Tuesday, September 26, 2017

Larry Kudlow And Brian Domitrovic's 'JFK And The Reagan Revolution'

Just read this through and i am quite astonished.  First by the simple fact that i was never aware of Kennedy's huge contribution.  I should have been.  Yet the counter narrative has blinded me and everyone else for my entire life.   My personal opinion regarding Kennedy has now jumped from a B to an A.

The results speak for themselves.  Two key policies ensures prosperity regardless.  Add in two or three other policies as well and it can be unbeatable.

Our true enemy has been economic ignorance from two groups.  The first been the general mass of politicians and their staff of government employees whose economic sense is zero and banally self serving.  The second been economists themselves.

That Clinton was forced to accept good policy by the house is telling.  It was not obvious at the time.

The take home is that it is possible to operate a naturally prosperous economy.  Doing so has been the captive of pure ignorance and mental midgets.

Book Review: Larry Kudlow And Brian Domitrovic's 'JFK And The Reagan Revolution'


It’s hard to imagine any of this nowadays, but if you were for income tax cuts in the 1970s you were an oddball.  Neither Democrats nor Republicans were in favor of reductions in the tax burden.  Jimmy Carter and George H.W. Bush both said tax cuts would unleash inflationary pressures.  No less than Alan Greenspan observed about tax cutting economist Arthur Laffer back then that “I don’t know anyone who seriously believes his argument.”

In light of the above, it’s no surprise that the 1970s were a relatively unhappy time for the U.S. electorate.  With economic policy explicitly anti-production, growth wilted and Americans properly sulked.  History is in many ways repeating itself in the 21st century.  As Larry Kudlow and Brian Domitrovic write in their essential new book, JFK and the Reagan Revolution: A Secret History of American Prosperity, “Fifteen-plus years into the twenty-first century, Americans are in a sour mood.  They are cranky.  Unhappy.”

It’s no mystery why.  As Kudlow and Domitrovic note, since 2000 economic growth in the U.S. has been subpar to say the least.  Democrats and Republicans have seemingly forgotten the basics to prosperity.  In writing their book, the authors set out to remind readers that life – and by extension economic growth – isn’t that complicated.  It’s as basic as a low tax/sound money policy mix.  Years ago Kudlow’s teaching of the correct policy mix was broadened to include free trade and light regulation, and that hasn’t changed.  He still believes that, as does Domitrovic. But in their first co-authored endeavor the authors have correctly decided to hammer away on taxes and money.  Their explicit point is that our sour mood needn’t be permanent.  They’re very right.

With an eye on bringing life to the policy mix of economic growth that they view as “human,” “impressive,” “fulfilling,” and “good,” the authors first bring the reader back to the 1960s and John F. Kennedy’s (JFK) presidency.  Though JFK was a Democrat, and was historically associated with American-style “liberal” policies, he’s experienced a modern revival in the eyes of many on the right owing to his stances in favor of tax cuts in concert with maintenance of a strong dollar.

The authors should be cheered for what they’ve done.  While it’s increasingly known that JFK swung more to the right than has been broadly reported by the mainstream, up until JFK and the Reagan Revolution there hadn’t really been any book expressly written to focus on the supply-side (all demand begins with production first, so “supply side” is all about reducing the tax, regulatory, trade and monetary barriers to production) history of JFK’s presidency.  The latter is important on its own, but with the future in mind, it’s crucial: somewhere along the way the focus on growth became a partisan issue as Democrats and Republicans fought over what is obvious.  Kudlow and Domitrovic have done the essential whereby they’ve shown that growth isn’t a partisan concept; that a Democrat and a Republican (Ronald Reagan) adopted similar policies to great, economy enhancing effect.

The authors assert that "Both Kennedy and Reagan identified substantially cutting income tax rates and getting the dollar strong and stable as the specific policy mix that would let the private sector, which is to say the real economy, thrive.” Life is once again, very simple.  So is economic growth. 

 Let’s not forget that an economy is but a collection of individuals.  Broken down to the individual we can easily see that no individual is made more prosperous if more and more of his income is confiscated through taxation.  And as individuals take money in return for their production, their prosperity is surely not enhanced by devaluation of the very dollars, Pounds, euros, yen, and yuan they earn.  Economists in the discredited economics profession have for the longest time believed in high taxes, and they still believe devaluation is great.  The authors are too kind to give the economics profession the shellacking it deserves, but they implicitly do.

Indeed, in their book non-economists like Douglas Dillon, JFK, Jude Wanniski, Robert Bartley, Jack Kemp and Ronald Reagan are the heroes.  Economists like Paul Samuelson, Robert Solow, James Tobin, and Walter Heller are not.  No doubt credentialed economists of the heterodox variety such as Arthur Laffer and Robert Mundell get their proper due as intellectual forces behind the growth revolution chronicled, but the fact that Kudlow and Domitrovic properly lionize them is yet another implicit indictment of the economics profession.  That is so simply because Laffer and Mundell’s views were well outside the low-growth economics mainstream of the 1960s and 1970s.  Kudlow and Domitrovic are celebrating common sense in JFK and the Reagan Revolution, they’re celebrating a removal of needless governmental barriers to production, and most of all they’re celebrating the dynamic human action that is always and everywhere the result of smaller government.  This is important simply because modern economics is all about charts and equations.  Thankfully there’s nothing of the sort in the book being reviewed.  The authors are implicitly concluding that economics as practiced by the credentialed is a sham. Amen.

