Question for libertarians and fiscal conservatives

Great Debates
1

First of let me give full disclosure. I’m definitely on the fiscal conservative side of things and there are many posts to corroborate that, and none to contradict it. Also, I’m much more of a dilettante than a serious scholar. Never read Ludwig von Mises and don’t intent to.

Now here’s the question posed to me by a liberal/socialist friend: Why did the United States do so well economically in the 1950s following record debt in WWII and 90% tax rates at the time?

My response: Good question, I don’t know. I’m guessing that there’s something to do with the special circumstances of the post-war world. Pent up demand (I think I read that someplace) at home and need to rebuilt massive parts of Europe. But basically, I don’t know, I’ll see if I can find an answer.

Which is what I’m doing here. Can anyone tell me what happened and why? :confused:

2

Cashed up soldiers after the war, a larger working class with women meant more disposable income, factories in the war learnt how to produce fast and cheaper, big factories just standing around with idle capacity, on and on and on.

The beginning of consumerism.

3

Not to mention, virtually no other intact industrial economy, means no foreign competition and you can get away with running a business in a way that would get you killed in today’s economy. The golden age of auto union benefits, for example was made possible by the fact that there was no external competition, so if the companies wanted to give workers generous benefits, sacrificing innovation and productivity somewhat, that wouldn’t hurt them that badly. (And when I say “the companies wanted”, of course, I mean that the unions wanted and the companies didn’t feel like fighting back as hard as they would today.) Of course decades down the line, that kind of stagnation fell flat under the rigors of actual competition. By analogy, the US could “afford” to have growth-reducing high tax rates both because companies were almost guaranteed to do well no matter what you did, and other countries were so poor that they couldn’t compete as hosts for multinationals.

TL;DR: The US had a virtual monopoly on industrial production, and a monopoly’s a pretty good place to be in. It gives you lots of goodies to spread around and make people happy, without hurting your competitiveness - because who are you competing against? In many cases, the US succeeded despite, not because of, its policies; there wasn’t much you could do to screw up that economic position, short of communism or carpet-bombing.

4

But who were American industries supposed to sell their products to? Outside of the United States, everyone was pretty much broke.

What you ended up having was the Marshall Plan. Americans were giving money to Europeans so the Europeans could buy American goods.

5

Even if such comparison of completely different economies across the decades was possible (and there are many other issues, such as the number of deductions and loopholes available, much higher income that they applied to, or the fact the government tax revenues were not at all higher back then), I don’t even think that the premise that the U.S. did much better when the top tax rates were 90%+ is correct. From 1951 to 1963 (when the top marginal tax rate was 91%), the real GDP growth averaged 3.7%. In the next 13 years, it once again averaged 3.7%.

6

Because we essentially had a world wide monopoly on manufacturing and manufactured goods during that period, so we were able to expand our markets and market penetration on a global level, even with large amounts of debt and high tax rates. Just about every country needed a lot of stuff…trucks, heavy equipment, raw materials, goods and services, etc etc, and the US was in a rather unique position to give it too them.

I suppose other factors could have been that the US standard of living was still pretty low (we had just gotten out of the Great Depression, which was pretty grim, and immediately jumped into a world war), and our own people were also wanting tons of goods and services that weren’t available for some time prior to the GD and WWII, which also allowed for rapidly expanding markets, as companies rushed to meet the huge demand following the war. I’m not sure, but I also think that some of the debt the US incurred during the war was from the whole lend lease programs, and other countries were paying at least some of that money back (not sure about this, but think this was the case).

So, we were in the position as the only large manufacturing country level completely intact following the war, and our manufacturing companies were already geared up to make stuff on very large scales, while demand world wide for a whole range of stuff we could provide was huge, as countries went about the process of putting themselves back together.

-XT

7

There was also a lot of consumer capital available due to the high savings rate in WWII (all those war bonds), there was tremendous optimism in the U.S. due to the vctory in WWII, the baby boom was underway and the population was very young and starting households, which meant they were buying houses and consumer goods like mad.

Health care costs were low because A) a lot of expensive treatments we have today didn’t exist, and B) the population was young and healthy. Today if you have cancer, you’ll go through a host of expensive treatments. If your kidneys fail, you’ll spend a long time on expensive dialysis. IN 1950, if that happened the ‘treatment’ consisted of a doctor telling you to go home and die. Today, if an old person’s knee wears out, they’ll get expensive joint replacement surgery. In 1950, they’d get a cane.

During this period, government regulations on business were much lower. This was before the Kefauver amendments to the Pure Food and Drug Act, the Americans with Disabilities Act, all the ‘Great Society’ regulations, and myriad other regulatory burdens that have been put in front of business since then.

The economy was less mature then, meaning there was more low-hanging fruit to be had in terms of efficiency gains. Developing economies always grow faster because of this. The 1950’s saw the start of a technological boom in electronics, business processes, energy infrastructure, transportation, and other components of a modern 1st world economy. At the start of WWI for example, air travel was still a slow, noisy, dangerous affair that was available only to the rich. By the end of the 1950’s, modern jet airliners were available.

