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The Keynesian Heyday

The election of John Kennedy in 1960 opened the way for the academic Keynesians to bring their ideas to actual government policies.

Fine Tuning

In the days of vacuum tube televisions, a channel selector switched among channels 2 through 13.  A "fine tuning" knob made the incremental adjustment necessary to get a clear picture for a given channel.  (Digital controls have eliminated fine tuning.)

During the Keynesian heyday, economists boldly saw themselves as on the verge of being able to fine tune the economy using incremental adjustments to government policies.  If unemployment was X thousand jobs too high, they foresaw the ability to fine tune fiscal policy, for example, to dial up full employment.  At the time, a 4% unemployment rate was regarded as consistent with price stability in the Phillips curve tradeoff so that was the accepted definition of full employment.

To get the flavor of this period, have a look at the Economic Report of the President:  1962.  This Keynesian manifesto sets out the plan to tame the business cycle and, in particular, to achieve full employment.

The Kennedy-Johnson Tax Cut

"In the course of 1962, the pace of expansion slowed.  By mid-1962 it had become apparent that, given the level and structure of Federal tax rates, the strength of private demand would be insufficient to carry the economy up to full employment of its resources.  Consequently, President Kennedy announced in August that he would propose a major tax bill in 1963, reducing the rates of personal income and corporate profits taxes from levels which had been determined in large part by the need to fight the postwar and Korean inflations.  The year 1963 saw prolonged debate over this measure, and enactment came only in February 1964.  But by mid-1963, increasing confidence that prosperity would be maintained with the aid of the expected tax cut, the continuing support of an expansionary monetary policy, the fuller response of business investment to the 1962 tax measures, and the strong demand for automobiles once again began to accelerate the pace of expansion.  Thus, as the Revenue Act of 1964 became effective, the economy was already moving ahead strongly."

Economic Report of the President, 1965, Chapter 1, pp. 37-38.

Essential Ingredients

The Phillips Curve

Macroeconometric Forecasting Models

Crowding Out

expanded discussion

References:

Heller, Walter. Monetary vs. Fiscal Policy (a dialogue with Milton Friedman). 1969.

Economic Report of the President:  1962.  This Keynesian manifesto sets out the plan to tame the business cycle and, in particular, to achieve full employment.


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