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Chapter 1

STORMY WEATHER

T

he air hung heavy on Thursday, January 19, 1961, asAmerica’s youngest-ever president-elect spent his final day preparing to takeoffice. As John F. Kennedy spent the morning meeting with the outgoingpresident, Dwight D. Eisenhower, a storm was gathering. By nightfall, athunderous blizzard would set in, interfering with inauguration eve festivitiesand leaving ten thousand cars abandoned on the streets of metropolitanWashington, D.C. But for now, a different storm occupied the youthfulstatesman: an economic one.

   This was thesecond time Eisenhower and Kennedy had gotten together since Kennedy’s narrowelection victory over Eisenhower’s vice president, Richard M. Nixon, theprevious November. It was Eisenhower’s last chance to brief his successor, andhe touched on several of the worrisome matters facing the nation. He advisedKennedy to put troops in Laos so as to stifle the Ho Chi Minh Trail, whichNorth Vietnam was developing to make a push into South Vietnam. JFK would nottake this advice.

   Kennedy did takeseriously Eisenhower’s economic concerns. Ike insisted that Kennedy dosomething about the increasing degree to which foreigners were coming to theU.S. Treasury to trade in their dollars for gold at the guaranteed rate of $35per ounce. The $1.5 billion in yearly “dollar dumps” by foreigners appeared toindicate a growing lack of global confidence in American economic leadershipand performance. If left unchecked, the flight from the dollar couldprecipitate an economic crisis at home and endanger foreign policy goals. JFKsummoned his treasury secretary–designate, C. Douglas Dillon, to this portionof the meeting. Dillon’s presence surely conveyed the message that JFK wastaking Ike seriously on the issue. Dillon was a Republican and until two weeksbefore had been Eisenhower’s undersecretary of state.

   When Kennedyleft the White House just before noon, he headed to the residence of a friendfor a briefing by his incoming labor secretary, Arthur Goldberg. Goldberg toldhim that the number of Americans who were unemployed was rising sharply,possibly to the level of 5.5 million, a staggering 50 percent jump in the spaceof one year. Kennedy left the home where he had met Goldberg and assured thepress, “We’ll have something to say in a few days” about how to tackle theunemployment problem. Then he was off to a lunch at a gathering of the leadersof the labor unions making up the AFL-CIO. After a standing ovation on hisentrance, Kennedy told this group that the major challenge he faced was“maintaining our standing in the free world.” George Meany, the AFL-CIOpresident, relayed afterward that Kennedy had insisted that “the Nation’sstanding . . . depended on the domestic economy, and that his first concern was,”quoting the president-elect, “to ‘try to get this country moving forwardagain.’ ”1

   Kennedy wastalking about the sluggish economy, but the next day hundreds of military menwho had been brought in for the inauguration took that charge literally as theyshoveled out the nearly two hundred cars that had been abandoned in the snow onPennsylvania Avenue. They succeeded in clearing the way for the inauguration,and right on schedule, on a platform in front of the Capitol, Kennedy deliveredhis enormously and justly famous inaugural address in the clear cold.

   The fame ofKennedy’s greatest line—“ask not what your country can do for you—ask what youcan do for your country”—has overshadowed the fact that the first issue,foreign or domestic, that John F. Kennedy brought up in his inaugural addresswas poverty. “For man holds in his mortal hands the power to abolish all formsof human poverty,” he said, reading the second sentence of the second paragraphof the 1,366-word script, after he had dispensed with the salutations.

   Kennedy returnedto the theme three further times in the fourteen-minute address. At thefour-minute mark, he said, “If a free society cannot help the many who arepoor, it cannot save the few who are rich.” A moment later, speaking of our“sister republics south of our border,” he called for “a new alliance forprogress—to assist free men and free governments in casting off the chains ofpoverty.” And five minutes after that, he called on the nation “to bear theburden of a long twilight struggle . . . a struggle against the common enemiesof man: tyranny, poverty, disease, and war itself.”

