
With that in mind, he, despite many who told him not to do so, including his economic advisor John Kenneth Galbraith (who wanted to raise taxes, run up a debt and increase government spending to improve the economy) Kennedy cut taxes from 91% down to about 70%, which was actually less than his original proposal of 65%.

While the tax cuts were not enacted until after his death in 1964, they resulted in an economic upswing that allowed Lyndon Johnson to preside over a country in economic prosperity.

According to Wikipedia, while Johnson was president "GNP rose 10% in the first year of the tax cut, and economic growth averaged a rate of 4.5% from 1961 to 1968. Disposable personal income rose 15% in 1966 alone. Despite the drop in tax rates, federal revenues increased dramatically from $94 billion in 1961 to $150 billion in 1967.

Thus, the result was an economic boom in the 1960s instead of a deeper recession or even a depression which would have occurred had Galbraith had his way. And we would not be thinking of Kennedy in the same light as we now do. If Kennedy had listened to his advisers, we'd be talking about Kennedy in the same light as we talk about Carter.

Richard Nixon won in a landslide in 1968 and decided he was going to continue to ride the wave of the good Johnson economy (rather, the Kennedy economy) by "playing it safe."

However, due to factors beyond Nixon's control, the economy was sputtering by 1971, Nixon announced a 90-day wage-price freeze, stimulative tax cuts, a temporary 10% tariff, and spending cuts.

The economy recovered enough by 1972 and Nixon won again in a landslide.

But, according to, "In 1973 the war between Israel, Egypt and Syria prompted Saudi Arabia to impose an embargo on oil shipped to Israel's ally, the United States. Other member nations of the Organization of Petroleum Exporting Countries (OPEC) quadrupled their prices. Americans faced both shortages and rapidly rising prices. Even when the embargo ended the next year, prices remained high. Higher energy prices affected all areas of American economic life: in 1974 inflation reached 12 percent, causing disruptions that led to even higher unemployment rates. This era of recession and inflation ("stagflation") brought an end to the unprecedented economic boom America had enjoyed since 1948."

While Carter complained about inflation being so high when he was elected in 1976, it was even higher when he left office in January 1981.

With the country now mired in a recession, the window was now open for a the first successful trial of supply-side economics, which would end the era of high taxes.


Nikki said...

I remeber the days of long gas lines in the 70's with gas wars and stocking up. My grandmother got so frustrated with a man trying to push her to hurry and physically threatening her that she sprayed him with gas and left...those were the days. It makes me think that we don't have it so bad now days and we are just spoiled. thanks for the great read and I will look forward to more info on this subject. :)N

Chris Holte said...

I suppose the other comments have been deleted. But there is a lot of evidence that Galbraith was right and that the stagflation of the 70's was caused by excessive borrowing by the public, excessive interest rates intended to fight inflation, and the borrowing associated with the Vietnam war -- even more than other exogenous factors. The tax cuts on the rich did not cause a boom. High Interest rates not only depress the economy, they force merchants to raise their prices and create a payback hole of compounded red ink. Spending did stimulate the economy, and redistribution of wealth, loans for housing, and tax policies that encouraged companies to actually invest in actual capital (wealth plugged back into the economy) stimulated the economy by enabling people to buy more. Kennedy's tax policies didn't.