How can the American Economy Be restored

March 2014
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This is an election year, which guarantees that
three key subjects will receive considerable attention: 1.
America’s foreign policy and its effect on aggressive
overreaching predatory states; 2. The Affordable Care
Act’s effect on America’s cost, access, and quality of
healthcare; and 3. How to restore America’s economy
creating growth, jobs, and confidence in the future. One
of these three stands out above the others: how to restore the American economy.
Restoring the American economy is critical to maintaining America’s na-
tional defense and strategic position in the world as well as creating the resources,
both human and economic, to sustain the access and quality of America’s
healthcare system. In recent
election years candidates have
appeared primarily as ideo-
logues espousing the glory of
cutting deficits, cutting taxes,
increasing taxes, increasing def-
icits, or more spending or less
Press control and click to on topic to go to Feature
1. How Can the American Economy Be Restored?
2. Recent Cartoon
3. The Wise Old Owl

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March 2014
2
spending as if any of these was in itself the magic ideological bullet. So putting
politics to one side, what should a candidate be saying who makes sense about re-
storing America’s economy and creating growth, jobs, and confidence in the fu-
ture?
Reality based economics teaches that different circumstances call for differ-
ent policy choices. There are times when many new efficiencies have contributed
to a rapidly growing economy where carefully drafted tax increases will not ad-
versely affect economic growth or jobs and may permit increased government
spending on appropriate programs. Under different conditions, when the economy
is not growing appropriately and there is substantial long term unemployment,
those same tax increases could be very detrimental if enacted. So what might be
good policy in one case may be very bad policy in another.
Recently it was reconfirmed that our economy is still only growing at an an-
nualized rate of 2.6%, that long term unemployment has increased 171% since
January 2008, and that total unemployment remains over 12%, and short term un-
employment as reported by the government remains at 6.7%. So putting politics to
one side, what should a candidate be saying who makes sense about restoring
America’s economy and creating growth, jobs, and confidence in the future?
The candidate should say that in the last 100 years America’s economy has
been in a difficult, prolonged stagnant situation like we face today on several occa-
sions. On three of those occasions the federal government’s policies lead the way
to rapid economic growth, well paying full employment, and restored belief in the
promise of the future. On each of those three occasions the
federal government (including the Federal Reserve) adopted an
essentially identical carefully coordinated policy approach that
encouraged the private sector to provide substantial long term
growth.

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Each time the policies were based on a President looking to what re-
ality based economics teaches would work best under all of the
then present circumstances. On two of those occasions we had
republican presidents, Warren Harding in the 1920s and Ronald
Reagan in the 1980s. To avoid the appearance of being partisan, I will
focus on the third occasion in the 1960s, when John F. Kennedy, a demo-
crat like Barack Obama, set the policy course.
As part of his public educational effort on December 14, 1962 Kennedy
spoke before the Economic Club of New York in a lengthy address explaining his
approach. He explained that our national security depended on the strength of our
nation's economy as much as our military and diplomatic situation. Given this
truth, Kennedy explained that the leader of the free world “cannot afford to be sat-
isfied, to look back or to pause” but that an economically strong United States is
“of vital importance to the [security of the] entire Western World.” Like today,
Kennedy was concerned about the stagnant state of the economy over the preced-
ing five years.
Kennedy was not moved by carefully manipulated sta-
tistics showing that the American economy was creeping
forward. Rather, he focused on what should be our goals say-
ing, “Utilization of existing plant and equipment could be
much higher; and if it were, investment would rise. We need
not accept an unemployment rate of 5% or more, such as we
have had for 60 out of the last 61 months. There is no need
for us to be satisfied with a rate of growth that keeps good
people out of work and good capacity out of use.”
It is striking to think how for the past five years (60 months) the U.S. econ-
omy has limped along with a government that suggests that 6.7% short term unem-
ployment is a rate that lets us ignore real job creation! Today the unemployment