WWII had all kinds of rationing, which caused pent-up consumer demand. When the rationing ended, consumer demand spiked.

Don’t underestimate the value of Keynes’ ‘animal spirits’. The U.S. population was optimistic, there was a ‘can-do’ spirit, people worked their butts off, and American exceptionalism was the rule of the day.

People who quote the 91% tax bracket as proof that high taxes don’t hurt economic growth are cherry-picking a single number and ignoring the other vast differences between the economy then and the economy today. But the fact is, even then the high tax brackets were seen as an impediment to growth. When Kennedy lowered the top rate from 90% to 70%, real tax revenue went up 33% in inflation and population adjusted terms over the next five years. Clearly the high rates were not just a drag on the economy, but had gone past the point of diminishing returns and were actually resulting in less revenue because of excessive tax avoidance or the growth-limiting effects of the high rates.

Of course, we can ask the same kind of question in reverse. Let me ask you: If big government is such a good idea, how come the 50’s saw such a boom when total government spending in the U.S. was only 21% of GDP - less than half of what it is today? If deficit spending boosts an economy through Keynesian stimulus, how come the economy didn’t collapse after WWII when government spending dropped from 53% of GDP down to 21%? How could an economic boom even be possible when so much government spending was stopped so suddenly?

8

A fair amount of the growth was that the government funding of returning GI benefits. In the short term it boosted the economy by giving housing loans. The government also provided money for GIs to get educated, which had huge economic benefits in the long term. Overall the benefits from these two things were far more than what it cost the government to do them, thus the economy grew and national debt decreased. I don’t have the facts and figures offhand, but if my memory is correct the US spent more on GI benefits than it did on the Marshall plan to rebuild Europe.

Which is kinda an important lesson there. If you aid people in buying homes AND make sure they have the skills to get good paying jobs to pay off those mortgages, things go rather well. Somewhere along the line we forgot all about the skills for good paying jobs part, but still kept pushing people into buying homes. The results of that have become quite obvious recently.

9

Sam Stone, as always, does much better than I when articulating a response.

Just to pile on, I might answer your question with a question…how can the government taking 91% of marginal income result in a private-sector ‘boom’?

What could possibly happen when government officials take that money and shuffle it around, that could result in an explosion of wealth-creation and employment in the private sector?

If there is no reasonable hypothesis to answer that question (and there are a few, I will admit…but they are never discussed intelligently on this Board) then the government has no right to that money.

The burden of proof is not on you to somehow “prove” the taxpayer has a right to his/her own money. The burden of proof is on the government to show how they will not squander it. Otherwise it belongs to the taxpayer.

10

The 2010 budget was $3.5 trillion, about half a trillion of which was emergency spending to counteract the economic meltdown brought about by deregulationist fuckwits. $3.5 trillion is not more than 42% of US GDP, is it? Remove the emergency spending and what number is it close to, hmmmm? As far as how we could get an economic boom in the fifties despite the government cutting spending you answered your own question. Different times baby. Right now we’re feeling the effects of thirty years of the aforementioned fuckwittery and individual and corporate taxes, if and when we do get out of this mess, will have to go up considerably.

11

My point, which I guess I wasn’t clear enough on earlier and which the anti-tax crowd never grasps, is that money doesn’t disappear when the government collects it. Sure the government was taxing some people at 91%. But then it turned around and spent the money it had collected.

Do you think industries care who they sell their products to? They’re just as happy selling their products to the government as they are selling them to private citizens. And a private citizen buying stuff with money he got from the government is spending just the same as a private citizen buying stuff with money he got from a job or investments.

An economy is all about money moving around. And goverment taxation and government spending certainly move money around. They’re not the ideal means of circulating money in the economy but they’re not as devastating as some people believe. Sometimes government spending is an economic good because it’s buying things when other customers aren’t.

12

Please cite an example of that. And how the taxpayer spending his own money isn’t a more optimal allocation of resources.

13

Which is better - the government buying schoolbooks for a classroom or an addict buying crack? According to your logic, the crack is the more optimal allocation of resources.

14

Only if you are a crack addict. If you aren’t, then a more optimal allocation might be hookers and blow, or bibles or something…

-XT

15

Don’t help him. I want to hear Idaho explain how crack is better than schoolbooks. He stated his belief and now I want to see if he can back it up.

16
  1. First of all, MOST citizens, the average guy, the average family with 2 or 3 kids, did NOT pay 90%. In fact, the average citizen paid very little income tax in the 1950’s, he paid very little property tax, very little or no state income tax, and FICA pay deductions in the 1940’s and 1950’s were only about 100 bucks annually - Max!/maximum.
    Overall, taxes were EXTREMELY low in the 1940’s and 1950’s for the middle class. So much so, that wives did not need to work back then. Today, a spouse is needed to work just to pay all the taxes on today’s family.
  2. The United States did well economically from 1775 up into the 1970’s, due to protective **trade tariffs **that protected our good paying jobs and our many industrial factories. It was trade tariffs that gave Americans the highest standard of living and the highest paying jobs in the world.

