Guns or Butter

by Bernstein, Irving;

  Only two proposed amendments were of general interest—capital gains and the Ribicoff education credit. The former, of course, was an indestructible perennial that came up every time taxes were changed. In the original Kennedy bill in January 1963 one of the basic reforms would be a narrowing of capital gains and that had brought the lobbyists out in force. The Ways and Means Committee actually broadened the gains. The Treasury with presidential backing tried to persuade the Finance Committee to strike the House provision and restore the old rates. The Treasury expected a very close vote because Democrats Anderson, Talmadge, and Ribicoff, along with three moderate Republicans, Dirksen, Morton, and Carlson, seemed doubtful. But in the committee vote on January 17 all six fell into line. The House was reversed 12 to 7.

  The proposal to allow the parents of college students to deduct tuition from their income taxes had long been sponsored by private and opposed by public institutions. The Treasury had firmly opposed this deduction, mainly because of the loss of income, estimated at $700 million the first year and $1.3 billion by 1970. The Ribicoff amendment was artfully drawn to relate the deduction inversely to income in order to parry the charge of helping the rich. It had wide Republican support. But, Barr wrote the White House on January 13, “We have the Committee votes to beat this one.” Ribicoff agreed and did not allow his amendment to reach a vote. Rather, he would take it to the floor of the Senate, where he expected stronger support.

  On January 23, 1964, the Finance Committee approved H.R. 8363 as amended by a vote of 12 to 5. The majority of nine Democrats and three Republicans was exactly as anticipated. The only change was in the no vote; Senator Bennett finally made up his mind and joined the four already against the tax cut.

  The Senate debated the tax bill in a rather mundane fashion for six days. The only modest sparks came from the two big amendments. The administration won handily on capital gains 56 to 25. But Ribicoff came much closer because of strong Republican support. Here Wayne Morse, the Senate’s expert on education, carried the day. He stressed the fact that the Association of State Universities and Land Grant Colleges strongly objected to the amendment; that several private college presidents had told him that they would raise tuition if it passed, shifting the cost to the Treasury; and that, since many private colleges were denominational, this would raise the divisive church-state issue. Nevertheless, the administration barely won by a vote of 48 to 45. The Democratic lines were steady against the amendment 43 to 19, but a strong majority of Republicans joined Ribicoff 26 to 5.

  On February 7 the Senate adopted H.R. 8363 as amended. The vote was overwhelming, 77 to 21. Heavy majorities in both parties supported the tax bill—56 to 11 Democrats and 21 to 10 Republicans.

  The conference committee met between February 10 and 19 and its main task was to resolve the difference over capital gains. It pretty much accepted the Senate version and reported on February 24. The House accepted the report the next day 326 to 83. The day following the Senate approved 74 to 19. At this final stage the opposition had vanished.

  The President could hardly wait to celebrate. He signed the law six hours after the Senate acted on February 26, 1964. He called it “the largest [tax reduction] in the history of the United States … and the single most important step we have taken to strengthen our economy since World War II.” He shared the credit with “our late, beloved President John F. Kennedy” and gave the Kennedy family four pens. He expressed gratitude to Dillon, the Treasury staff, Mills, Long and even Byrd. He informed the public that their income taxes would fall almost 20 percent starting in eight days, that as consumers they would have $25 million more a day for consumption, that corporations would enjoy similar benefits and opportunities. He told everyone that, if they really loved their country, to get out there and spend. No politician could have imagined a more pleasurable task.

  What had Lyndon Johnson contributed to the passage of this important piece of legislation? Dillon had been intimately involved in both shaping the bill and its legislative history. When asked whether Johnson had changed Kennedy’s bill, he said, “Not at all.” His only interest was in “getting the bill passed … and he certainly got it much quicker.” Dillon canceled out the concessions to Byrd because Kennedy was also willing to bring in a budget under $100 billion. Johnson did present an even lower budget, but that was only a “gesture,” not needed to satisfy Byrd.

