Case Studies
Full Employment
 The lessons of the depression and war convinced economists and politicians alike that the government could prevent hardship and promote prosperity by manipulating taxes and spending.
Ultimately it was the war that put an end to the Depression. By 1944, twelve million men and women were in uniform, and 66 million more had jobs supporting the mightiest war machine. After WWII there was a fear that the economy could slip back into a Depression if the government’s spending used to maintain full employment for the war effort was removed. FDR introduced a second Bill of Rights which included the right to a useful and remunerative job in the industries, or shops, or farms, or mines throughout the nation. Out of this came the Full Employment Bill. Before the bill was passed FDR died, and Vice President Harry S. Truman took over the office of the President. As President Truman signed the Employment Act of 1946 which no longer referred to full-employment instructing the government instead to promote maximum employment, production, and purchasing power. The passage of the Employment Act of 1946 marked the commitment of the government to use its considerable power to insure that prosperity continued.
Dwight Eisenhower and Automatic Stabilizers
 Dwight Eisenhower, known as Ike was swept to victory in 1952, the first Republican president since Herbert Hoover. Like Hoover, Eisenhower inherited a prosperous economy. And like Hoover, Eisenhower was forced to watch as that economy slid into a recession. Hoover responded with a large tax increase that deepened the depression. However, Ike did not make changes in taxes rates. He believed that if you just keep the tax rate stable, revenues will automatically fall when the economy falls because people will have less income. The revenue will rise when the economy rises because people will have more income and that exercises a certain stabilizing effect on the economy. Ike took advantages of these stabilizer to bring America out of the recession of 1954.
| Comment & Analysis by Richard Gill In 1954 when GNP began to fall, federal tax revenues also began to fall. Not because of any plan but simply because there was less taxable income. This meant relatively more money in the hands of consumers, which, in turn, meant that private spending did not have to fall as much. Instead of the economy spiraling down into a Great Depression, private spending was maintained at a relatively high level and the fall in the national income was cushioned. |
The Kennedy Tax Cut
 John F. Kennedy took office as the country was already beginning its recovery from the Recession of 1960, but unemployment remained high. Kennedy’s advisors realized the government would soon be taking in ore than it was spending. That surplus would stop economic growth, well short of full employment. That could be corrected in two ways: by tax cuts or increased expenditures. Kennedy was committed to tax cuts despite calls from John Kenneth Galbraith, a long-time friend, who lobbied that social programs on the behalf of the poor were in need of more support. The Treasury Department was dubious about a big tax-cut and wanted only a 4 billion cut. Kennedy advisor and chairman of the Council of Economic Advisors Walter Heller was pushing for a 12 billion cut. Kennedy tried to sell the $12 billion tax-cut to a reluctant congress. Congress passed the Kennedy tax program following his death. The economy immediately took off in a burst of prosperity.
| Comment & Analysis by Richard Gill What the tax cut did was simply give more disposable income to consumers. It shifted private spending up. The gap between spending and full employment was eradicated.. The apparent success of the tax-cut of 1964 was hailed by many as a total vindication of Keynesian ideas. |
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