The dismantling of trade tariffs began in the 1970’s, and we have been losing good paying jobs and losing our factories since then.

17

Better for whom?

I thought the problem we were trying to solve, way back up the post ladder in this thread, was that people didn’t have enough resources to purchase things that they needed…education, healthcare, etc.

So I proposed we give them resources. Then they can do what they want with it. There is no more need for the government to get involved. And all the various departments, regulatory agencies, etc. can go away.

Or is that really the problem? It sounds like you are actually proposing something different.

Which is it? Is it that the poor don’t have enough resources? Or are you saying the problem is something else?

18

I’m hesitant to speak for Sam as he knows his shit, but I’m pretty sure he meant total government spending; over $6.4 billion if you take into account S&L. With US GDP probably coming in around 14 and a half billion this year, 40% is in the ballpark.

19

It is better for the crack addict to buy crack than for the govt to take his money for school books. How can this be?! :smiley:

First let’s set aside scenario where the crack addict is burglarizing homes and stealing cars to fund his crack purchases. Criminal actions like theft are non productive to the economy. For this hypothetical, we’ll just say the crack addict is working at a legitimate 9-5 job (maybe even some overtime too!) to pay for his cocaine.

Well, the flaw in your reasoning is that you’re taking past historical expectations and motivations for earning $$$ and later applying that earned $$$ to present-and-future purchases that you deem more noble. You can’t do that because you can’t assume that money even exists in both universes for you to “re-allocate” correctly.

Yes, school books may be more worthy purchase than crack cocaine but normal people don’t motivate themselves to work so they can buy “school books for all the children.” If the crack addict knew ahead of time that his money would be taken for govt purposes such as school supplies, he may have not worked overtime or simply just avoided working at all. He’s no longer part of the productive output that can be counted (or taxed in other words.)

As a similar example, let’s say a drug scientist and his wife have a baby. It turns out the baby has a very rare disease that only happens 1 in 1 million people. The scientist is devastated but vows to find a cure. The scientist then works day and night researching and experimenting with chemistry to invent a new drug that will save his child. After 5 years, he finally stumbles across a drug combo that works. He’s overjoyed. Not only did he save his own child but also the 7,000 other humans (7 billion divided by 1 million) that have the same disease.

However, a critic might say he should have devoted his 5 years to finding a cure for some other disease that has more sufferers such as AIDS or muscular dystrophy. Muscular dystrophy has affected 250,000 and the scientist supposedly “misallocated” his brainpower and effort on something that only helps 7,000 vs 250,000. Again, the flaw is that you can’t count that scientists’ past effort with his framework of expectations and reapply it for something else. All those past hours of monumental effort only existed because of his dire circumstances of his child. People often like to say that money is “fungible” and think that idea also applies to motivations. Motivations for economic output are not fungible.

So a more complete picture is that if you’re analyzing the economic incentives and govt spending, you also have to reconstruct the whole mental framework of the taxpayer at the time the money was earned. I think we leave out the original motivations that triggered the economic activity because we inadvertently use short sentences that’s missing some crucial context.

If I paraphrase IdahoMauleMan, he said something like:

“the taxpayer spending his own money is a more optimal allocation of resources.”

It’s more accurate (but unfortunately more wordy) to state it as:

“the taxpayer with the expectations of spending his own money is a more optimal structure of incentives which leads to more resources to optimally allocate.”

It’s an awkward sentence but the idea is to separate the point-in-time mental framework of earning that money from the later decisions to allocate it among various worthy causes."

You can’t work backwards from some noble goal such as “school books” and assume the work output will be there to make it happen. Instead, you let people pursue what they want and you “skim” off the money (taxes) from the flurry of economic output to fund the “school books.”

20

I don’t know. You’re the one that said it. If I had it was “most optimal” I suppose I would have meant it was better for everyone. But I’m asking you what you think.

Really? Because I don’t see any of that in the OP. The OP was asking how you can reconcile the hsitorical fact of a long period of high taxation and general prosperity with a claim made by some people that high taxation always causes economic decline.

Is this an answer to my question? Are you saying that an addict buying crack is the most optimal use of resources?

If you’re asking for my personal views, I feel that the government and businesses and individuals make an overlapping range of decisions. In some cases the government makes better decisions than businesses or individuals. In some cases businesses make better decisions than the government or individuals. And in some cases individuals make better decisions than businesses or the government. So I don’t think you can rank them first, second, and third. You have to look at the decisons being made on a case-by-case basis and decide whether each decision is better of worse than somebody else’s decision.