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March 2014
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rate among teenagers is over 21%, for Blacks over 12%, Hispanics over 8% and
for Asians over 6.0%. Looking at similar figures in 1962, Kennedy suggested “this
[kind of unemployment level] might be one of our most serious national
problems.” To Kennedy, “our choice, therefore, boils down to one of
doing nothing and thereby risking a widening gap between our actual
and potential growth in output, profits, and employment-or taking action, at the
Federal level, to raise our entire economy to a new and higher level of business ac-
tivity.”
Kennedy most importantly understood that the solution lay with the private
sector and not increasing the size and reach of the government. He said, “The most
direct and significant kind of Federal action aiding economic growth is to make
possible an increase in private consumption and investment demand--to cut the fet-
ters which hold back private spending. *** The *** best means of strengthening
demand among consumers and business is to reduce the burden on private income
and the deterrents to private initiative which are imposed by our present tax sys-
tem; and [provide] an across-the-board, top-to-bottom cut in personal and corpo-
rate income taxes.”
President Kennedy was not talking about “‘quickie’ or a temporary tax cut”
nor about “giving the economy a mere shot in the arm, to ease some temporary
complaint” like the current administration has tried on and off for the past five
years. Rather, Kennedy believed that “the accumulated evidence of the last five
years” showed “that our present tax system *** [is] too heavy a drag on growth
*** [and] siphons out of the private economy too large a share of personal and
business purchasing power; that it reduces the financial incentives for personal ef-
fort, investment, and risk-taking.”
That being said, was Kennedy, like the current administration, proposing
that we increase government spending, whether we call it stimulus or infrastruc-
ture, and with it government debt to support such spending? “In short [Kennedy

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said,] to increase demand and lift the economy, the Federal Government's most
useful role is not to rush into a program of excessive increases in public expendi-
tures, but to expand the incentives and opportunities for private expenditures.” So
Kennedy rejected “increasing Federal expenditures more rapidly than necessary”
explaining the federal government “must not spend more than can be justified on
grounds of national need” and what it spends must be done “with maximum effi-
ciency.” This certainly would not include what we see today, multimillion dollar
grants to study the mating habits of flies or extravagant government retreats!
What are the key characteristics of the type of major tax cuts that Kennedy
was suggesting? To work, President Kennedy suggested that the cuts “should re-
duce net taxes by a *** sufficiently large amount to do the job required. Too large
a tax cut, of course, could result in inflation and insufficient future revenues--but
the greatest danger is a tax cut too little or too late to be effective.”
The cut should be designed to “increase private consumption as well as in-
vestment.” Thus, “after-tax income could and should be greater, providing strong-
er markets for the products of American industry. When consumers purchase more
goods, plants use more of their capacity, people are hired instead of laid off, in-
vestment increases and profits are high.”
Kennedy elaborated that not only individual rates should be cut,
but “corporate tax rates must also be cut to increase incentives and the
availability of investment capital.” The cuts should be designed to
“stimulate the modernization, replacement, and expansion of our productive plant
and equipment” including “investment tax credit *** [and] liberalization of depre-
ciation allowances.” To make these types of tax “measures fully effective” the tax
reductions must include a broad based corporate and individual reduction to create
private sector “demand.”
In justifying individual tax cuts, Kennedy explained, “those in the lower
brackets, *** are certain to spend their additional take-home pay,” and “those in

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March 2014
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the middle and upper brackets,” will be encouraged to undertake additional efforts
and enabled to invest more capital.”
To Kennedy, tax cuts were an important part of tax reform.
He believed that tax cuts “should improve both the equity and the
simplicity of our present tax system. This means the enactment
of long-needed tax reforms, a broadening of the tax base and the
elimination or modification of many special tax privileges.
These steps are not only needed to recover lost revenue and thus make possible a
larger cut in present rates; they are also tied directly to our goal of greater growth.”
Kennedy recognized that “the present patchwork of special provisions and
preferences lightens the tax load of some only at the cost of placing a heavier bur-
den on others. It distorts economic judgments and channels an undue amount of
energy into efforts to avoid tax liabilities. It makes certain types of less productive
activity more profitable than other more valuable undertakings. All this inhibits
our growth and efficiency, as well as considerably complicating the work of both
the taxpayer and the Internal Revenue Service.”
Just as the current administration argues that the effective
rate is lower than it appears because of special tax breaks, Ken-
nedy chided similar comments in his day, responding “these var-
ious exclusions and concessions have been justified in part as a
means of overcoming oppressively high rates in the upper
brackets--and a sharp reduction in those rates, accompanied by
base-broadening, loophole-closing measures, would properly make the new rates
not only lower but also more widely applicable. Surely this is more equitable on
both counts.”
Clearly a candidate that wants to makes sense about restoring America’s
economy and creating growth, jobs, and confidence in the future should be advo-
cating broad based tax cuts with these characteristics. Kennedy expressed the ben-

