LITTLE ROCK — GENTLE READER may have noted the regular contributions of Paul Krugman to this page. He provides a welcome counterweight to our editorial opinions, for his column functions as both an alternate view and sitting duck. It’s a weekly temptation to point out some of his more myopic observations about politics, economics and you-name-it that we regularly pass by, but when he plays historian, a decent respect for the past won’t permit us to pass over his imagined version of it in silence. Just out of respect for the historical record. For silence gives consent. And the young and gullible may be led to believe Dr. Krugman is writing real history instead of another of his polemics disguised as economic analysis.
It’s one thing to advocate some policy for the future, or engage in robust debate about the country’s present course, but there ought to be something inviolable about the past, and while historians regularly re-interpret it, just making it up crosses the line. And somebody needs to blow the whistle when that happens. So consider this a short, sharp, shrill blast at Dr. Krugman’s fanciful account of the roots of American prosperity, 1945-60. Call it the editorial equivalent of a yellow flag on the play.
Let’s replay those years as they really were or, as the father of modern history, Leopold von Ranke, put it: wie es eigentlich gewesen ist. Despite expectations after the Second World War had come to a close, this country did not sink back into hard times once the war had ended, and with it all that wartime spending.
How surprising, for it was a time when many Americans assumed that once government didn’t have to finance a worldwide war, and could cut taxes and ease its restrictions on the economy (like rationing and wageand-price controls), a recession was inevitable—maybe even a return to the Depression of the 1930s. It was a time before Milton Friedman had come along and turned the dismal science on its head, when Keynesianism was not just the dominant economic philosophy but almost folk wisdom. Americans who may never have heard of John Maynard Keynes had absorbed his economic theories almost by osmosis, they were so much a part of the political and intellectual air back then.
THESE DAYS Keynesianism ain’t what it used to be, but a few true believers—like Paul Krugman—still survive. And no matter what phase the economy may be in at the moment, boom or bust, they can be counted on to offer much the same advice: (1) tax, and (2) spend. And if that doesn’t work, and it hasn’t for the past four years, not very well anyway, why, just up the ante, and tax and spend even more. Just call it by a more respectable name, like Stimulus. Even if, instead of fully recovering from the late unpleasantness of 2008-09, the American economy seems to have been stimulated into a coma that even now is only slowly lifting.
This week Dr. Krugman supplied an explanation for the unexpected vigor of the American economy during the Eisenhower Years by explaining that it was largely the result of, you guessed it, keeping taxes high. Individual taxes, corporate taxes, all taxes. Especially on those with the most to tax. The problem today, he explained, is that the “modern American right, and much of the alleged center, is obsessed with the notion that low tax rates at the top are essential to growth.”
Whereupon the good Herr Doktor rolled out this historical factoid to refute any such notion: “Yet 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 high, too. And look how well the country did!
Case closed.
No need to go into detail. Details like these:
—The marginal rate on top incomes may have been 91 percent in the 1950s, but how many Americans actually paid it after taking advantage of all the deductions, exemptions, subsidies and tax shelters provided favored interests, industries and investments back then, and even now?
For example, the notorious 27.5 percent “oil depletion allowance” that was considered less a part of the U.S. tax code than holy writ in states like Texas. More recent subsidies include hand-outs for “green” industries. Think ethanol and Solyndra, those poster children for wasteful government spending and still more interference with the free market.
The effective tax rate on top earners in this country has long been lower than the one on paper, or the top earners wouldn’t have enough capital left to invest in the economy, start new enterprises, or employ the rest of us.
For example, the Congressional Budget Office put the effective tax rate for the top 5 percent of earners at 19 percent in 1979 and 20.8 percent in 2001. Their lowest effective rate was 16.6 percent in 1986 and highest (20.8 percent) in 2000. Their average effective rate over those years: 18.9 percent. A far cry from glib talk of a 91 percent tax rate.
—Even as the country ended the post-war era of the late 1940s, Congress was slashing taxes. The Revenue Act of 1945 cut them by some 13 percent of federal revenues the next year, one of the biggest tax cuts in American history. It also repealed the wartime “excess-profits” tax and cut the top marginal tax rate from 94 to 86 percent, and the lowest marginal tax rate from 23 to 19 percent.
To quote Walter George, chairman of the Senate Finance Committee at the time, the lower taxes would “so stimulate the expansion of business as to bring in a greater total revenue.” It did. Just as cuts in the capital-gains tax have had much the same effect ever since, whether the president of the United States was named Kennedy, Reagan or Bush at the time. The lower the tax rate, the more revenue government seems to collect. Which figures: Lower taxes spur investment, producing more income to tax.
—When the Republicans took control of both houses of Congress in 1946, they wasted no time phasing out wartime rationing, and phased in still another round of tax cuts with predictable results: Business investment went from $10.6 billion in 1945 to $40.6 billion by 1948, setting the stage for an historic expansion of the American economy that wasn’t supposed to happen according to the Keynesian orthodoxies of the time. All this over the heated opposition of a Democratic president (Harry S. Truman) and the leading liberal economists at the time.
INSTEAD of the post-war economy declining as taxes fell and government restrictions eased, it grew dramatically. In 1947, the country had a Gross Domestic Product of $231 billion. Between 1945 and 1960, it grew at an average annual rate of 4.75 percent. What’s more, the prosperity of the Eisenhower Years proved only a preface to the longrunning economic expansion of the 1960s after the Kennedy tax cuts were enacted.
Unemployment, which had measured 3.9 percent in 1948, stabilized at 3.1 percent in 1956. Compare that enviable figure to the current unemployment rate of 7.9 percent. That’s after an $800-billion “stimulus” passed in the first months of the Obama administration, the largest economic recovery package in American history—with some of the most disappointing results.
To summarize: The only detail Paul Krugman seems to have left out of his simplistic history of the post-war American economy is history itself.
Editorial, Pages 16 on 11/28/2012