Economy in The 1960s
The Other America
In 1962, Michael Harrington published The Other America, a shocking expose of poverty and want in the United States. Thoroughly researched, the book chronicled the plight of “the unskilled workers, the migrant farm workers, the aged, the minorities, and all of the others who live in the economic underworld of American life.”17
The book had an immediate impact. More than 70,000 people bought the first edition, including President John F. Kennedy.18 Described as shocking but necessary reading, the book drew a curious and telling response. After all, poverty was hardly new. Many of the people and regions so powerfully described by Harrington were not recently impoverished. For the tenant farmers of the rural South, the isolated occupants of Appalachia, and struggling immigrants of northeastern ghettoes, poverty was not a new condition. But what was new was the degree of affluence that surrounded these pockets of poverty; what was new was the extent and type of material comfort enjoyed by most Americans. Real, desperate poverty, set against this backdrop, represented a disturbing challenge to Americans’ sense of their nation.
The Other America and the reception to it were, therefore, somewhat optimistic. They were grounded in the belief that poverty need not exist, that it was not part of the natural order, and that societies and their governments could take steps to eliminate it. During the 1930s, Franklin Roosevelt had created a new expectation for the American government—it should aggressively intervene in the economy to redress its periodic downswings. During the 1960s, politicians would carry this logic to the next step—they would declare war on poverty and embrace a moral and political responsibility for driving it completely from America.
The Affluence of the 1950s
The affluence that Americans would come to expect—and demand––of their government was grounded in a handful of critical developments in the years following World War II. For starters, contrary to expectations, American defense spending remained relatively high after the end of the war. The Cold War, and the war in Korea, required enormous military spending. With between 2 and 3.5 million men in uniform and defense industries consuming millions of federal dollars, the economy operated on a continuous wartime basis.19 Certain industries, like the aerospace industry, boomed after the war; companies like Lockheed and McDonnell Aircraft, GE and Westinghouse employed thousands of people, many of them in high-paying engineering and technical occupations.
But postwar prosperity was rooted in more than military spending. New technologies boosted productivity in both the industrial and agricultural sectors. Farm income increased; yields of corn, wheat, and cotton at least doubled. American manufacturers also realized new levels of productivity as industrialists poured $10 billion annually into capital improvements. Increased investment abroad also created jobs and generated wealth at home. Americans’ foreign investment was relatively static between the world wars, but in the fifteen years following World War II it increased 1000%; investments in raw materials and resources like oil played a large part in this boom.20
But the real story of the new affluence was less the way it was earned than the way it was lived. The economic growth of the 1950s generated more than jobs, it created whole new ways of life. New synthetics, new production methods, and higher wages made a new type of consumption possible. Americans bought cars, televisions, and household appliances at record levels, and they borrowed money optimistically to do so.
Americans’ pursuit of consumer comfort was complemented by their growing demand for entertainment. Television, movies, and both professional and college sports filled the weekly routine—and the family vacation became an annual custom. By 1960, Americans spent $85 billion a year on entertainment, double the spending of the previous decade.21
American affluence also relocated during the ‘50s. It moved from the cities to the suburbs. Increasing car ownership, better highways, and home loans made possible by the GI Bill encouraged a mass migration. By 1960, roughly one-third of all Americans lived in the “burbs.”22
The new affluence of the 1950s revised existing portraits of life in America; the American Dream took on a new set of particulars and a new set of expectations. Yet there was certain irony to it all. As Harrington pointed out, 50 million people still lived in some degree of poverty. And more broadly, for all these inflated expectations of life in America, real economic growth during the 1950s was relatively moderate. The country actually slipped in and out of mild recessions three times during the decade; the GNP grew on average only 2-3% annually. Perhaps more sobering, European economic growth actually exceeded that in America in the late 1950s, while the Soviet government reported record economic gains.23
The presidents of the 1960s thus inherited a complex set of challenges. Consumer possibilities inspired heightened demands for life in America, yet economic growth was modest. The public demanded aggressive government action to redress economic shortcomings, yet prevailing ideologies insisted on fiscal responsibility and limited government intervention. Poverty was designated both immoral and curable, yet it was a huge and tenacious part of the American social landscape. In short, in many ways, expectations had gotten far ahead of reality. The bells and whistles of a consumer society convinced many that permanent and universal prosperity was more possible and imminent than it really was, and policymakers had little choice but to fall in line with these inflated public expectations.