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March 2014
7
efits of this approach saying, “I am confident that the enactment of” a tax cut that
meets those criteria “will in due course increase our gross national product by sev-
eral times the amount of taxes actually cut. Profit margins will be improved and
both the incentive to invest and the supply of internal funds for investment will be
increased. There will be new interest in taking risks, in increasing productivity, in
creating new jobs and new products for long-term economic growth.” With re-
spect to unemployment, Kennedy believed this was the one approach that would
lead to “full employment. It will encourage the location of new plants in areas of
labor surplus and provide new jobs for workers *** and reduce a number of gov-
ernment expenditures.”
The current federal government seems focused on the idea that it needs to
raise taxes to eliminate the budget deficit. Think of the $3 trillion in new taxes im-
posed in the last five years. Kennedy also faced this kind of argument based on in-
creased defense and domestic needs. He acknowledged that
“what concerns most Americans about a tax cut, I know, is ***
the deficit in our Federal budget.” Kennedy said he had not been
able to propose “a balanced budget” because “it has been necessary
to augment sharply our nuclear and conventional forces, to step up our efforts in
space, to meet the increased cost of servicing the national debt and meeting our ob-
ligations *** to veterans, ***[and to fight] the recession we found in industry.”
Sounds a lot like what we have or should be doing today.
Faced with reality, Kennedy said, “We shall, therefore, neither postpone our
tax cut plans nor cut into essential national security programs. This administration
is determined to protect America's security and survival and we are also deter-
mined to step up its economic growth. I think we must do both.”
“Our true choice is not between tax reduction, on the one hand, and the
avoidance of large Federal deficits on the other. It is increasingly clear that no
matter what party is in power, so long as our national security needs keep rising, an

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March 2014
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economy hampered by restrictive tax rates will never produce enough revenue to
balance our budget just as it will never produce enough jobs or enough profits.”
Most importantly, Kennedy realized that, “In short, it is a paradoxical truth
that tax rates are too high today and tax revenues are too low and the soundest way
to raise the revenues in the long run is to cut the rates now. *** And the reason is
that only full employment can balance the budget, and tax reduction can pave the
way to that employment. The purpose of cutting taxes now is not to incur a budget
deficit, but to achieve the more prosperous, expanding economy which can bring a
budget surplus.”
That advice was good in 1962 and is even more appropriate today. Kennedy
understood that spending on items like defense and key long term infrastructure
helped prime the economy, because those were needed private sector areas with
excess capacity currently able to expand and provide long term employment. By
the same token, he also understood the need to cut government spending that was
not necessary and would detract from the expansion of the private sector.
Kennedy coupled his tax cut message with a clear understanding that “the
size of the deficit is to be regarded with concern, and tax reduction must be ac-
companied *** by increased control of the rises in expenditures.” He pledged,
with the exception of defense and space, “that the total of all other
expenditures combined will be held at approximately its current lev-
el.” Kennedy stated he had “directed all heads of Government de-
partments and agencies to hold Federal employment under the levels
authorized by congressional appropriations; to absorb through greater
efficiency [higher costs] ***; to achieve an increase in productivity which will en-
able the same amount of work to be done by fewer people; and to refrain from
spending any unnecessary funds that were appropriated by the Congress.” A wise
candidate for office will also espouse a similar commitment to fiscal discipline.

