Tax Cuts & Puritans

Virginia's Harry Byrd, 75, chairman of the Senate Finance Committee, had been ailing for weeks, and Washingtonians freely surmised that the old budget watchdog had lost not only his bite, but also his bark. Little did they know. Last week Byrd came out roaring like a lion after reading in the Washington Post that "Budget Director Kermit Gordon told a congressional committee yesterday that a balanced budget would lead to increased unemployment, higher taxes and a general economic decline."

If that account was correct, growled Byrd. the President ought to fire Gordon forthwith.* "I submit that a man who thinks a balanced budget would be a catastrophe does not have the frame of mind to direct the budget . . . Responsible fiscal positions should be filled with sound men. If we do not get crackpot economists out of these positions, the American system will be lost."

Just Mildly. Gordon denied the newspaper's summation of his testimony. The story was wrong--not wildly, just mildly. Much of the misunderstanding stemmed from the efforts of all sorts of Administration spokesmen to make the President's new taxcut, big-deficit program sound like the sexiest thing since Bardot started wearing clothes.

As it happened, Gordon had all sorts of glowing words to say about the New Frontier's tax program. But the sentiments at issue came while he was under close questioning from dubious members of the Congressional Joint Economic Committee. He insisted that "under current condi tions," with the economy sluggish, attempts to balance the budget would be "self-defeating." Reduced federal expenditures would "reduce private production, employment, profits and wages. This, in turn, would lead to lower federal revenue collections, and a deficit would remain."

Later on, answering questions from Michigan's Democratic Congresswoman Martha W. Griffiths, Gordon added that a balanced budget, achieved through either higher taxes or lower expenditures, would lead to "a sharp decline in gross national product" and an unemployment rate "approaching 10%" of the labor force (the figure is now 5.8%). His denial of Byrd's charges was based on the fact that he was talking about "current conditions," had never said that a balanced budget would be economically harmful as such.

The Puritan Ethic. To argue its case for combining tax cuts with huge budget deficits, the Administration sent up to the Hill a host of persuasive witnesses, including, besides Gordon, Walter W. Heller, chairman of the Council of Economic Advisers, Labor Secretary Willard Wirtz, Agriculture Secretary Orville Freeman, Commerce Secretary Luther Hodges, Treasury Secretary Douglas Dillon. But committee members seemed far from persuaded. Even liberal Democrats pronounced themselves disturbed about that dizzying $11.9 billion deficit in the President's budget for fiscal 1964 (beginning next July). Heller, for one, argued that the New Frontier's program would lay open to the U.S. "one of the most exciting expansionary periods in our economic history." But when Heller said that opposition to the Administration approach derived partly from "the basic Puritan ethic of the American people," Wisconsin's liberal Democratic Senator William Proxmire replied that the President's proposals violated that "good old" ethic "in such a shocking and drastic way that it is very, very hard for us to accept." Said Rhode Island's Senator Claiborne Pell: "Even as a liberal Democrat, I have doubts about the continuation of a deficit. I think we would like to see a balanced budget. This worry, I think, is throughout the country as well."

As President Kennedy himself has expounded the Administration concept in recent speeches and in messages to Congress, the budget is in the red because a slack economy does not produce adequate federal revenue. The Administration cannot eliminate the deficit by reducing expenditures--that would only shrink "aggregate demand" for goods and services, thereby making the economy even slacker. So what is the answer? It is to cut taxes while keeping federal expenditures high. The stimulating effects of tax reduction would increase incomes and profits, eventually making it possible for the Government, even at lower tax rates, to collect enough revenue to balance the budget. "In the end," said Witness Gordon to the committee, "the problem of federal deficits can be solved only in a prosperous and growing economy. It is to this goal that the Administration has directed its tax and expenditure policies."

The argument is older than the New Frontier, and for all the Administration's talk of bold new solutions, it was oldfashioned (but never fully accepted) John Maynard Keynes doctrine. Though old hat to economists, it might be hard to sell to the Congress, or, for that matter, to the people. With a touch of irony. Congresswoman Griffiths pointed out to Gordon that "we began this Administration with a call for sacrifices, and when you offer a tax cut, it sounds as if you were not asking for a sacrifice." Yet. by advocating tax reduction with the budget deep in the red, she went on, the Administration is "asking people to sacrifice long-held prejudices and beliefs."

* Byrd previously had called for the firing of two other budget directors. Gordon has been on the job only five weeks.

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