Beyond the 1937-like craze in Congress today over cutting the budget deficit, there is a more serious debate going on in the US over how to stimulate aggregate economic demand in order to spur more rapid job growth. In this debate, there are competing views over whether to raise spending or cut taxes – sometimes referred to as left Keynesians and right Keynesians. Macroeconomists have mainly favored the spending route because the historical evidence is that spending gives more bang for the deficit buck since the initial impact brings a one-for-one boost to demand, while a tax cut initially loses some bang because tax cut recipients initially save a part of their higher disposable income. But there is agreement among those who engage in this debate that tax cuts too will stimulate demand and job growth, especially when they are aimed at lower income Americans who spend more of their disposable income on the margin than do the rich.
In fact, the greatest moment of success of Keynesian policy in the history of the United States is not the New Deal, as is often claimed by proponents of greater deficit spending in the current crisis. The height of the influence and success of Keynesian policy advisers was the Kennedy administration’s income tax cut of $13.5 billion over three years. The policy was strongly urged by President Kennedy’s Council of Economic Advisers, led by the great American Keynesian economists James Tobin, Walter Heller and Arthur Okun. Facing unemployment rates around 7 percent, the economists sought to bring it down to 4 percent. By early 1964 (after Kennedy’s death), the proposal was passed into law. The tax cut is attributed with moving the economy to 4 percent unemployment and a very high rate of capacity utilization. In his history of that era, Michael Bernstein (A Perilous Progress) writes that “by the fall of 1964 the success of the tax cut was so apparent that, in the words of Arthur Okun, ‘economists were riding . . .
Read more: Do the Right Thing: Responding to the Economic Crisis
