WASHINGTON — Wondering why government can’t restart the sluggish economy? Well, one reason is that we are still paying the price for the greatest blunder in domestic policy since World War II. This occurred a half-century ago and helps explain today’s policy paralysis. The story — largely unrecognized — is worth understanding.
Until the 1960s, Americans generally believed in low inflation and balanced budgets. President John Kennedy shared the consensus but was persuaded to change his mind. His economic advisers argued that, through deficit spending and modest increases in inflation, government could raise economic growth, lower unemployment and smooth business cycles.
None of this proved true; all of it led to grief.
Chapter One involved inflation. Increases weren’t modest; by 1980, they approached 14 percent annually. Business cycles weren’t smoothed; from 1969 to 1981, there were four recessions. Unemployment, on average, didn’t fall; the peak monthly rate — reached in the savage 1980-82 slump — was 10.8 percent. Americans lost faith in government and the future, much as now. Confidence revived only after high inflation was quashed in the early 1980s.
Now comes Chapter Two: How the retreat from balanced budgets has weakened America’s response to today’s downturn, the worst since the Great Depression. It has limited government’s ability to “stimulate” the economy through higher spending or deeper tax cuts — or, at least, to have a legitimate debate over these proposals. The careless resort to deficits in the past has made them harder to use in the present, when the justification is stronger.