David R. Henderson  

Harry Byrd on Keynesianism

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When I'm at my cottage in Canada, as I am now, I do a lot of reading. I just finished Robert Caro's new book, The Years of Lyndon Johnson: The Passage of Power. It's good, but for those with limited time (that's pretty much all of us, right?), I still recommend Caro's first two books in the series, The Path to Power (1982) and Means of Ascent (1990.) One of the stories in the book is about old Harry Byrd, a Democratic senator from Virginia and chairman of the Senate Finance Committee. He held up the 1963/64 Kennedy/Johnson tax cut bill until LBJ assured him that he would keep the federal budget for fiscal year 1965 (which went from July 1, 1964 to June 30, 1965) below $100 billion. LBJ got it lower than the 1964 budget in nominal terms, the first drop in many years. In those days, by the way, this number did not include trust fund spending, the biggest of which, of course, was Social Security.

Here's a little thumbnail Caro gives on Byrd's thinking on macroeconomic policy:

He "would have no truck with Keynesian theories," recalls Douglas Dillon, who as secretary of the Treasury dealt with the senator more frequently than any other member of the Kennedy Administration. Franklin Roosevelt had been all right for a while, Byrd was to say; the two governors [Byrd had been governor of Virginia in the 1920s and FDR, of course, had been governor of New York] had become personal friends; he had been an early supporter, the finance chairman, in fact, for FDR's first presidential campaign; "then this fellow Keynes got ahold of him." He liked to boast that "I am the only man left in the Senate who voted against the Wagner Act [which gave unions monopoly power] and the TVA [the Tennessee Valley Authority, the government agency that used eminent domain to take people off their land so that it could flood the valley and produce electric power.] When President Kennedy, arguing that tax cuts would stimulate the economy and that the concept of a balanced budget was an outdated and "misleading . . . mythology," called, in one of his typically eloquent speeches, for "new words, new phrases" in economic theory, Byrd had been moved to make a speech of his own--in the old words and phrases. The "illusions," he said, were the ideas that budgets did not have to be balanced, that debt was not evil. No one who witnessed his frustration and genuine indignation at government's indifference to the old verities could doubt their depth. Jabbing his finger at a sheet of statistics on his desk, one day in 1962, he said, "The civilian employment in government went up 35,000 in just the last month." The red face turned redder with anger. Again and again the finger jabbed the paper. "Just think of that--35,000 in the last month."

The tax cut bill, by the way, was the one that cut all marginal tax rates on personal income and cut the top rate from 91 percent to 70 percent. Although it was pitched by Walter Heller, Kennedy's and Johnson's chairman of the Council of Economic Advisers, as a Keynesian demand-side policy, it clearly had a huge supply-side, incentive-based component. I've never been persuaded that Heller saw the 1963/64 tax cut as totally demand-side. He was a strong Keynesian, to be sure, but if you look at what he said about the cut in marginal tax rates in Germany after Hitler (see my "German Economic Miracle" in The Concise Encyclopedia of Economics), you wonder.

In the summer of 1980, I had a nice phone conversation with Heller when I tracked him down to his island home in Washington state. I wish I had known about his 1949 National Tax Journal article referenced here before I had that conversation.


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COMMENTS (5 to date)
Bruce Bartlett writes:

I have heard for many years that Kennedy got the idea of the tax cut from German Chancellor Ludwig Erhard, but have never been able to confirm it. I tried to find press reports about any meetings they had but came up empty.

Incidentally, there was a much bigger tax component to the German economic miracle than is commonly known. When Erhard reformed the currency he lopped a zero or two off the currency but didn't change the thresholds for the tax brackets. This had the effect of giving everyone a huge tax cut; they were taxed as if they were making a fraction of their former income.

I've read the Heller article but do not remember if he got into this. I believe he also wrote an article for the NTJ that was favorable toward the Shoup tax reforms in Japan.

Daniel Kuehn writes:

I see Byrd was backwards on more than just civil rights!

(I'm a little bitter... my great grandad lost his job thanks to Byrd and his machine when he tried to integrate Arlington County schools)

Xiaoqing Liu writes:

In my opinion, I do think that the tax cut would effectively stimulate economy.

Firstly, cutting marginal tax rate on personal income enable people to have more money to spend, which would shift the demand curve to the right. As the demand curve shift, price of product would rise within the same quantity. As the price rise, the producer would produce more to win more profit, also, high profit will attract more companies to enter the industry. As a result, more job opportunities are created.

Secondly, higher income motivate people to work harder and more creatively, which will shift the marginal labor quantity curve to the right. In general, improvement in labor productivity will shoot up GDP.

James writes:

Xiaoqing Liu,

Yes, if the cost of government goes down then your analysis is 100% correct. It's no different than a decrease in the cost of oil or any other thing that everyone has to pay.

However, if the government spends $100, then it must collect $100 in taxes sooner or later. A tax cut only pushes taxes into the future. That's the problem with the Keynesian model. It assumes that a government can stimulate the economy just by delaying taxes. This will only work if the taxpayer ignores the effect of an unavoidable tax increase in the future.

Luke Carlson writes:

I think you might be interested in the blog of Ludwig Erhard's great-nephew, Andreas Kluth; he writes for The Economist.

Three good blog posts from him concerning Erhard:

1)http://andreaskluth.org/2008/10/15/uncle-lulu/

2)http://andreaskluth.org/2010/10/15/spontaneity-and-order/

3)http://andreaskluth.org/2008/12/18/what-uncle-lulu-would-do-today/

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