   As Kennedy hadcomposed the speech with the help of his aide Theodore Sorensen in the weeksprior to the inauguration, he had told Sorensen to identify and apply the“secret” of Abraham Lincoln’s Gettysburg Address. One of those secrets wasaddressing the most pressing concerns of the moment, and it was no accidentthat Kennedy devoted, comparatively, so many precious words to poverty in aninaugural address that he was determined to make a historic one. At the time ofhis inauguration, nearly five and a half million Americans were out of work,eligible for an average of $31 a week, for half a year, in unemploymentinsurance.2

   The recessionresponsible for the growing unemployment of January 1961 had hit the previousApril, the month before Kennedy stunned the political establishment by winningthe Democratic primary in West Virginia, and the recession itself was only halfof the problem with the American economy. The other half was that it wasneither unprecedented nor surprising. Recessions were becoming rather the normover this part of an era that we often today refer to as “postwar prosperity.”The 1960–61 recession came on the heels of two that had already occurred duringthe eight years of the Eisenhower administration. At the time of Kennedy’sinauguration in January 1961, the United States had spent twenty-seven of theprevious ninety months in economic contraction.

   Yes, whenKennedy entered office, Americans had spent 30 percent of the previous eightyears in recession. This figure is so unusually large that it is difficult tofind comparable periods in all of American history. For example, from 2000 to2015, not a particularly good economic era, the economy was in recession fortwenty-six months, or 14 percent of the time. From 1983 to 2000, the UnitedStates was in recession for all of eight months—4 percent of the time.

   That the 1950swere not years of consistently expansive, ever-blooming prosperity is asurprise to many Americans, who are given to think that the first full decadeafter World War II was phenomenal economically, perhaps the greatest era ofprosperity that there ever was. According to popular lore, in the 1950s jobswere abundant, they paid well, they were for life, you could raise a bigfamily, afford a new suburban house, several cars, and then some.

   It’s true thatthe 1950s saw some notable expansions of prosperity. Suburbanization was infull swing. The number of single-family homes in the nation was in the processof increasing by eleven million over the decade, a jump of over a third.Televisions, appliances, and cigarettes were flying off the shelves. Spendingon sports, recreation, and foreign travel was at high levels. By 1958, peoplewere devoting a quarter more money to eating out than at the beginning of thedecade. Advertising came into its own, accounting for $10 billion of thenational economy, the same share as the market for new cars.

   However, theprosperity of the 1950s was constantly interrupted, and was experienced by ashrinking share of the American people. From 1949 through 1960, the Americaneconomy fell into recession four times. Four recessions in eleven years—adubious feat that the economy has accomplished only twice since 1929. (Theother occasion was 1970–81, when Kennedy’s economic policy was forsaken.) Therewas a recession in 1948–49, in which the ranks of the unemployed swelled tofour million. There was a recession in 1953–54, in which unemployment again hitfour million (with another half million giving up on work altogether). Therewas a recession in 1957–58, in which unemployment moved up past five million.And there was the recession that provided the context for John F. Kennedy’svictorious campaign for president in 1960, the one that was still lingering ashe asked the American people to “ask not what your country can do for you.” Inthat recession, unemployment again hit five million.

   Serialrecession—a downturn every three years or less. This was the predicament of theAmerican economy in the years in which Kennedy came of age as a politician,when he was a congressman, senator, and presidential candidate. If anything wasclear to the preternaturally ambitious JFK in 1961, it was that if he wanted tomake a difference as president in the 1960s, he had to identify and solve thisproblem—a reality he acknowledged more than implicitly in his own inauguralwords. Serial recession had to stop in favor of uninterrupted growth.Otherwise, Kennedy would prove to be an ordinary, a status quo, a caretakerpresident. The Kennedy hype and “mystique” would all be for naught, a con job,cover for incompetence, if the fledgling young president could not “get thiscountry moving forward again.”

   What was holdingback the economy so persistently in the 1950s and early 1960s? The governmentwas—by design, as hard as that may be to believe today. The income tax rates ofthe United States were enormously high during this period, far above anythingwe are familiar with today. The top rate of the federal income tax was 91percent: no misprint, 100 minus 9 (today’s top rate is about 40 percent). Ifyou were a top earner, a member of the upper echelon of the “1 percent,” as wesay today, you had to fork over upwards of 91 cents for every dollar you madeover a certain threshold.

