Kennedy (76 page)

Nevertheless the highly publicized break in the market, and the three days of gyrations and four weeks of sag that followed, seemed certain to disturb business and consumer spending. The President called an emergency meeting for May 29 in the Cabinet Room. It was not a cheerful way to spend his forty-fifth birthday. But somewhat to his surprise, he found Dillon, Heller, Federal Reserve Chairman Martin and the other economists present generally unperturbed. The critical loss of confidence, they said, was in the market, not in the economy or even in the administration. Most financial analysts had been predicting for some time that stock prices could not long continue to rise further and faster than potential profits, reaching paper values twenty or more times their earning power. But too many investors, large and small, had been bidding prices up and up, not out of an interest in dividends or corporate ownership, but out of a desire for tax-favored capital gains in an inflationary economy. Now inflation was over, a fact for which the steel price rescission may have served some as a reminder. Once investors started weighing the actual earning power of their shares instead of hoping for continued price rises, many of them realized that bonds and savings banks offered a better return on their money than overpriced and risky stocks. This long-expected downward re-evaluation, the President was told, while temporarily worsened by speculation and its own
momentum, would in the long run put the market on a sounder basis.
³

But the President expressed concern in our meeting about the market continuing to fall and dragging the economy down with it. Essentially, in addition to pressing for pending economic legislation, three new courses of action were considered:

1. First was a Presidential “fireside chat” to reassure the nation, to place the market drop in perspective, to review the basic strength of the economy, to contrast the situation with 1929 and to call for calm and confidence. But after work on a possible speech was well under way, this course was suspended, to be revived only if selling went completely out of hand. Stocks were gyrating up, down and up again. Less than 2 percent of the total volume of stock was actually being sold by panicky or margin-called owners, and a nationwide television speech might only spread their panic to others. By staying out of it, by keeping calm, the President hoped to help spread calm, and in time turn the paper losses of the 98 percent who held on into actual gains. He decided, as a “low-key” substitute, simply to open his press conference on June 7 with an over-all look at the economy, using a very mild and very brief analysis of the stock market as a springboard for a review of his program.

2. The second possible action considered that Tuesday was to lower the “margin requirement,” the percentage of actual cash which a stock buyer must put up when he buys on credit. No legislation, only a change in Federal Reserve regulations, was required to reduce this cash requirement from 70 percent, where it then stood, to 50 percent, thus enabling and encouraging more investors to buy more stocks.

The Council of Economic Advisers favored an immediate reduction, partly as a demonstration of Presidential determination (although, due to the peculiar status of the Federal Reserve Board, the President could only request, not direct, the Board to do anything). But there was no evidence that a lack of credit was the market’s immediate problem, and it was agreed by the others that any immediate move might
be interpreted as an admission of serious trouble. Instead, margin requirements were quietly lowered to 50 percent some six weeks later, and by late October the market had started booming again, soaring a year after the May scare back up to its December, 1961, high, from which it continued to rise.

3. The third proposal considered in our May 29 meeting, which was considered throughout the balance of the summer, and which related more to the general economy than the stock market alone, was a “quickie” income tax cut of $5-10 billion. It was to apply to both individuals and corporations, and last one year or even less. The Council of Economic Advisers was for it, unless the economy improved. Secretary Dillon was against it, unless the economy worsened. The President reserved judgment until he saw which way the economy moved. Another meeting was scheduled for one week later, and similar meetings were held regularly throughout the summer.

Even during that first week the pressures increased. Senate Democratic Whip Humphrey called for a temporary tax cut. So did Secretary of Commerce Hodges. Secretary of the Treasury Dillon assured Senator Byrd in open hearings that none was planned. The President was irked by Cabinet members publicly committing him either way in advance of his decision, and irked as well by press speculation that he had secretly decided for a “quickie.”

At the June 6 meeting Heller was more gloomy about the economy. He was backed by outside advisers Samuelson and Robert Solow, who used language that hit the President where it hurt. While not yet foreseeing a new recession in 1962, they felt that

By the end of June, Samuelson had raised the odds on a 1962 recession from 20 percent to even. By mid-July Samuelson and Solow spoke, they said, for “a majority of economists inside and outside the government”
⁴
in asserting that, without a temporary emergency tax cut, losses of profits, production, employment and total output in 1962 would characterize “the developing recession.” Walter Heller feared a downturn “before the snows melt” (they melt late in his native Minnesota). Rockefeller and labor, the Chamber of Commerce and the ADA, the academic economic
advisers to the Treasury, all joined in urging a tax cut in 1962, though they all differed sharply on what kind.

But in each of our meetings throughout the summer, Douglas Dillon and others offered persuasive arguments to the contrary. The economic indicators were, as the President described them, “a mixed bag,” some down, some up, some steady. If the Congress would act promptly on the tax bills already before it—including the investment tax credit, a repeal of surface transportation taxes and, above all, a bill providing stand-by authority to adjust taxes in an emergency—that would be enough. If Congress was balking at these, then sending up a new bill would not help and might only endanger the tax credit bill then before the Senate. Moreover, argued Dillon, the President had already indicated early in 1961 that a comprehensive tax reform bill, to be submitted after passage of the “little” tax reform bill which contained the investment credit, would include some reduction in tax rates. That hope should be enough. It involved waiting only a few months; and any reduction taken in 1962 could not be used in 1963 as sugar coating for an otherwise unpalatable reform bill.

