March 18, 1966
Vol. V, No. 1

When I was discussing the subject of this newsletter with colleagues here in the House, one of them suggested I entitle it "Election Year Memo from a Political Lunatic." As you can see, I thought better of that suggestion. However I expect some of my colleagues will insist the title was appropriate.

What this newsletter contains is a prediction and a recommendation:

The prediction: Federal taxes will go up in 1966. They will go up in one of two ways -- through inflation, a cruel, senseless, unequal and damaging way; or through a deliberate and, I think, sensible decision of Americans through their Congress to enact a moderate tax increase to head off inflation and keep our economic growth sound and healthy.

The recommendation: Let's do it by a tax increase and not by inflation. Let's do it even in the face of the national myth that voters in an election year invariably rise in indignant wrath if their taxes are raised as they are heading for the polls.

Between 1963 and 1965 we challenged and overcame a basic economic and political myth -- the one that says you never cut taxes in times of prosperity and an already unbalanced budget. During those years we cut federal taxes by a staggering $20 billion. We did so because our economy, while prosperous, was lagging behind its potential and -- more importantly -- because we needed to create more jobs for our growing work force. The experiment was a tremendous success:
 

I'm sure we all will agree this is a record of success. The picture is a bright one. But, at the risk of being called a wet sponge, I want to remind my readers that this "new economics", about which I wrote in three newsletters last summer, has two sides. And I think the time is approaching when we must put it to work, not to stimulate our economy, but to hold it somewhat in check.

As I explained in those reports, most economists now believe that, in times of a slack economy, with under-employment and under-utilization of our industrial capacity, you should cut taxes or increase spending (even in the face of an existing deficit in the budget). You can expect these results:
 

That 1963-65 experiment has made "New Economic Christians" out of a lot of unbelievers like Wall Street bankers, the titans of industry and leading conservative business writers. Most of them are convinced the prescription set forth above actually works. It passed the test. But now a bigger test is standing outside our front door -- or at least heading up the walk -- and I hope we don't flunk it.

A prescription for low blood pressure won't work for high blood pressure, and we now must examine the other side of the "new economics." Here's what it says on the label: When the economy is operating at near-capacity, when unemployment is down and labor shortages are imminent, when you begin to see "too many dollars chasing too few goods", you put on the fiscal brakes. You raise taxes or cut spending (even in the face of an existing surplus in the budget). The expected result:
 

As I explained in my "Silent Revolution in Economics" series, the prescription for a slack economy bordering on recession is for government to put more money into the economy than it takes out. In other words, you either increase expenditures or cut taxes. Conversely, you check an over-heated economy bordering on inflation by having government take more money out of the economy than it puts in. In other words, you cut expenditures or raise taxes.

To recall my earlier metaphor, when water is everything you act to meet a drought, but you also plan ahead to prevent a damaging flood.

A high-level economic debate is now raging in Washington. The question is whether the time has come to put on the economic brakes. A few economists argue that there is still slack in the economy, that deflationary action is not yet indicated. A majority, however, including some of the leading advocates of the "new economics", see these signs indicating action:
 

I might say that this same view is held by most of the economists who advocated the tax cuts of recent years -- and, in particular, by Dr. Walter Heller, former chairman of the Council of Economic Advisers and chief architect of the "new economics" which has so advanced our economy since 1961.

But, wait, you say, aren't you overlooking something? Why not cut spending instead of increasing taxes? This would appear to be the easiest and quickest course: we have a war on; domestic needs can wait.

Perhaps so, but I am frank to say that I don't think this is a live possibility. In fact, we are applying far more of a pinch on domestic programs than people realize right now. And further cutting back could have serious effects on many problem areas.

In this connection, I was interested in a survey reported March 5 by the Saturday Review. Prominent businessmen, financial leaders and economists for large corporations were asked what steps they would take to meet mounting war costs. Only 15% specifically advocated curtailing domestic programs. The main thrust of their responses was toward increased taxation if war expenditures rise.

What we must remember is that 80% of our federal budget is virtually untouchable. We certainly can't cut defense spending. If anything, we should be spending more on international affairs. Perhaps we could cut some funds from the space program, but as our competition with the Soviet Union is growing more intense I don't think we will. The cost of veterans' benefits is as fixed as anything can be. We can't cut the interest on the federal debt, and the basic, housekeeping costs of the government must go on, no matter what happens. This leaves just 20%, or about $21 billion, to run every other department, agency and activity of the federal government and pay out over $8.5 billion in grants-in-aid to the states. There simply aren't many places to cut without endangering programs needed by the 195 million Americans who are not in Viet Nam.

Of course, spending cuts are always more attractive when they occur in other states and other regions of the country. But I think we ought to take a look at what's happening in our own backyard before we talk about sweeping reductions in domestic programs:
 

Thus, when we talk about spending cuts as the way to deal with the threat of inflation, I think we had better think carefully about what this would mean to Arizona. And if this is true of Arizona, it's true of vitually every other state of the union. In my judgment, while some cutbacks might be possible, I don't believe the country will let us make them or that they are necessarily the best solution to the problem.

Instead, I think we ought to have an immediate, moderate tax increase for individuals and corporations. I would suggest that it have two features:
 

Maybe I'm wrong, but I think thoughtful citizens would accept this modest sacrifice at a time when our troops are heavily engaged in Viet Nam and when the people at home have earnings and incomes at all-time highs. At the end of the year, the situation could be reviewed, but in my judgment the immediate inflationary crisis might well have passed and the need for the special tax have ended.

Here is what the temporary tax increase might mean:
 

I give our citizens credit for a lot more sense and willingness to make tough decisions than do some of my colleagues. One of the oldest rules of "practical" politics is: "Vote for all tax cuts and all spending bills." Another is: "If you must vote for a tax increase, never do it in an election year." I reject these old myths. I think that people want leadership and want their leaders to talk sense and explain unpleasant truths when they exist. And this is what I'm trying to do in this newsletter.

The unpleasant truth I began with is clear to me: Taxes will go up this year -- either by plan or by inflation. There is good reason to believe that the "new economics" -- the most successful approach yet of what is certainly an inexact science -- can give us even more of the remarkably stable, long-term growth we have had in the past five years. But this is possible only if we recognize that this machine comes with both an accelerator and a brake. I think the time has come to put on a little brake.

I don't like the thought of higher taxes any more than I like our being in a war. But I'd prefer higher taxes to the even higher costs of inflation or the sacrifice of needed programs.