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Kennedy was right when he said it bears repeating: “our practical choice is
not between a tax-cut deficit and a budgetary surplus. It is between two kinds of
deficits: a chronic deficit of inertia, as the unwanted result of inadequate revenues
and a restricted economy; or a temporary deficit of transition, resulting from a tax
cut designed to boost the economy, increase tax revenues, and achieve--and I be-
lieve this can be done--a budget surplus. The first type of deficit is a sign of waste
and weakness; the second reflects an investment in the future.”
History tells us John F. Kennedy was right. The tax cuts put in
place by Warren Harding, Ronald Reagan, and John Kennedy resulted
in our 3 decades of the highest rates of growth during the last century.
Since the enactment of the federal income tax, growth averaged less
than 3% per year other than after the Harding/Reagan/Kennedy cuts. On average
each major cut saw major growth seven out of the succeeding 10 years.
During the seven year expansion started by Reagan’s tax cuts, the economy
created 17 million new jobs. Compare that to the last five
years. Since 1960, federal statistics show that as tax
brackets have come down Federal tax receipts have in-
creased. There are differences between 1960 and now.
One major difference is that most startups and successful
growing employers are no longer traditional corporations.
Today, pass-through entities such as S corporations,
L.L.C.s, L.L.P.s, and the like, represent the overwhelming majority of companies
needed to power a new wave of growth. Most high bracket taxpayers are not the
Rockefellers, but the owners of pass-through entities paying the entity’s tax on its
retained earnings.
So most of those returns no longer represent the freely disposable income of
individuals, but rather the compelled tax paid by the individual owner with the re-
tained non-tax portion remaining in the business enterprise as the capital that funds

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10
inventory, new plant and equipment, new products, and expanded employment.
Thus what Kennedy explained was a key role for reducing corporate taxes is now
equally shared by individual taxes.
The converse is also true. 2012’s hefty increase in upper bracket taxes is a
major reason that employment and productivity stalled in 2013. Any candidate
worth electing should not forget “our practical choice is *** between two kinds of
deficits: a chronic deficit of inertia, as the unwanted result of inadequate revenues
and a restricted economy; or a temporary deficit of transition, resulting from a tax
cut designed to boost the economy, increase tax revenues, and achieve *** a budg-
et surplus.”
Recent Cartoon

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March 2014
11
The economy has been essentially stagnant, with limping growth. To
sustain its direction or see real improvement, consumers need to resume
spending and business to business spending needs to grow. The University of
Michigan’s consumer sentiment survey rose to 80 from 79.9 earlier in March.
While still below February’s final figure of 81.6 it has returned to the right
direction. This appears to be supported by the Commerce Department’s report
that consumer spending and personal income rose by a modest 0.3% in
February. The Institute for Trend Research’s, just published, proprietary
leading indicator fell in March, indicating that “the US economy will be
growing, but at a slower pace, in the second half of 2014 and into early 2015.”
There is a slight hint that wage driven inflation may be threatening the first signs of stag-
flation as pressure to give increases builds at a time when efficiency has not risen. Also
troublesome is the report that contracts to buy previously-owned homes fell 0.8% in February,
to the lowest level since October 2011. The gauge is off 10.5% from the same period in 2013.
Another concern was the fact that The Commerce Department reported that orders for long-
lasting goods, excluding transportation, rose only 0.2%. This is not a good sign for business to
business sales.
The important Institute for Supply Management, Chicago’s measurement of manufactur-
ing activity in the Midwest, fell to 55.9 in March, down 3.9 points below February. Some
economists believe the weather has been a factor.
It is equally likely that many businesses, whose segment of the economy is not showing
signs of real growth, are waiting to see the outcome of the 2014 midterm election and whether
the new Congress can help to re-focus the federal government on growth and job creation.
States with lower taxes and pro-business agendas have outperformed the rest of the country
dramatically. Texas has low unemployment, where Illinois leads the nation. What do you think
is the difference? John Kennedy knew. Give us a call we can help you build your future.
The Wise Old Owl

How can the American Economy Be restored

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