  Walter Heller, who played a pivotal role in promoting the idea of the tax bill but was not directly involved in the legislative process, was more philosophical:

  The tax cut illustrated a difference between the Kennedy and Johnson approach. Kennedy felt that the way to get the tax cut was to educate the Congress and the country and persuade them to go for it. … Johnson’s idea was, “Let’s get the damned thing passed and demonstrate to the country what it can do.” That, as it happened, was probably the ideal combination, where Kennedy had done much of the educational work, and then Johnson used his incomparable technique to get the thing through.3

  The Revenue Act of 1964 reduced nominal tax rates from a range of 20 to 91 percent in 1963 to 16 to 77 in 1964 and 14 to 70 percent in 1965. The withholding rate of 18 percent in 1963 was cut to 14 percent in March 1964. By 1965 the income tax obligations of individuals were expected to fall by $9.2 billion. The main corporation rate was reduced from 52 percent in 1963 to 50 percent in 1964 and 48 percent in 1965. On the first $25,000 of corporate income the tax rate was cut from 30 to 22 percent. By 1965 the obligations of corporations were expected to be $2.4 billion lower. Thus, the combined reduction for individuals and corporations would come to $11.6 billion by 1965.

  The Keynesians had predicted that this unprecedented and radical tax change would significantly increase consumer spending and corporate investment, thereby giving the economy a big lift to an approximation of full employment. Heller had also told the President that rising incomes would increase net tax flows to the Treasury, which would create a budget surplus that he could use for new and expanded domestic programs. Publicly, of course, Johnson had fully accepted this analysis and had worked very hard to get the Revenue Act passed. Privately, he had some doubts.

  Johnson would say, as Heller later recalled their conversations, “You know, Walter, I’m an old-fashioned economist, and I’m not sure I understand all these new-fashioned ideas, but I’m depending on you.” He understood them all right, but he was concerned that they might not work. During the first two or three months Heller began to worry too.

  In April 1964 Heller went to the White House to inform the President that he must return to the University of Minnesota. Johnson took him for a walk around the oval behind the White House. “After you leave me and go back to Minnesota,” Johnson said, “I’ll come out there and haul you back here and publicly horsewhip you if it doesn’t come through.”

  The Council kept a hawk’s eye on retail sales, and, Heller said, they were “absolutely dead in the water.” Then John Lewis brought in a clipping from the Washington Daily News which read, “Waiters are reporting an enormous increase in tips since the tax cut.” Lewis had written on the clipping, “Now I know what’s wrong. They haven’t been spending it, they haven’t been saving it, they’ve been giving it away!” That, Heller said, “broke the tension.” The American economy had been launched into a gigantic upward roll.

  The indexes of economic activity moved inexorably upward month after month, quarter after quarter. It was as though the law of gravity had been repealed and the numbers had forgotten how to fall. Lyndon Johnson, particularly as his campaign for the presidency gathered steam, became obsessed by these figures. On March 21, 1964, he instructed Heller to prepare a summary of “Economic (Good) News Notes” every Monday, Wednesday, and Friday. Heller asked Secretary Wirtz to send to the Council the Labor Department statistics and other materials in the fields of “employment, wages, prices, productivity and similar economic matters.” Johnson loved to rattle off these numbers. If he met with businessmen, he told them precisely how much the
ir profits had risen. If he talked to labor leaders, he showed them the increase in employment and the decline in unemployment. His speeches and public papers were generously seasoned with good economic news. His section of the annual Economic Report of the President read like the annual report of a corporation that was swimming in cash.

  The statistics were exhilarating. Gross national product in 1958 prices skyrocketed from $569.7 billion in the first quarter of 1964 to $631.2 billion in the last quarter of 1965. Disposable personal income shot up from $423.4 billion in the first quarter of 1964 to $486.1 in the last three months of 1965. Since the savings rate did not change, all of the gain was spent. Median annual family income in 1965 prices increased from $6,444 in 1963 to $6,882 in 1965. The number of poor families, defined as having an annual income of less than $3000 in 1965 prices, fell from 8.5 million in 1963 to 8 million in 1965.