Kudlow and Domitrovic’s history begins with the situation inherited by John F. Kennedy.  Economic growth in the 1950s had been very much stop & go, and Kennedy was eager to find a way out.  Interesting about the time in question was that the top tax rate on income was 91 percent.

Readers will understandably cast a skeptical eye on such a number.  Who, after all, would pay such a high rate? And that’s the broad point of the authors.  They found that thanks to an increasingly complicated tax code top earners typically paid “an average rate of tax that was well below 50 percent.” As for the Americans who made more than $100,000/year (the top .05 percent of all earners), the effective tax rate averaged out to 36 percent.  Getting right to the point for those who view all taxes through a class warfare prism, the authors cite a report from a Kennedy administration economist (Stanley Surrey) that revealed how “high tax rates redound to the benefit of the well-connected.” They also redound to politicians who see their power increase since each tax hike creates a tax giveaway opportunity for them.

More important with prosperity in mind, the fact that few paid the 91 percent rate doesn’t excuse it, nor does it signal pro-growth tax policy obscured by high headline rates.  What we see in the nosebleed rates that JFK inherited is that taxes are increased so that politicians can reduce them through favors.  A high rate of taxation is the surest sign of an incredibly complex tax code that rewards those who do as the government says, as opposed to what market signals dictate.  Consider the unseen here.  Imagine the growth lost in the high tax 1950s thanks to tax rates that could only be lowered insofar as the American people did as politicians desired.  Consider the unseen now.  Tax rates are still way too high, and even now they can be reduced only if Americans do as the political class wishes.  What have we lost?

So while Kennedy perhaps instinctually wanted lower tax rates in concert with a less complicated tax code, and was very explicit about his belief in a sound dollar (“…the dollar must be protected…”), it can’t be forgotten that his Council of Economic Advisers (CEA) was staffed with – you guessed it - credentialed economists almost totally in the bag for John Maynard Keynes.  It’s almost redundant to mention “economists” and “Keynesian” together.  Whatever Kennedy believed, he was largely being advised by economists who viewed government spending as equal (and to some, better) to private savings and investment when it came to boosting economic growth, who saw currency devaluation as the best way to increase exports, and who viewed prosperity (your reviewer is laughing as he types) as something to be managed by economists as a way of avoiding too much….prosperity.  About the latter, the confused economics profession (another redundancy) believes almost to a man and woman that booming economic growth is the cause of inflation, thus explaining why this profession would like to manage it if allowed.

The views inside Kennedy’s CEA largely informed his administration’s early economic policies (“the federal budget can and should be made an instrument of prosperity and stability”) that had little to do with freeing up the private sector, and lots to do with Congress consuming wealth always and everywhere produced in the private sector.  It didn’t work very well.  The authors gleefully featured a few choice lines from a 1962 Kennedy CEA report that is venerated to this day by the (insert Donald Trump’s favorite pejorative here) economics profession about how “The single most important stimulant to investment is the…full utilization of capacity…During periods of economic slack, estimates of future demand are relatively pessimistic, and many prospects are foregone which would appear profitable under conditions of high demand.”

Kudlow and Domitrovic’s unveil of the droolings from inside the CEA was instructive for it showing how divorced economists were (and still are) from reality.  Kennedy was up against some really silly people, but in fairness Reagan suffered some of the same weak-kneed thinking during his presidency as the authors acknowledge.  The world has evolved, but economists generally haven’t.  They still think growth can be planned, that spending is stimulative, that devaluation is good, and that inflation is caused by prosperity.  What’s a lot of fun is how the authors respond to the ballyhooed CEO report.  The latter is worth the price of the book alone.  At one point they note how Peter Thiel (an early Facebook investor) and Mark Zuckerberg surely did not base their decisions about expanding the social media giant with usage of U.S. “economic capacity” in mind….Their response is great.

The good news is that the CEA economists eventually lost influence at which point the Kennedy Treasury department gained it.  Out went the fabulist models of economists, and in came the real world solutions of people like Treasury secretary Douglas Dillon.  Dillon, like Surrey, was in favor of sound money and tax cuts.  Of great importance about the cuts, they were not to be the temporary ones desired by the CEA; rather they would be permanent.  For tax cuts to stimulate economic activity, they must reduce the penalty levied on work.  As the authors put it, “a Keynesian tax cut sees to it that individuals keep more of what they are already earning.  A marginal tax cut enables individuals to keep a larger percentage not only of current earnings, but of greater earnings in the future.”

And so it went.  On August 13, 1962 Kennedy gave a speech in which he proclaimed that “Our tax rates, in short, are so high as to weaken the very essence of the progress of a free society, the incentive for additional return for individual effort.” Kennedy’s Keynesianism had been shed, or at the very least it had been pushed a little bit to the side in favor of better policies that actually had something to do with economic growth.

Kennedy got his tax cut (91 percent to 70 percent at the top end, 20 percent to 14 percent at the bottom end) through Congress by 1963, but the U.S. Senate proved quite a bit more deliberate per its design.  Then tragedy struck with Kennedy being felled by an assassin’s bullet in November of 1963.  The authors note that Kennedy had scripted discussion of tax cuts for later that day in Austin.  He never got to give the speech.

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