   It was not onlythe ultra-high incomes that had to deal with big tax rates. There weretwenty-four levels, or “brackets,” in the income tax code. Every time you madea little more money, your extra earnings—even if just for a cost-of-livingincrease to keep up with inflation—were taxed at the highest rate your incomehad been subject to before, or your raise threw you into an even higher taxbracket.

   The firstbracket hit a typical individual with a yearly income of $700 (some $5,600today) with a rate of 20 percent (today’s bottom rate is 10 percent). Afterthat, rates increased a few percentage points with every few thousand dollarsin further income, to 22, 26, 30 percent and on up, all the way to the finalnosebleed rate of 91 percent, which affected those reporting income of over$400,000 per year.

   Though the highrates might have been defensible when the government was desperate for moneyduring World War II and the Korean War, in peacetime they served to stifleeconomic initiative and growth. Every time people started to earn more money, agreater portion of their income was siphoned away to the government. And everytime they started to earn less money, their tax rates went down, meaning theygot to keep a greater share of their income than before. Incentives in thiscode of “progressive” income tax rates were backward. Doing well came withproportionately lower take-home income, and doing poorly with tax relief.

   When RepublicanDwight Eisenhower ran for president in 1952, he indicated that he wanted taxrates to go down. They were plainly too high. He had a condition, however:spending had to fall first. The editorial page of the Wall Street Journalagreed with Ike. In a telling 1953 editorial, the Journal wrote, “GeneralEisenhower and [Republican] Senator [Robert A.] Taft [of Ohio], of course, havethe right idea. The way to talk about tax reductions is to talk about spendingreductions. So long as we have a $75–79 billion budget and a $5–10 billiondeficit, it’s a waste of time to talk about lower taxes. When we have a budgetin balance tax reductions can follow automatically. You can’t unlock the doorwith any other key.” This remained the posture of the editorial page of theJournal (and many Republicans) on tax cuts under its editorship by VermontRoyster through the 1960s, including the era of the Kennedy tax cut. Firstspending cuts, then tax cuts. Or, as actually happened in the 1950s: no taxcuts, because spending cuts never came.3

      There weremoments in the early Eisenhower years when members of the administrationconsidered tax cuts in the expectation of future spending declines. Eisenhoweroverruled such suggestions. Instead, he opted for accelerating federalspending, whereby programs already planned would be put in place sooner ratherthan later. In seeking to spur general economic activity by boosting governmentexpenditures during a recession—the classic “Keynesian” alternative—Eisenhowerguaranteed that he would never cut income tax rates. There would always be adeficit to take care of. Eisenhower himself had to quash the idea, floated byadvisers, that he was intent on cutting taxes at some point in hisadministration. In a press conference in 1953, he said, “In spite of somethings that I have seen in the papers over the past 8 or 9 months, I personallyhave never promised reduction in taxes. Never.”4

   The big progressiveincome tax code ensured the frequency of economic slowdowns in the postwarperiod. Economists at the time actually agreed on this point, arguing that thetax rates kept the economy on an even keel. The tax code’s sharp progressivitywas an “automatic stabilizer,” a term coined in the 1940s, whenincome-taxes-for-everyone first came in.

   The logic wentlike this: As people made more money during economic expansions, they werethrown into higher tax brackets, and the government collected a greater proportionof national income than before. The effect of the expansion was thereby dulled,a mild recession would hit, and people would fall into lower tax brackets astheir income declined. This would amount to an effective tax cut, and anexpansion would start anew.

   Small boom andsmall bust, small boom and small bust, with inflation held off because thegovernment was still guaranteeing foreigners the dollar for $35 per ounce ofgold, as arranged at the Bretton Woods monetary conference in New Hampshire in1944. This was the mild course that the economy was on, thanks to progressivetaxation and the slim link to gold in the Eisenhower years. It was, in theoryat least, a way to ward off both runaway booms, with their inflation andshortages, and depressions, with their inhuman levels of unemployment.

   Three thingswere clearly wrong with this state of affairs. The first was that recessionswere too frequent. That of 1960 was the fourth in eleven years. They werecoming so often that not all of those laid off in one recession could find ajob by the time the next one hit. The “structurally unemployed” were a growinggroup.