John Kennedy: From Fiscal Conservative to Innovative Tax Cutter
In navigating this economic minefield Kennedy began with fairly traditional views. Faced with a slow-growing economy and an unemployment rate of 7% in 1961, he resisted the advice of his Ivy League economic advisors that he launch an ambitious program of public works funded by deficit spending. Budget surpluses, these Keynesians argued, imposed a drag on the economy. Dollars that consumers could spend should not be tied up in government vaults. These dollars should be spent, and a series of demand-side tax cuts (tax reductions aimed at middle and lower class consumers) should be introduced.
But Kennedy was afraid that this program would bring on charges of fiscal irresponsibility from congressional conservatives. And he was also inhibited by his inaugural call for sacrifice. Indulging the public in tax cuts and government jobs hardly seemed consistent with his request that citizens “ask not what their country can do for them, but what they could do for their country.”
But a year into his presidency, the economic news was still sobering; by the spring of 1962 the stock market was falling and unemployment still hovered near 7%. Even worse, a controversy surrounding US Steel threatened to send the stock markets into a panic. In early April, the steel giant announced that it was raising prices, and just weeks after President Kennedy had successfully convinced the steelworkers union to temper its wage demands. Kennedy exploded and his furious outburst made its way into the press. “My father always told me that all businessmen were sons of b----s,” Kennedy was quoted as saying in Newsweek.24 Attorney General Robert Kennedy added further to business anxieties by convening a grand jury investigation of US Steel.
The stock market immediately fell in fear of the administration’s attack on big business. The sluggish economy had already caused the Dow to drop 50 points after peaking near 750 the previous year. Now it plummeted another 50 points. And on 28 May, the Dow fell more than 6% in a single day. “Kennedy’s Crash” was the worst single day on Wall Street since the Depression-launching crash of 28 October 1929.
The president realized that he needed to do some damage control with the business community. Thus, he suggested that he was considering large tax cuts, many of them aimed at businesses. Even more immediately, he raised depreciation allowances for industries through executive orders. In December, he made the most dramatic gesture to the wounded feelings of big business. In a speech before the Economic Club of New York he condemned the tax code that placed too heavy a burden on business initiative and profits and urged sweeping tax reductions.
The tax proposal that he would advance in 1963 included a series of benefits for business and wealthy Americans—investment tax credits, improved depreciation allowances, lower capital gains tax rates, and a reduction of the top marginal tax rate charged to America’s wealthiest people from 91% to 65%.25 But his plan also included across-the-board tax cuts for all taxpayers. A modified version of his proposal passed the House in September, but it would not be signed into law until 1964, after the president was assassinated.
Kennedy: Supply-sider or Keynesian Convert
Kennedy’s tax cuts are widely credited with stimulating economic growth over the next two years. By 1966, there were 5.5 million more Americans employed than when he was elected to office. During these same years corporate profits grew more than 70%.26
As with the rest of Kennedy’s legacy, politicians have argued over what exactly these tax policies represented. Republicans have called Kennedy an early supply-sider—a Democratic Ronald Reagan who recognized that economic growth rested on lowering business taxes and reducing the burden of government. Democrats have emphasized the demand-side portion of the cuts—the across-the-board rate reductions—and have insisted that Kennedy would never have tolerated the sorts of cuts later supported by Reagan and his Republican successors. They insist that Kennedy was ultimately a Keynesian convert, willing to cut taxes and accept deficit spending as an answer to economic stagnation.
The truth is probably somewhere in between. Kennedy was more of an economic and political pragmatist than a supply-side theorist or Keynesian convert. From start to finish, he was influenced by political considerations in developing his economic strategy. He resisted demands for deficit spending because he feared charges of fiscal recklessness; he backed away from increased government spending because he feared that congressional conservatives would block these and every other part of his domestic agenda. He accepted a program of tax cuts only when it looked like his administration would be undermined by the “Kennedy Crash” of 1962. He proposed an extensive series of tax cuts and credits only after his presidency was criticized in Hoover-like terms.
