Our budget deficit has crested $1.4 trillion, the national debt is over $12 trillion. Every citizen in this country owes over $40,000 in debt. Not that’s not credit card, that’s the national debt per capita. Another view is that the national debt this year will be very close to 100% of GDP.

We’ve been running deficits for years. We had a couple of good years at the end of the 90s but Republican leadership chose to give out tax breaks instead of paying down debt. Then we had some wars, and a recession. Democrats and Republicans are equally guilty.

But who really started this mess? That charismatic leader of the early 1960’s that was unfairly taken from the world, John F Kennedy is to blame for our deficit.

A history lesson is in order. We run a deficit when the government spends more money than it takes in. Up until the 60s we only ran deficits in times of war. Military spending far outpaced tax revenues and so the government raised money with debt. A famous economist by the name of John Maynard Keynes proposed that running a peace-time deficit could stimulate the economy. No one had tried it before, but JFK was fresh in office and his economists were drinking the Keynesian Kool-Aid.

There are essentially two ways you can run a deficit to stimulate the economy. You can increase government spending without increasing taxes or you can give tax cuts; naturally we’ve done both in the current recession. There are also two kinds of tax cuts: supply-side and demand-side. You older folks will know of supply-side economics as “trickle down economics”. Cutting taxes on the supply side helps business. They produce more, hire more, and provide more to consumers at lower prices. Demand-side cuts out the middleman and provides tax cuts direct to the consumer. We have more money to spend and stimulate the economy.

Kennedy focused on stirring demand with tax cuts directly to the people. He was assassinated before the bill was passed. However after Kennedy was killed the stalling in Congress on the bill passed with flying colors. Kind of like a legacy thing.

And of course like any other stimulus program it didn’t work as intended right? Wrong. The tax cuts were largely considered a success. It did exactly as it was intended.

But then almost every president after JFK, starting with Johnson, ran greater and greater deficits. It’s become the de facto fiscal stimulus method. And perhaps it’s the best policy, but we won’t know for sure unless someone stops buying our debt.

Regardless, we have a huge debt to pay back, and it started with JFK. No it’s not really fair to blame him. The original program was for $10 billion in stimulus, a laughable amount by today’s standards. A government with any level of restraint would see temporary deficits as a real method of success. I guess we’ve just redefined “temporary” from a few years to a few decades.

Were Keynes or JFK alive today and saw what was done with this theory, they’d certainly not be interested in taking the credit for our deficits today. What we have today is not what either would have envisioned. But it did start with Keynes’ theory and JFK’s implementation. You decide who’s at fault (hint: probably LBJ).

By The Weakonomist

The Weakonomist is the founder of Weakonomics. Clicking the picture of the puppy will tell you more about him. If you like what you're reading consider subscribing to the blog, following him on Twitter, and checking out the related posts below. Please consider a donation if you really enjoy Weakonomics. Also keep in mind that nothing I say can be construed as financial advice.

categories: economics, government