Economics Without The B.S.**:
The Economy of the 1960’s versus our Present Economy
The 1960’s were our most productive decade since WWII – and I’m talking about decades and not some reconstructed 10 year period. [This is real GDP growth; factoring out inflation; in current dollars and not some reconstructed base line. Based on fiscal year data and not calendar year data.] During the spend-thrift 60’s (up to FY1969) (the Vietnam War, Great Society Programs, etc., etc.) where we had eight years of Democrats and the only balanced budget was the one submitted by LBJ in FY1969 -- Debt to GDP went from over 55% to approximately less than 40% when the Liberal Democrats finally got kicked out.
Some want to attribute this remarkable recovery to the Kennedy tax cuts. But by the time LBJ signed this tax cut, in 1964 after JFK was assassinated, the economy was already growing over 6% annually -- and the tax cut was still a year away from taking any effect. In the first year that the tax cuts took effect, they contributed just over $10 Billion to a $600 Billion economy. To put the $10 Billion in perspective, the NASA budget that year was over $6 Billion.
The economic growth of the 1960’s can be attributed to many things – the tax cut is just one, and not the most important. Mainly you could characterize this decade, not as a supply-side phenomenon, but as a demand-driven economy.
1. From the Depression through the 1950’s and even into the 1960’s there was pent up demand for consumer items.
2. Defense spending was at a premium. This was the height of the Cold War and a post-Sputnik era (until we landed on the Moon). And by the mid-1960’s we had the Vietnam build-up. Go to Huntsville, AL and the Red River Army Depot in Texarkana, TX and convince them how unimportant this was.
3. Government spending in general, during the 1960’s, was much more capital intensive/infrastructure as compared with the last several decades we have had (especially since the 1980’s). The welfare programs were far fewer than what we have today. Social Security paid for itself in those days. There was no Medicare until later in the decade. And many of the states were making the same kind of expenditures – CA, NC, just to name a few. Expenditures for roads, water projects, utilities in rural areas, university programs, airports, shopping centers, suburban sprawl, etc.
4. Our economy in this post-war period was different in its input/output from sectors than what we have had in the last several decades (since the 1990’s anyway). Our GDP was almost pretty evenly divided between Government (Fed, state, and local), consumer, and industry/commercial – today we are about 40-50% consumer, 35-40% Govt, and the rest industry/commercial. Up to the 1960’s the Govt spending could ‘pump-prime’ the economy – today that effect is much diminished [just ask W and the Big O].
Today we are a consumer economy based on service sectors, which have multipliers of half that and less than the manufacturing sector. Cutting taxes will not have the stimulus effect needed to propel the economy because of the tax burden that is mainly on upper income individuals. Middle class and low income wage earners are tapped out on debt and the housing recovery (only a little over ½ -way to 2007 levels) will take several more years to benefit these consumers.
Tax cuts have little effect in a consumer economy when working people pay little in income taxes (and real wages for working people have not kept up with the national productivity gains over the decades and many working people have high consumer debts) and most of the tax burden is on the upper income folks -- Bush found that out. Because we have a consumer economy the $700 billions of stimulus under Bush and Obama has little impact.
Increasing our exports/trade policy doesn't do much when only 9% of the economy is manufacturing.
[An aside: Most households in the 1960’s were single-income households, with few two income households.]
5. NASA spending during the post-Sputnik era was running around 3-4% of the Federal budget – today it is less than ½ of 1%.
6. The post-Sputnik era saw technology take off, with an impetus from Government R&D spending and spending to bolster education. The growth of the technology sector eventually went from Govt reliance to the consumer sector.
7. Foreign trade – the good as well as the bad news for the dollar. The continental European countries (Germany, France, Italy, minus England) were coming out of the post-WWII doldrums by the late 1950’s and were very competitive with the U.S. by the 1960’s. The U.S. benefited greatly during this period from the increase in world trade – back and forth. The best year we ever had with the Balance of Payments was way back in the mid-1960’s, before the tax cut (personal rates as well as business taxes) went into effect.
8. And finally, for the Monetarists, the Fed was a little more accommodating in 1960’s in comparison to the 1950’s (when we had three recessions).
So, while the tax cuts were beneficial to sustained growth, they were hardly the only thing at play and were by no means the initiator of the growth during the 1960’s nor the most influential. And all this economic productivity occurred during a decade of civil unrest, protest, and labor-management strife; not to mention sex, drugs, and rock n' roll.
Listen to JFK’s speech on why we are going to the Moon. Then you will understand how a demand-driven economy works and how Fed spending creates jobs and drives innovation and productivity, especially at a time when ALL who worked shared in those productivity gains.