All Terrain Thinking

A Compendium of things I think are Important

Economics: It's not just whats' in your wallet

The theoretical basis for fine-tuning the economy and speeding up the growth process can be demonstrated with the AS - AD diagram. The shift in the AS curve from AS to AS' can be thought of as a shift in potential output which is the result of some combination of increases in inputs and productivity. Where the economy actually ends up depends upon the shift in aggregate demand. In the example below, the shift in AD matches the shift in AS - the result being that output expands with no upward pressure on the price level. If the demand curve shifts out further than shown, the result will be a higher level of output and a higher price level.

It wasn't until after the Summer of 1961, however, that the policies derived from the theoretical discussions of growth began to take shape. By then the tax cutters had gained the upper hand in the debates over the proper course for government policy and by the Fall of 1962 the first piece of the tax cut plan was in place. In September and October new depreciation schedules were adopted and the Investment Tax credit bill was passed, initial steps toward faster growth.

If there was to be a second step, it would have to be after a significant national debate that in many respects resembles the one that would take place in twenty years. The budget balancers had assembled some powerful spokespeople including President Eisenhower who spoke in favor of not only a balanced budget, but elimination of national debt. President Kennedy, sounding very much like Keynes thirty years earlier, indicated that our choice "is not between deficit and surplus but between two kinds of deficits: between deficits born of waste and weakness and deficits incurred as we build our future strength." The secret was the multiplier, "the $8-9 billion added directly to the flow of consumer income would call forth a flow of at least $16 billion in added consumer goods and services." Finally, three months after President Kennedy's assassination, the second step was taken with passage of the Revenue Act of 1964 - a combination of tax reform and tax reduction. Individual income taxes were cut and the progressivity of the tax schedule was reduced, while corporate taxes were cut and the investment tax credits of 1962 broadened. We had now seen the adaptation of the Keynesian anti depression model to deal with recessions.

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