  The number of persons employed, seasonally adjusted, rocketed up from 69.6 million in January 1964 to 73.4 in December 1965, a gain of 3.8 million jobs. The number out of work dropped sharply from 4.1 million in January 1964 to 3.1 in December 1965, a decline of 1 million in the jobless. The unemployment rate, 5.6 percent in January 1964, dropped under 5 percent a year later and was down to 4.1 percent in December 1965. This virtually reached Kennedy’s goal of 4 percent unemployment. Those with jobs worked longer hours. Average weekly hours in manufacturing rose from 40.5 in 1963 to 41.2 in 1965. These employment gains came in the face of an enormous inflow of jobseekers, particularly baby boomers and women, who were attracted by both their need to work and the growing availability of jobs. The labor force grew by almost 6 million between 1960 and December 1965, by just under 3 million between January 1964 and December 1965. According to the CEA, starting in 1963 GNP had to grow at a rate of 3.75 percent annually to hold unemployment constant and this was expected to rise later in the decade.

  Output shot up. The industrial production index (1957–59 = 100) jumped from 127.9 in January 1964 to 148.3 in December 1965. The automobile industry broke all prior records. Business expenditures for new plant and equipment exploded from $39.2 billion in 1963 to $52 billion in 1965.

  Corporate profits surged. In 1965, after taxes, they rose 67 percent over the preceding 5 years and were 20 percent above 1964.

  All of this took place, until the first major military commitment in Vietnam in July 1965, in a period of virtual price stability. The all-commodities wholesale price index (1957–59 = 100) crawled up from 100.3 in 1963 to 100.5 in 1964, and to 102.5 in 1965, most of the increase taking place in the last half of the year. The all-items consumer price index (1957–59 = 100) moved from 106.7 in 1963, to 108.1 in 1964, and 109.9 in 1965.

  In his Godkin Lectures at Harvard in 1966 Walter Heller could not refrain from a bit of crowing:

  The rationale of the 1964 tax-cut proposal came straight out of the country’s postwar economics textbooks. And in turn the tax cut itself—recently described by Dexter Keezer as “a triumph of high-test Keynesian economic therapy”—will richly repay its debt to the textbooks by supplying the classic example of modern fiscal policy and multiplier economics at work. Careful appraisal of the tax cut’s impact on GNP shows a remarkably close fit of results to expectations. And until Vietnam intervened, the tax cut had brought us back to “a balanced budget in a balanced economy”—in fact, by the first half of 1965, Federal receipts had already risen $7½ billion above their previous tax-cut levels, and the Federal budget (NIA basis) was in surplus. So in conception as well as in delivery, it was a textbook tax cut.

  The “careful appraisal” to which Heller referred was a sophisticated analysis by Arthur M. Okun, a member of the CEA staff and later chairman, of the impact of the tax cut which was written during the summer of 1965. How, Okun asked, would the economy have performed if the Revenue Act had not been passed? There would have been modest gains in GNP, disposable income, and consumption, while profits would have slipped and investment would have leveled off. “This no-tax-cut world would have shown rising unemployment and sagging operating rates.”

  Tax reduction transformed this world. Consumers behaved exactly as the Keynesians had predicted and were spending almost all their tax gains. “By the second quarter of 1965, consumption expenditures had registered a remarkable rise of $45 billion from their rate in the last quarter of 1963, … an increase over six quarters … unmatched in our peacetime history.” Consumption was the engine of the boom. The famous Keynesian multiplier of “close to two” proved out. Okun calculated it for 1964–65 at 1.82, that is, a reduction of $1 in taxes produced a $1.82 increase in consumption expenditures. As anticipated, the rise in consumption expenditures from higher business investment was considerably less and needed more time to make its impact.

  Again as forecast, the federal government by the second quarter of 1965 was receiving $7 billion in increased receipts from the tax cut and that figure would continue to rise. State and local governments were getting $1.5 billion more. Okun estimated that ultimately the federal gain would be $10 billion annually and the state and local gains $2.2 billion, “a total that nearly matches the $13 billion of the reduction.”

  He reckoned that the tax cut was responsible for a $25 billion annual rise in GNP by mid-1965, that it would climb to $30 by the end of that year, and ultimately to $36 billion. Okun concluded that “the Revenue Act of 1964 lived up to the intentions and expectations of its advocates and … had delivered a powerful stimulus to economic expansion.”

