The Public Policy

Back When Democrats Knew Economics

Who warned that "increasing federal expenditures" would "demoralize both the government and our economy"?

By 10.25.12

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Eleven months before he was assassinated as he rode with his wife in the back seat of an open convertible in a motorcade through downtown Dallas, President John F. Kennedy delivered a major address to the Economic Club of New York at the Waldorf-Astoria Hotel on December 14, 1962.

The unemployment rate that month was 5.5 percent. The annual inflation rate was 1.3 percent.

The sticker price on a new Chevy Impala convertible was $2,919. Gas was 31 cents a gallon. A morning coffee and newspaper was 15 cents -- a dime for the coffee, a nickel for the paper. Cheeseburgers were 20 cents.

The minimum wage in 1962 was $1.15. For 50 weeks at 40 hours per week, that's $2,300 a year -- 79 percent of the price of a new Impala convertible.

The 1962 federal deficit $7.1 billion, more than double the $3.3 billion in federal red ink in 1961.

The $7.1 billion deficit was 1.3 percent of GDP. For 2012, the Office of Management and Budget projects that the federal deficit will hit 8.5 percent of GDP, over six times higher than in 1962, relative to the size of the economy.

President Kennedy began his address to the Economic Club of New York by stating that U.S. security is directly linked to the strength of the nation's economy.

National security "will not be determined by military or diplomatic moves alone," he stated. "It will be affected by the decisions of finance ministers as well as by the decisions of Secretaries of State and Secretaries of Defense, by the deployment of fiscal and monetary weapons as well as by military weapons, and, above all, by the strength of this nation's economy as well as by the strength of our defenses."

To strengthen the economy, Kennedy called tax cuts on business and all income groups, a less expansionary government, a simplified tax code that downsized loopholes and special privileges, and the removal of obstacles to private initiative.

The "most direct and significant kind of federal action aiding economic growth is to make possible an increase in private consumption and investment demand -- to cut the fetters which hold back private spending," he asserted.

In contrast, a course of "increasing federal expenditures more rapidly than necessary," he warned, "would soon demoralize both the government and our economy."

Kennedy called for "an across-the-board, top-to-bottom cut in personal and corporate income taxes" in order to reduce "the deterrents to private initiative which are imposed by our current tax system" -- a federal tax system that "exerts too heavy a drag on growth," "siphons out of the private economy too large a share of personal and business purchasing power," and "reduces the financial incentive for personal effort, investment, and risk-taking."

Kennedy's bottom line? "In short," he stated, "to increase demand and lift the economy, the federal government's most useful role is not to rush into a program of excessive increases in public expenditures, but to expand the initiatives and opportunities for private expenditures."

And the impact of tax cuts on deficits? "Our true choice is not between tax reduction, on the one hand, and the avoidance of large federal deficits on the other," he declared. The"paradoxical truth" is that "tax rates are too high today and tax revenues are too low and the soundest way to raise revenues in the long run is to cut the rates now."

Those were the good old days, a time when Democrats and liberals understood that it's economic growth, not redistribution, that delivers overall increases in a nation's standard of living, across all income groups.

"A rising tide lifts all the boats," Kennedy stated in a speech in Arkansas on October 3, 1963.

Today, President Obama thinks the path to a better world is by way of a confiscatory tax on the biggest yachts, even if it means fewer boats of all sizes in the water.

Obama's way has already been tried and it doesn't work. In 1990, Congress passed a 10 percent "luxury tax" on high-end jewelry, aircraft and yachts as a way to force "the rich" to pay their "fair share."

Taxing away another $2 million from a rich guy when he buys a $20 million yacht was supposed to create more heaven on earth.

Instead, 81 percent of the 1,400 workers at Viking Yachts, the largest yacht manufacturer in the United States, were laid off within eight months of the enactment of the yacht tax -- and "the rich" still had their money, and their old yachts.

Egg Harbor Yacht, one of the oldest boatyards in South Jersey, filed for bankruptcy a year after the yacht tax was enacted and laid off its 250 workers.

By the time the law was rescinded in 1993, Viking Yachts was down to 68 employees.

"When it was all over, 25,000 workers had lost their jobs building yachts, and 75,000 more jobs were lost in companies that supplied yacht parts and materials," reports economics professor Walter Williams at George Mason University. "The Joint Economic Committee concluded that the value of jobs lost in just the first six months of the luxury tax was $159.6 million."

The impact on the federal deficit during the first year of this shot at creating more "fairness"? Instead of adding a projected $31 million to the government coffers, the net effect of the luxury tax was $7.6 million more in federal red ink.

The redistributionists sneer at the concept of "trickle down," as if they can't see the obvious fact that new jobs are created and new income is generated when someone invests his energy and risks his capital in creating a new enterprise or expanding an existing business.

What's also obvious is what trickled down from the "luxury tax" -- more unemployment, more poverty, more red ink, and more inequality.

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About the Author
Ralph R. Reiland is the B. Kenneth Simon professor of free enterprise and an associate professor of economics at Robert Morris University in Pittsburgh.