In short, Kennedy’s political instincts proved stronger than his economic principles. His political instincts ultimately overrode even his inaugural commitment to sacrifice on behalf of higher national goals. The inflated demands of the American public forced the president into new economic directions. And in the short run, it all seemed to work out. The economy grew, jobs were created, and poverty was reduced. By indulging businesses and the public in large tax cuts, the economy experienced a robust recovery. But the legacy Kennedy passed to his successors was not just a growing economy; he also affirmed the belief that the nation’s lofty ambitions could be achieved without sacrifice—that the economy could grow, and that an ambitious agenda of economic and social reform could be advanced while simultaneously cutting taxes that boosted incomes and swelled corporate profits.
Lyndon Johnson and the Great Society
For Lyndon Johnson, this legacy would prove particularly problematic. Since his days as a rural teacher he had been committed to alleviating the suffering of America’s poor. As president, therefore, he proposed an expansive domestic agenda aimed at reducing poverty, expanding educational opportunities, increasing the safety net of public services for the poor and unemployed, and tending to the health and financial needs of the elderly. And confronted with compelling statistics, the Congress and the nation rallied to his vision. For example, with close to one-half of the elderly living without health care, and roughly one-third living below the poverty line, often due to high medical expenses, Johnson’s call for a federal program of medical insurance for the elderly—Medicare—found ready support. With more than half of America’s adults lacking a high school diploma, Congress also passed a bundle of programs designed to increase aid to schools and provide training for those without the skills or education needed to advance in the work force.27
Financing this bundle of proposals, labeled “The Great Society,” was a difficult task in itself, but it was further complicated by the rising costs of the war in Vietnam. By 1968, the United States was spending $22 billion a year on this distant war, a full 12% of the total federal budget. But Johnson feared that increasing taxes to finance the war or pay for his Great Society would undermine support for both. He thus insisted on proceeding on both fronts without raising taxes. And thanks to a Democratic majority in Congress and Johnson’s own considerable political skills, he was able to secure funding for both without establishing new revenue sources. Moreover, for a short time, the economic indicators were positive; by 1968, the GNP had doubled.28
Paying the Price for the Great Society
By the end of Johnson’s term however, inflation had reared its ugly head. And as the 1960s became the 1970s, many policymakers began to question the wisdom of Kennedy’s and Johnson’s assault on poverty. These critics were troubled most by the rising costs of the programs that had been implemented during the optimism-filled 1960s. For example, when created in 1966, Medicare cost $3 billion. Congressional analysts estimated that the annual cost would rise to $12 billion by 1990, but the estimates were not even close. By 1990 Medicare spending had actually reached $112 billion annually. In 2003, costs reached $244 billion ($172 billion in inflation-adjusted 1990 dollars).29
The cost of Johnson’s Great Society was indeed sobering, but there was no denying its success in reducing poverty and improving public health. By 1970, the share of the population living in poverty had been cut in half. Before 1963, and the creation of Medicare and Medicaid, one in five Americans had never seen a doctor. By 1970, this proportion had shrunk to one in twelve. Infant mortality rates fell by one-third between 1965 and 1972; among African Americans, infant mortality rates were reduced by half.30
In retrospect, perhaps Americans erred not in waging war on poverty but in believing that it would be a simple, painless fight. The mistake of policymakers lay in failing to acknowledge that this war could be advanced only through sacrifice on the part of all Americans. But perhaps even if they had, the public would have resisted the suggestion that expanded public services could be achieved only through higher taxes. Public opinion polls taken over the last decades reveal that a majority of Americans consistently support lowering taxes; they also frequently support proposals to cut government spending. But when asked to identify the social program or government service that they would like to see terminated or reduced, the consensus evaporates. In fact, quite often poll respondents support both tax cuts and increased federal spending on education, health, and social programs.31
In other words, 50 years after John Kennedy announced a war on poverty, Americans may still cling to an unrealistic understanding of the affluence that surrounds them and the cost of maintaining the government services they have come to expect. We might like to quote Kennedy’s inaugural call for self-sacrifice, but we seem to prefer, in practice, the recipe for economic development laid out before the New York Economic Club in 1962. Rather than asking what we can do for our country, we would rather the government take steps to boost “consumer spending and investment demand . . . cut the fetters which hold back public spending.”32