LESSONS LEARNED #55: “Liberals are all for trickle-down economics as long as the wealth trickles down from those who support liberals.” -Old Pithy

Posted by PITHOCRATES - March 3rd, 2011

 JFK Governed as a Conservative

We’ve had two ‘trickle-down’ administrations in recent times.  Both JFK and Ronald Reagan were proponents of supply-side economics.  Between these two administrations we had a few Keynesians (LBJ, Nixon, Ford and Carter).  JFK and Reagan cut tax rates.  The Keynesians never lowered the tax rate lower than JFK’s.  Reagan did.  But not the Keynesians.

JFK was a Democrat.  But he governed as a conservative.  He was strong on defense.  Even got us into Vietnam to prevent the dominoes from falling in Southeast Asia.  And he was business friendly.  But that doesn’t stop Democrats from loving him, though.  Most probably don’t know anything about his conservative side.  They think about Camelot.  Jackie.  John John.  “Ich bin ein Berliner” (the big Cold War speech after the Soviet Union built the Berlin Wall).  Landing a man on the moon and returning him safely.  “Ask not what your country can do for you; ask what you can do for your country.”  And the civil rights stuff.  Not that he was a hawk when it came to war (Bay of Pigs-sort of, Cuban Missiles Crisis and Vietnam).  And a tax cutter.

LBJ may have been JFK’s vice president but he was no JFK.  Kennedy wanted to build a strong economy and he believed that started with making a business-friendly environment.  Which he did.  Johnson, on the other hand, was a big, old school, liberal.  To him businesses were just cash piñatas for the government to whack.  He wanted their money.  Because he wanted to spend it.  And boy did he.  He exploded the role of government in our lives.  Increased taxes.  Increased regulation.  And increased the government bureaucracy.  He called it his Great Society.  And he gave FDR‘s New Deal a run for its money.

JFK’s Tax Cuts Stimulated Economic Activity

When Kennedy became president, there was a bit of a recession going on.  Unemployment got as high as 6.7% in his first year.  And the top marginal tax rate was 91%.  When he looked at the two the answer was obvious to him.  With a top marginal tax rate of 91%, there was little incentive to invest.  If your earnings exceed a certain amount, you only kept 9 cents of each additional dollar?  So why bother?  Like Billy Joel said, “You can pay Uncle Sam with the overtime.  Is that all you get for your money?”  Or like George Harrison said, “There’s one for you, nineteen for me.  Cause I’m the taxman.”   

No one likes paying taxes.  Especially confiscatory taxes.  It’s why the Beatles left the UK.  All you need may be love.  But even hippies want to keep their money.  And JFK understood this.  High taxes discouraged investment.  And drove some business away.  So he put together an economic plan that included cuts in the tax rates.  He brought the top marginal rate from 91% to 70%.  And how did that work?  Not too bad.  Based on the numbers.

In the four years following his tax cuts, tax receipts increased 41%.  So he brought more money into Washington by cutting tax rates.  And it gets better.  The unemployment rate went down 33% (from 5.7% to 3.8%).  And GDP increased 35%.  In the technical language of economists, these numbers are awesome.

The LBJ/Nixon Policies End the JFK Economic Expansion

Well, the party wasn’t going to last.  Thanks to Lee Harvey Oswald.  JFK was dead.  Assassinated.  And LBJ took the oath of office in Air Force One before leaving Texas.  Who can forget the image of a grief-stricken Jackie as Johnson took the oath?  Much like with the assassination of Lincoln, the consequences of that action was to forever change the country (we all wonder how Reconstruction would have gone with Lincoln).  JFK was gone.  LBJ was in.  And he was bringing his Great Society with him.  And the size of government would never be the same.

Johnson raised taxes in his last 2 years to pay for the massive federal spending.  Nixon cut them.  He brought the top marginal rate back to the Kennedy level.  But he didn’t cut spending.  And to keep up with the spending he started printing money.  Gold started flying out of the country so he decoupled the dollar from gold, igniting inflation.  The heady days of the JFK economic expansion were over.  Looking at a period that included the last 2 years of LBJ’s term and Nixon’s 6 years, it’s not a pretty picture.

Tax receipts soared 77% to pay for all that government spending.  And, not surprisingly, the unemployment rate soared, too.  It went from 3.8% to 5.6% (an increase of 47%).  GDP shot up an impressive 80%, too.  Landing on the moon, Vietnam and the Great Society created a lot of economic activity.  But that economic activity wasn’t real.  It was a bubble.  Paid for with high taxes and printed dollars.  So prices were high thanks to inflation.  And a lot of us didn’t have a job.  And this is what Carter got when he entered office.  Malaise.  Stagflation (high unemployment and high inflation).  And something we called the misery index (the sum of the unemployment and inflation rates).  Carter was not going into the 1980 election with a lot going for him.  And the Iranian Hostage Crisis didn’t help any either.

Ronald Reagan Cuts Taxes, Stimulates the Economy and Wins the Cold War

Then came Ronald Reagan.  He put Carter out of his misery by winning the 1980 election.  Then rolled up his sleeves.  And got to work.  When he came into office the top marginal tax rate was 69%.  By the time he left it was 28%.  The Left called him reckless and irresponsible.  That he ran high deficits.  And exploded the federal debt.  Well, yes, both of these did increase during the Reagan years.  But it’s not because of the tax rate cuts.  Those were caused by spending more money than the treasury collected.  And, believe you me, the treasury really raked it in during the Reagan presidency.

In 1981, tax receipts were about $600 billion.  In 1990 (adding in the first year of George H.W. Bush), tax receipts were about $1 trillion.  In other words, the Reagan tax rate cuts increased tax receipts by 72%.  The treasury collected more tax dollars at the lower tax rates.  So there is no way no how you can blame deficits and debt on the Reagan tax rate cuts.  And it gets better.

During the Eighties, the unemployment rate fell 26%.  And the GDP rose 86%.  Lower tax rates.  Higher tax revenue.  Lower unemployment.  And a surge in economic activity.  Wow.  Can it get any better?  Why, yes.  Reagan spent the Soviet Union into defeat in the Cold War.  They just couldn’t keep up.  Caused a lot of trouble on the other side of the Iron Curtain.  Long story short, after his presidency, Eastern Europe would be free of Communism.  And the Berlin Wall would be no more. 

Supply-Side Economics Works

The moral of this lesson?  Supply-side (aka, trickle-down) economics works.  It worked for JFK.  And it worked for Reagan.  What doesn’t work is the Keynesian economics of LBJ, Nixon, Ford and Carter.  They grew government.  Increased government spending.  Giving us higher taxes, higher unemployment, higher inflation and malaise.  The only thing that trickled down was their misery.

So if trickle-down can fill the federal coffers why do liberals hate it?  Because those who support supply-side economics are typically in the private sector.  Have jobs.  Don’t belong to a union.  And don’t need any help from government.  You put that all together and the answer is clear.  These people don’t lobby liberals.  So what good is their wealth when no part of it makes its way to liberal pockets?  Like Big Labor?  Or public sector unions?

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