Yes, I'm still on this story of him and Walter Heller's 1968 university debate. On Heller's argument for the efficacy of the fiscal multiplier he of course focused on the 1964 tax cut.
Friedman in response I think makes a very perspicacious argument about the nature of economic debates-and it applies to political debates more generally.
"I think it will be interesting if you have an experiment in 1969 on the effects of fiscal versus monetary policy. But whichever way it goes, it’s only going to be a small part of the total body of accumulated evidence that is available. But let me turn to a couple of episodes."
https://fraser.stlouisfed.org/docs/meltzer/monetary_fiscal_friedman_wh (Pg. 55)
I think this is a very perceptive and important point. It's that you can always find lots of correlations that show you plausbly might be right but it's much more difficult to show that you likely are right. Proving causation is the tough part.
It's rare that there is a true smoking gun moment where even those who disagree with you have to admit you're right.
He was basically warning that however things went in the economy in 1969 by itself it probably wouldn't be conclusive. This is something Friedman's successor-Scott Sumner-seems to not appreciate when he gloats about winning a bet with Krugman in 2013 about monetary offset.
As to the question of the 1964 tax cuts, Friedman said there was no proof of causation provided by the Keynesians that the 1964 tax cuts were behind the fabulous growth we had in the subsequent years.
"The one that is most dramatic and that Walter Heller emphasized most is, of course, the 1964 tax cut. Now let me point out to you that, so far as I know, there has been no empirical demonstration that that tax cut had any effect on the total flow of income in the U. S. There has been no demonstration that if monetary policies had been maintained unchanged— I’ll come back to that in a moment— the tax cut would have been really expansionary on nominal income. It clearly made interest rates higher than they otherwise would have been. But there is no evidence that by itself it was expansionary on income."
"Arthur Okun wrote a paper in the summer of 1965 that he presented at the Statistical Association Meeting that fall which gave a statistical analysis of the effect of the tax cut.4 It’s a very interesting paper; it’s a fine thing to have done. I think we ought to have more such examinations. But if you examine what he did, you will find that what he has is an illustrative calculation of, not evidence on, the importance of the tax cut."
https://fraser.stlouisfed.org/docs/meltzer/monetary_fiscal_friedman_1969.pdf
Speaking of the 1964 tax cuts, in later years, of course, the Right belatedly came to celebrate them with the rise of the Laffer Curve and the Supply Side Revolution. The SSers would claim Kennedy for themselves.
Bruce Bartlett shows that whatever the impact of the tax cuts, they were in at least one sense unprecedented-or LBJ's budget in 1965 was unprecedented-the tax cuts actually correlated with a very rare occurrence-and actual decline in nominal spending:
"We will never know for sure whether the tax cut would have passed the Senate had Kennedy lived or perhaps been so watered down and amended that it would have failed to stimulate the economy. All we know for sure is that after Kennedy’s assassination on Nov. 22, 1963, Johnson made passage of the tax cut a top priority. Addressing a joint session of Congress on Nov. 27, he said:
"No act of ours could more fittingly continue the work of President Kennedy than the early passage of the tax bill for which he fought all this long year. This is a bill designed to increase our national income and federal revenues, and to provide insurance against recession. That bill, if passed without delay, means more security for those now working, more jobs for those now without them, and more incentive for our economy."
"One crucial problem confronting Johnson was that he took office in the midst of planning for the budget for the 1965 fiscal year, which would be sent to Congress in just a few weeks. He was somewhat hamstrung by a promise Kennedy had made to keep the deficitbelow $9.2 billion. This may not sound like much, but the entire federal budget in those days was about $100 billion. The tax cut was expected to reduce revenue by $11 billion in 1964, and the gross domestic product was a little more than $600 billion."
"Johnson’s strategy was to cut spending in order to pacify Senate conservatives and members of the business community. He asked for a reduction in nominal dollar spending in 1965 below that in 1964, something that has happened only rarely in American history and usually only after wars ended, permitting a big cut in military outlays. Budget concepts today differ from those in 1964, but current figures show that Johnson accomplished his goal. Spending was $118.5 billion in the 1964 fiscal year, and $118.2 billion in 1965."
So a tax cut that accompanied a drop in nominal spending-that's not how the Keynesian multiplier is supposed to work. Or how monetary easing should work either-the idea is that to juice the economy you need to see more not less nominal spending.
"Space prohibits a full discussion of the impact of the tax cut, but current data show that inflation-adjusted G.D.P. increased 5.8 percent in 1964 after a 4.4 percent rise in 1963. Growth improved to 6.5 percent in 1965 and 6.6 percent in 1966. These were the three best back-to-back years for economic growth in the postwar era, and economists generally credit the Kennedy-Johnson tax cut for much of it."
