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Tuesday, November 20, 2012

Nostalgia For the Fifties–Bad Idea

Paul Krugman has written a paean to the 1950s (The Twinkie Manifesto, New York Times 11.18.12), suggesting that in that idyllic era we all lived with high tax rates and enjoyed a booming economy.  Therefore, says Krugman, the current conservative rhetoric that preaches lower taxes for the wealthy produces higher economic growth is simply wrong.

In the 1950s incomes in the top bracket faced a marginal tax rate of 91, that’s right, 91 percent, while taxes on corporate profits were twice as large, relative to national income, as in recent years. The best estimates suggest that circa 1960 the top 0.01 percent of Americans paid an effective federal tax rate of more than 70 percent, twice what they pay today.

Not only that, the Labor Movement was at its strongest and most muscular:

In 1955 roughly a third of American workers were union members. In the biggest companies, management and labor bargained as equals, so much so that it was common to talk about corporations serving an array of “stakeholders” as opposed to merely serving stockholders.

Not so fast say critics like Brink Lindsey of the Cato Institute Brink Lindsey (CATO@Liberty 11.19.12). Correlation is not causation.  

Economic performance is a function of both economic policies and the underlying conditions for growth. When conditions are highly favorable (as, in China’s case, when relative backwardness creates the possibility for rapid catch-up growth), even fairly bad policies (like China’s) can produce good results. And it turns out that the conditions in the United States during the early post-WWII decades were highly favorable indeed.

But several factors were especially conducive to strong performance at that time. There was a pent-up demand for goods and services after the privations of the Great Depression and the mobilization of World War II. There was also a pent-up supply of new products that couldn’t be brought to market during the depression and war years. That pent-up supply was augmented by technological and organizational breakthroughs accelerated by the imperatives of total war.

Big advances in transportation, communications, and air conditioning stimulated catch-up growth in the underdeveloped South and under-populated West. And rapid upgrades in human capital (first explosive growth in high school graduates, then explosive growth in college graduates) doubtless helped to spur productivity gains.

The reason why taxes were so high was because they could be.  The economy was booming to such a degree that taxing both wealthy and non-wealthy alike was unlikely to slow down production or consumption. The Federal Government, always anxious to tap the public for some spare change, was no different in the Fifties than today. 

Krugman talks winsomely about the corporate executives “serving an array of ‘stakeholders’ as opposed to merely serving stockholders”, implying that in the Golden Fifties there was a harmony between corporate executives and labor leaders.  Nothing could be farther from the truth. The labor movement had victories because business, flush with new money, felt that it was easier to pay off union bosses than to fight them. There was then and there always will be a dynamic struggle, a la Marx between labor and capital.  The only problem is that capital is winning.  Labor, bloated with its early successes, and convinced that capitalists were patsies, proceeded to extract more and more resources from business with big-muscle tactics until the tide turned, and it missed the conservative, free market, right-to-work boat.

Krugman falls into another correlation-causation trap.  He says that in the 1950s corporate executives lived in modest homes compared to the garish, baroque pleasure palaces of today.  That was because, argues Krugman, that high taxes reined in otherwise crass and venal interests and used the money for more appropriate social ends. Let is forget for a moment the patronizing sentiments expressed by Krugman – that government has more taste than fat cat capitalists eager to spend and display their wealth in showy, glitzy ways and should regulate that ignorant tendency.  

One reason why CEOs and their Boards of Directors lived in the modest homes of Fairfield County, Connecticut, or Grosse Pointe was because they were members of the WASP elite for whom any crass show of wealth was beneath them and simply not done.  Their houses were simple frame or brick – yes, set on a large acreage, but well-landscaped and-designed – and their second homes on Martha’s Vineyard, Nantucket, or the Upper Peninsula were rough-hewn, integrated into the landscape and above all, tasteful.  This was the WASP culture of the 50s.  Higher taxes most definitely did not force these corporate executives into modesty.

Cato’s Lindsey notes that the Fifties soon turned to the Miserable Seventies, which thanks to tax reform among other factors, the economy returned to boom times: 

When conditions for growth become less favorable, performance deteriorates and pressure builds for new policies. Which is exactly what we saw in the 1970s: stagflation, followed by the dismantling of price and entry controls in the transportation, energy, financial, and communications sectors and a steep drop in marginal tax rates. Together with disinflationary monetary policy, those reforms helped to unleash the Long Boom of the ’80s and ’90s.

Krugman can’t just let his Golden Fifties lie, and he has to get in one more paternalistic platitude:

There are, let’s face it, some people in our political life who pine for the days when minorities and women knew their place, gays stayed firmly in the closet and congressmen asked, “Are you now or have you ever been?” The rest of us, however, are very glad those days are gone. We are, morally, a much better nation than we were. Oh, and the food has improved a lot, too.

We are a morally better nation thanks to the likes of Krugman who have made a living by excoriating the wealthy and by lionizing the poor, the disadvantaged, and the excluded.  If anything, we are a morally inferior nation with greed and unalloyed individualism rampant, accountability and responsibility forgotten from boardrooms to the inner city…Sorry, I, like Krugman, can get carried away.

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