KEYNESIANS IN THE WHITE HOUSE

When a reporter in 1961 asked President John F. Kennedy why he advocated a tax cut, Kennedy replied. “To stimulate the economy. Don’t you remember your Economics 101?” Kennedy’s policy was, in fact. based on the analysis of fiscal policy we have developed in this chapter. His goal was to enact a tax cut, which would raise consumer spending, expand aggregate demand, and increase the economy’s production and employment. In choosing this policy, Kennedy was relying on his team of economic advisers, This team included such prominent economists as James  and Robert who later would win Nobel prizes for their contributions to economics. As students in the 1940s, these economists had closely studied John Maynard Keynes’s General Theory, which then was only a few years old. When the Kennedy advisers proposed cutting taxes, they were putting Keynes’s ideas into action. Although tax changes can have a potent influence on aggregate demand, they have other effects as well  In particular, by changing the incentives that people face, taxes can alter the aggregate supply of goods and services. Part of the Kennedy proposal was an investment tax credit, which gives a tax break to firms that invest ill new capital. Higher investment would not only stimulate aggregate demand ‘immediately but could also increase the economy’s productive capacity over time. Thus, the short-run goal of increasing production through higher aggregate demand was coupled with a long-run goal of increasing production through higher aggregate supply. And indeed, when the tax cut Kennedy proposed was finally enacted in 1964, it helped usher in a period of robust economic growth.” Since the 1964 tax cut, policymakers nave from time to time used fiscal policy as a tool for controlling
aggregate demand. For example, when President George W. Bush moved into the Oval Office in 200 1, he faced an economy that was heading into recession. One of his first policy initiatives was a substantial and permanent tax cut. Bush explained, “The best way to increase demand for goods and services is to let people keep more of their own money. And when somebody meets that demand by additional production. somebody is more likely to find a job.” •