Friedman in response I think makes a very perspicacious argument about the nature of economic debates-and it applies to political debates more generally.
"I think it will be interesting if you have an experiment in 1969 on the effects of fiscal versus monetary policy. But whichever way it goes, it’s only going to be a small part of the total body of accumulated evidence that is available. But let me turn to a couple of episodes."
https://fraser.stlouisfed.org/docs/meltzer/monetary_fiscal_friedman_wh (Pg. 55)
I think this is a very perceptive and important point. It's that you can always find lots of correlations that show you plausbly might be right but it's much more difficult to show that you likely are right. Proving causation is the tough part.
It's rare that there is a true smoking gun moment where even those who disagree with you have to admit you're right.
He was basically warning that however things went in the economy in 1969 by itself it probably wouldn't be conclusive. This is something Friedman's successor-Scott Sumner-seems to not appreciate when he gloats about winning a bet with Krugman in 2013 about monetary offset.
As to the question of the 1964 tax cuts, Friedman said there was no proof of causation provided by the Keynesians that the 1964 tax cuts were behind the fabulous growth we had in the subsequent years.
"The one that is most dramatic and that Walter Heller emphasized most is, of course, the 1964 tax cut. Now let me point out to you that, so far as I know, there has been no empirical demonstration that that tax cut had any effect on the total flow of income in the U. S. There has been no demonstration that if monetary policies had been maintained unchanged— I’ll come back to that in a moment— the tax cut would have been really expansionary on nominal income. It clearly made interest rates higher than they otherwise would have been. But there is no evidence that by itself it was expansionary on income."
"Arthur Okun wrote a paper in the summer of 1965 that he presented at the Statistical Association Meeting that fall which gave a statistical analysis of the effect of the tax cut.4 It’s a very interesting paper; it’s a fine thing to have done. I think we ought to have more such examinations. But if you examine what he did, you will find that what he has is an illustrative calculation of, not evidence on, the importance of the tax cut."
https://fraser.stlouisfed.org/docs/meltzer/monetary_fiscal_friedman_1969.pdf
Speaking of the 1964 tax cuts, in later years, of course, the Right belatedly came to celebrate them with the rise of the Laffer Curve and the Supply Side Revolution. The SSers would claim Kennedy for themselves.
Bruce Bartlett shows that whatever the impact of the tax cuts, they were in at least one sense unprecedented-or LBJ's budget in 1965 was unprecedented-the tax cuts actually correlated with a very rare occurrence-and actual decline in nominal spending:
"We will never know for sure whether the tax cut would have passed the Senate had Kennedy lived or perhaps been so watered down and amended that it would have failed to stimulate the economy. All we know for sure is that after Kennedy’s assassination on Nov. 22, 1963, Johnson made passage of the tax cut a top priority. Addressing a joint session of Congress on Nov. 27, he said:
"No act of ours could more fittingly continue the work of President Kennedy than the early passage of the tax bill for which he fought all this long year. This is a bill designed to increase our national income and federal revenues, and to provide insurance against recession. That bill, if passed without delay, means more security for those now working, more jobs for those now without them, and more incentive for our economy."
"One crucial problem confronting Johnson was that he took office in the midst of planning for the budget for the 1965 fiscal year, which would be sent to Congress in just a few weeks. He was somewhat hamstrung by a promise Kennedy had made to keep the deficitbelow $9.2 billion. This may not sound like much, but the entire federal budget in those days was about $100 billion. The tax cut was expected to reduce revenue by $11 billion in 1964, and the gross domestic product was a little more than $600 billion."
"Johnson’s strategy was to cut spending in order to pacify Senate conservatives and members of the business community. He asked for a reduction in nominal dollar spending in 1965 below that in 1964, something that has happened only rarely in American history and usually only after wars ended, permitting a big cut in military outlays. Budget concepts today differ from those in 1964, but current figures show that Johnson accomplished his goal. Spending was $118.5 billion in the 1964 fiscal year, and $118.2 billion in 1965."
So a tax cut that accompanied a drop in nominal spending-that's not how the Keynesian multiplier is supposed to work. Or how monetary easing should work either-the idea is that to juice the economy you need to see more not less nominal spending.
"Space prohibits a full discussion of the impact of the tax cut, but current data show that inflation-adjusted G.D.P. increased 5.8 percent in 1964 after a 4.4 percent rise in 1963. Growth improved to 6.5 percent in 1965 and 6.6 percent in 1966. These were the three best back-to-back years for economic growth in the postwar era, and economists generally credit the Kennedy-Johnson tax cut for much of it."
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