July 12, 1965
Silent Revolution in Economics
Fundamental ideas and concepts held by most of mankind, or by a nation, rarely change. But sometimes they do. Kings once ruled empires, not by consent but, by "divine right." Men were once punished for denying the idea that the earth was flat. Fifty years ago Americans nearly all agreed that national security clearly required rejection of all alliances, international organizations and foreign wars.
Yet sooner or later all of these ideas were discarded by new knowledge and experience. In recent years another change -- just as revolutionary -- has been taking place. But for politicians this is a silent change which few admit or discuss. Yet the change is there just the same.
Perhaps I shouldn't talk about it either, but
I'm going to. Here's the heart of this silent revolution:
Few political leaders have yet dared to state the matter this bluntly. Why? Because it shocks many people, and it flies in the face of very basic American beliefs and traditions which I, along with most Americans, have always accepted. Yet strong evidence is accumulating that this new theory actually works and may be sound.
Let me dramatize the extent and nature of this
"revolution in popular attitudes" with two examples:
In my four years as a congressman I have turned out probably more reports on federal spending and budgeting than any other Member. I take great interest in the subject because of its vital implications for the future of all of us. Thus I feel compelled to face openly and to analyze this fundamental change which I see occurring.
Let me make it clear that I don't pretend to be an expert, to know all, or even very many, of the answers. I specifically do not present myself as an advocate of the "new economics." But I do suggest that when fundamental changes in government policy have occurred, they ought to be recognized, understood and discussed. If they are all wrong, our people ought to get busy and head them off.
In this and perhaps two subsequent reports
I want to lay these ideas out on the table, dissect them, and study the
arguments for and against. For the fact is that your government,
the support of leading elements in business, banking, economics and political
science, is now operating on some new economic premises. Among the
premises are these:
MORE 'DANGEROUS NONSENSE'?
I can already hear the cries of outrage from many
of my readers. They will go something like this:
Let me say quickly that 20 years ago I would have agreed with an of the objections just listed. Even four years ago when I came to Congress my first priority was to draft and introduce my flexible income tax proposal which included a mandatory budget balancing plan. As a new congressman I demanded an audience with Henry Fowler (now Secretary of the Treasury) and pressed my ideas.
Since that beginning I think I have learned a few things about federal financial policies. Yet I still don't know that I was wrong then, or that these newly-applied ideas are right. I will say that in 1965 they are being tried and they seem to be working. And I will say that almost every reputable economist, many leaders in banking and industry, and a majority of congressmen silently accept them. Because they are actually being tried, and because of the broader acceptance they are gaining, I think these ideas deserve your attention.
THE 1964 TAX CUT -- A CRUCIAL EXPERIMENT
To be sure, these ideas aren't "new" in one sense;
similar suggestions have been heard for 30 or 40 years. I describe them
as "new" because they now are being tried and used by our government.
Not until last year had they been given any kind of test in times of
prosperity. In 1964 the Congress decided to try a bold experiment proposed
some months earlier by the late President Kennedy. Let's set the stage
for his gamble and his strategy:
With an expected recession only months away President Kennedy proposed the start of our boldest experiment in the "new economics." On top of a $3 billion tax cut in the form of an investment credit and revised depreciation allowance, enacted in 1962, he proposed an $11 billion income tax cut -- the largest in history. He offered this as a device for heading off the recession and continuing our economic
3.advance. If the theory worked, it would mean, not a larger deficit, but in the end a smaller deficit than otherwise would have occurred.
THE RECESSION THAT DIDN'T HAPPEN
What happened? Here are the results:
THE EXCISE TAX CUT
A baseball manager who takes out his star pitcher in a tight eighth inning situation and then goes on to win can never prove that the star would not have won also. By the same token no one can ever prove conclusively that we wouldn't have had these advances without the '64 tax cut. But Congress -- and most of the business community -- believe that most or all of these gains were caused by the $14 billion in tax cuts. In fact, Congress was so impressed by this performance that more of the same was called for and passed last month. With strong business support and by a vote of 401 to 6 the House sent the $5 billion excise tax cut to the Senate, where it passed by a margin of 84 to 3.
Signed by the President just a few days ago, this new law is important to you for two reasons: 1) it will provide you with immediate savings on the things you buy, and 2) it will provide still further incentive to our economy, increasing business volume, creating more jobs and adding to corporate profits. If it works, and 485 Members of Congress think it will, it will be another example of the "new economics" aiding our economy.
EVERYONE BENEFITS FROM EXPANSION
When the economy slumps, most of us lose in someway
or another. I certainly don't believe that the milennium is here, or that
we'll never have another recession, but it now appears that we have at
least delayed a recession and prolonged an advance. If nothing
more, we have actually seen what a 4 1/2-year sustained advance can do
for us as a people. In these 4 1/2 years:
Clearly, there was room for further expansion of our economy, and it appears these fiscal measures have paid off. The country is benefitting on two levels -- first, in a rising standard of living for our people, and secondly, in a greatly increased capacity to meet our federal obligations, including interest on the national debt. I will return to this latter point in my next report.
THE TEST THAT COUNTS: DOES IT WORK?
Americans owe much of their economic success to their pragmatism. "Does the idea work?" This is the acid test in science or business or advertising. If it does work, it is used, no matter how strange or unorthodox it may seem at first.
Because the economic medicine now being tried conflicts with what appears to be established wisdom and common sense, let me draw some analogies to medicine and the space sciences -- fields where striking advances have been made in our lifetimes.
An orbiting astronaut desiring to return to earth doesn't (as might appear logical) point the capsule to earth and add power -- this will put him farther into space. A doctor trying to prevent polio also pursues a seemingly strange course -- he gives the child a tiny dose of the dreaded virus. Yet we have come to recognize that the complexities of space and the human body require such sophisticated solutions.
Our $650 billion, competitive, free-enterprise economy--to me, one of the real wonders of the world--is probably more complicated than the problems we deal with in space or medicine. Ponder for a moment 190 million Americans and over a million corporations each making separate decisions about buying, selling, working, advertising, investing, building -- each decision affecting some of the other persons and corporations. Now think about all of these people acting through their national government, 50 state governments and thousands of local governments making decisions about spending, taxing, constructing highways and buildings, etc. Obviously such a complex economy may need some sophisticated attention, too.
Yet the study of this economy has had little attention. Economics has been known as the "dismal science" -- for it excites few youngsters or adults the way space science or medicine do. The man on the street, who readily accepts "crazy" procedures that work in space or medicine, imagines that "simple horse-sense" is all that is needed in dealing with a nation's economy.
But with something as important to all of us as this is, perhaps we can learn, and perhaps we are learning some new things. Perhaps 20th Century America, which intends to place men on the moon and has curbed many deadly diseases, transplanted human organs and performed open-heart surgery, can learn enough about this "dismal science" to lessen the impact of recession and depression. This is what is involved in the experiment now going on.
Sylvia Porter, the popular newspaper columnist
who appears in several Arizona papers, is one of the enthusiastic advocates
of these new ideas. In a recent column she made this observation:
All right, many will say, the Kennedy-Johnson
experiment seems to be producing more federal revenue, more jobs and profits,
but there are some other, more important considerations. They might be
expressed like this:
These are serious questions, and they deserve serious answers. Those who advocate the economic experiments now underway believe there are valid and reassuring responses to each of them. We'll take them up in perhaps two more reports on this challenging subject.
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