Amaros
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quote:
ORIGINAL: KenDckey
Kidicat
I just have one question. Why was it a good thing when Kennedy (a democrat) administration reduced taxes and a bad thing when Bush (a republican) administration did it?
I already explained much of this in the other thread, but allow me to reiterate and expand.
Taxes are but one factor in the total economy: other factors include the labor market - i.e., how many, how mobile, how well educated, etc.
Another huge factor is infrastructure: transportation, communication, regulation, etc., etc. - without infrastructure, economies simply don't expand, because they can't - growth is largely determined by supply and demand, the larger and more accessible the markets, the more growth is theoretically possible, i.e., business opportunities.
The Third major factor is innovation: productivity and technological spillover. Technological spillover creates more business opportunities - the industrial revolution created demand for Oil (Whale oil initially), and increased efficiency drove prices down, creating more demand and a wider range of products available to market, as well as creating jobs and generating personal income to buy those products.
Internal combustion resolved transportation issues, expanded markets, and created demand for trucks and automobiles, as well as a host of related products from lawnmowers to chainsaws. Research into IC's in the Sixties and Seventies, led to the development of the PC in the Nineties, while investment in the internet backbone, specifically, protocols developed by the World Wide Web Consortium, that allow different types of computers to exchange data, and yes, funding for which was spearheaded by AL Gore, coincided in the Nineties to expand markets to Global proportions, and set off a round of productivity increases that is largely still driving the American economy.
Now in 1950, half the homes in the US still didn't have Electricity or running water - the interstate highway structure was just beginning to be built, and we had a huge cache of basic and applied research both from the war effort, and research captured from the Germans. We also had a huge debt from the war still, and taxes were very high, marginal rates at the top of near 90% I believe.
At the same time, a number of factors combined to stimulate growth: returning vets from the war needed jobs, creating a loose labor market - vets on the GI bill went to college in record numbers and whole generation of scientists, engineers, doctors, etc., etc., was trained. At the same time, the US government was engaged in a massive infrastructure building program: highways, dams, you name it.
The final factor was technological spillover from all that research that was suddenly available - plastics in particular were almost nonexistent before WWII, and plastics, along with electronics basically drove the American economy well into the Seventies, expanding the range of products available to market, at the same time incomes were rising to buy them.
Kennedy (or rather, Johnson) cut taxes at the time that the war debt was coming down to manageable proportions, and the cuts were across the board, meaning both middle class (consumer), and upper decile (producer) taxes were cut - you may recall the Laffer curve, which predicted increased savings.
People didn't save, however, they spent, and they spent in record amounts, driving consumption to unprecedented levels - products ranging from television sets and transistor radios, made possible by the expansion of the electrical grid, to new cars for the brand new transportation infrastructure were irresistible, and changed the entire social and economic landscape of America - we shifted right then from an agrarian social-economy to an urban industrial one.
So, you had a mobile, highly educated workforce, a vastly expanded infrastructure, and a never-ending stream of technological spillover.
What happened was this: increased demand created inflation, driving prices up, which in turn led to demands for wage increases to keep pace, which led to increased consumption, which led to more inflation, etc., etc. - what is called the "inflationary spiral" of the Sixties and Seventies. Productivity continued to increase, it just couldn't keep up with increases in demand, at the same time, those global markets, which the US had enjoyed a near monopoly on since the end of the war, were being encroached upon by the Japanese and European economies that had to be rebuilt from scratch after being almost utterly demolished during the war.
Inflation, stemming from the Kennedy tax cuts, eventually peaked in the late Seventies, while we began slowly transitioning from a trade surplus to a trade deficit, when Carters appointee to the Fed drastically cut back on the money supply, effectively bringing the whole economy - and the inflationary spiral - to a screeching halt.
It was under these conditions that Reagan was elected, the recession being blamed on Carter, though presidents, both democrat and republican had been ineffectually trying to stem inflation for almost twenty years, and supply siders under Reagan’s banner instituted more tax cuts.
Continued below:
Edited for spelling and grammer.
< Message edited by Amaros -- 9/21/2006 12:07:09 PM >
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RE: Economics for Estring - 
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