The legislative and economic arguments, in fact, overlapped. If the Congress passed a temporary tax cut and it proved premature, the President’s overreaction, an attribute he sought always to avoid, might make action more difficult when it was really needed. Nor did political arguments aimed at the 1962 mid-term elections impress him. Not only was he loath to be charged with partisan motivations, the record did not support them: whatever party was in control of the Congress during the three tax cuts enacted since the war had on each occasion lost the next election. Nor did he want a big tax cut to push his deficit beyond that Eisenhower record he liked to cite.

But the greater likelihood, O’Brien, Dillon and others reported, was that a temporary tax cut could not be passed. Too many key figures were against it or unconvinced. For the President to assert that a “quickie” tax cut was essential to our economic health, and then have it rejected, might well worsen the climate of confidence, further depress the stock market and impair prospects for the 1963 tax bill. Even the supporters of a temporary tax cut in the Congress and business community could not agree on its size, scope, timing, nature or conditions. The number of amendments certain to be offered held out the prospects of at best delay, at worst a bill so bad it would have to be vetoed, and, most likely, no bill at all.

Senator Douglas, a long-time advocate of tax cuts to fight recessions and an eminent economist, opposed a cut in 1962 in a thoughtful memorandum to the President. Senator Byrd not unsurprisingly was strongly opposed, and, most importantly, Chairman Wilbur Mills of the House Ways and Means Committee—who, in an unusual Presidential
move, had been invited to sit in on one of Kennedy’s sessions with his economists—remained unconvinced that a cut was needed or could pass. Other solons were for such a bill only if its economic impact were canceled by cutting out of the Budget the same amount of funds as the tax cut would release into the economy, thus rendering it meaningless.

In short, it was clear to Kennedy that, in the absence of overwhelming evidence that a tax reduction bill was needed to prevent a recession, the Congress, which had already spent a year and a half on his first tax measure, would not pass such a bill in that session. The President had no choice but to wait for that overwhelming evidence, and it never came.

Did Kennedy really want a quickie tax cut in 1962 which the Congress prevented him from obtaining? Its advocates thought so. The press said so. But, having taken part in all the meetings, my own judgment is that he, too, was unconvinced that a temporary cut at that time was essential, as distinguished from merely being helpful, in the absence of that overwhelming evidence that was required to get the bill through. “We want to be convinced,” he told a news conference questioner, “that the course of action we are advocating is essential before we advocate it.” Cool as the pressures built up around him, accused of undue delay and indecision, he refused to be stampeded into an unnecessary and unsuccessful fight that could only impair his long-range economic goals and his relations with the Congress. “Wilbur Mills,” he said one day, “knows that he was chairman of Ways and Means before I got here and that he’ll still be chairman after I’ve gone—and he knows I know it. I don’t have any hold on him.”

While he waited for the evidence, he pursued an alternative program, quietly and administratively increasing expenditures in a number of areas, publicly pressing for Congressional action on the tax credit, on public works and on other economic measures, liberalizing tax rules on depreciation, and telling each press conference that “we will continue to watch the economy.” Finally, after a review of the figures for July showed no signs of a recession sufficiently strong to convince him or the Congress, he delivered on August 13 an economic report to the nation by television from the White House. He concluded that report by promising a permanent tax cut bill in 1963 and by rejecting a temporary tax cut unless subsequent events made it necessary to recall the Congress for that purpose.

The operative words, which are italicized, satisfied both sides within the ranks of his advisers. Those opposed to the temporary tax cut agreed with his judgment that it could not be justified, and those favoring it accepted his judgment that it could not be enacted.

The speech, however, was in every other respect less satisfying. We tried every possible way to make a dull economics speech interesting. The President used charts beside his desk. He cited real-life human interest examples of individuals helped by his programs. But despite these efforts and despite, or perhaps partly because of, the President’s effort to extemporize informally as he moved from desk to chart, that speech was the worst speech he ever gave from the White House on television. It sought to educate the American people on the new fiscal philosophy. It urged action by the Congress on pending economic measures. It was, in short, the kind of “fireside chat” the critics said he needed. But it dealt not with a new crisis, only an explanation of why there was none—not with a new bill, only an explanation of why there would be none—and that kind of speech cannot be exciting. “I would call it,” said the President to one professor, “a C-minus performance.”

Nevertheless that drab speech, and the aforementioned June 7 opening press statement on taxes, laid the groundwork for one of the boldest and most far-reaching domestic economic measures ever proposed—the $10 billion tax cut bill of 1963, offered without experiencing or even predicting for the immediate future any of the three traditional occasions for a tax cut: a Budget surplus, a reduction in spending or a recession. While it would be convenient to assert that this bill was conceived solely by President Kennedy as a defiant challenge to the fiscal troglodytes, or that massive tax reduction to keep the expansion going had long been his plan for 1963, the actual facts are more haphazard.

The origins of that bill can be traced to the preinaugural task force on taxation, commissioned by the President-elect and headed by Professor Stanley Surrey, who was later Assistant Secretary of the Treasury. That report, like the President’s comprehensive Message on Taxation in April, 1961, recommended without details a sweeping, long-range, tax reform bill which would broaden the tax base by closing loopholes, end all inequities of benefit to the few, and thereby make possible lower rates for all. It was a tax reform bill, not a tax cut, and while it was agreed by Surrey and Dillon that the reforms would make possible the same amount of revenues at lower rates, and could only be passed with the help of such a “sweetener,” there was no mention or intention at that time of reducing the government’s net take. The President publicly emphasized, in fact, that with “budget problems as difficult as they are…we cannot carry
out a tax reduction in these critical times.” He planned to offer this bill in January, 1962, enabling the Congress to concentrate in 1961 on the “little” tax bill, a bill designed to help the economy and balance of payments with no net loss of revenue. In the unlikely event that he could achieve a Budget surplus, he planned a tax cut and a debt reduction as well.