The Supply-Side Revolution: An Insider’s Account of Policymaking in Washington
Presidential Economics: The Making of Economic Policy from Roosevelt to Reagan and Beyond
The Barbaric Counter-Revolution: Cause and Cure
Near the end of his second year in office, John Kennedy proposed a dramatic reduction in federal income-tax rates. The maximum rate, applied to income above $200,000, would fall from 91 percent to 70 percent, and down through the rest of the income distribution, rates would be cut by an average of 20 percent. Corporate taxes were to be cut, too. The reductions were enacted soon after Kennedy’s death, and their first stage took effect in 1964. Immediately afterward, America entered a period of unparalleled prosperity.
Nothing that any Democratic president has done in peacetime has commanded more Republican admiration than these reductions. In political discourse, the “Kennedy tax cut” has become one of those phrases, like “Munich” or “Bay of Pigs,” that is thought to prove an argument merely by being stated. Congressman Jack Kemp, in his tireless advocacy of reducing tax rates, has invoked the “Kennedy tax cut” hundreds of times. (The Republicans rarely call it what many economists do: the “Kennedy-Johnson tax cut.”)
Paul Craig Roberts, who with Kemp has been one of the most consistent proponents of “supply-side economics,” turns to the Kennedy tax cut several times in his new book. He says that when taxes went down, the incentive to save went up, as did the eagerness of America’s entrepreneurs to draw on those savings and make productive investments. Kennedy’s advisers, most of them Keynesians, may have thought that the tax cut would stimulate the economy by giving consumers more money to spend. But, according to Roberts, “what the policy-makers really got was a burst of saving and investment activity that spurred the economy…to faster growth of the ability to produce…. As Stanford economics professor Paul Evans has said, ‘the critics who assert that there is not a shred of evidence [for supply-side economics] just have not looked for it.”’
Herbert Stein, the chairman of the Council of Economic Advisers during the Nixon administration, also examines the Kennedy tax cut in his new book. But to him, the cause-and-effect relationship that seems so simple and obvious to Roberts looks a little more complicated.
It is conceivable, Stein says, that the tax cut had at least some of the effects that supply-siders such as Roberts say it did. But it is more likely that it did not. As the nation’s output increased, it did not display the trait the supply-siders would have predicted: faster growth in output per worker, resulting from modernized factories and equipment. Instead, Stein says, “all of the increase in the rate of growth of output after the 1964 tax cut went into effect resulted from the faster growth in the number of persons employed. Output per person employed actually grew more slowly after the tax cut than before, although one would have expected the reverse if the supply-side effects were dominant.” The expanded work force, in turn, reflected a higher level of aggregate demand. But did that demand arise from the tax cut, as the Keynesians …