  In fact, the 1964 tax cut became a legend and a sometimes misused example. Thereafter any President who wanted to reduce taxes would support his argument, regardless of conditions or timing, by citing the success of the Kennedy-Johnson tax reduction. This would be an abuse of the Keynesian analysis and a misreading of history.

  John Maynard Keynes devised a system which was flexible, which offered a variety of tools of economic policy, and which was applicable to many types of economic conditions. Reducing taxes was only one of his instruments. In fact, he wrote The General Theory in the mid-thirties when there was business stagnation and massive unemployment and he urged increased government expenditures to lift the economy. This was certainly not the situation in 1964, when a much larger fraction of the labor force was employed and the economy was growing, albeit at a slow and inadequate rate. Nor was it the condition in the late sixties, when the expenditures for the Vietnam War imposed on an already booming economy created severe inflation.

  Further, the situation in 1964 was unique in allowing for a reduction in tax rates without causing a decline in government revenues, in fact, increasing them. This was because the Revenue Act of 1964 cut the obsolete wartime tax rates which had become a drag on the economy. It was the best of all possible worlds: taxes were lower and the funds available for existing and even new government services rose. But, once the old rate structure was eliminated, that was it. Thereafter a tax reduction would reduce tax receipts and the government would need to borrow or to reduce its services, or both.

  A final speculative note, an “if” of history: How would the American economy have performed if Lyndon Johnson had not taken the U.S. into the Vietnam War in July 1965? A remarkable feature of the great expansion that flowed from the Revenue Act until the latter part of 1965 was essential price stability. Preserving the balance between full employment and steady wages and prices would certainly have been the challenging policy problem in the late sixties. The probability is that the economy would have continued to expand, but that inflation would have set in.4

  3

  The Civil Rights Act of 1964

  PRESIDENT Kennedy had equivocated on civil rights. But he was shocked by the violent racial confrontation in Birmingham, Alabama, in May 1963. Shortly afterward Governor George Wallace “stood in the schoolhouse door” to block the admission of black students to the University of Alabama. In a notable address to the American people on June 11 Kennedy stressed the moral imperative of civil rights for Negroes and promised to send a comprehensiv
e bill to Congress.

  The President delivered his omnibus measure on June 19, 1963. The major titles were the following:

  I. Voting Rights—completion of the sixth grade of school as prima facie proof of literacy for the right to vote in federal elections.

  II. Public Accommodations—persons without regard to race, color, religion, or national origin would have access to hotels, motels, places of entertainment, stores, restaurants, and similar public facilities.

  III. Desegregation of Public Education—the commissioner of education would establish programs to desegregate the public schools and the Attorney General would be empowered to file suit against a school board that failed to comply.

  IV. Community Relations Service—it would counsel and assist local communities in resolving disputes over discriminatory practices.

  V. U.S. Commission on Civil Rights—its life would be extended by four years.

  VI. Federally Assisted Programs—federal agencies which financed state and local programs would be required to withhold funds from any program which allowed for discrimination based on race, creed, color, or national origin.

  VII. Commission on Equal Employment Opportunity—under the law this commission would replace the President’s Committee on Equal Employment Opportunity that had been created by the Kennedy executive order.

  It was clear to the Kennedy administration and the Democratic congressional leadership at the outset that such a bill would confront formidable political obstacles. This was because the Democratic party was hopelessly split: the southern Democrats solidly opposed the bill and the northern Democrats lacked a majority in either house, to say nothing of two-thirds of the Senate for a cloture vote to stop an almost certain southern filibuster. Thus, Republican support in both chambers was indispensable. Two of the key figures, therefore, became William McCulloch of Ohio, the senior Republican on the House Judiciary Committee, and Everett Dirksen, the Senate minority leader. These difficulties also called for starting in the House, where the chances of success were markedly better in part because there was nothing like the Senate’s Rule 22, which allowed for unlimited debate. The administration, however, had the support of public opinion in the nation outside the South.