[Jthomp76]

Why does Krugman always point to the 50s as an example that Keynesianism works? What’s the rebuttal?

[jmherbener]

He points to the 1950s as a case in which the economy performed adequately while income inequality was being reduced by high marginal income tax rates. Here’s his argument:

http://www.nytimes.com/2012/11/19/opinion/krugman-the-twinkie-manifesto.html

There are many problems with this line of thinking.

First, Krugman implicitly denies that higher incomes on the market are earned by those who bring about superior satisfaction of the consumptive ends of other people. Letting people keep their incomes furthers the social goal of using resources to satisfies the most valuable consumptive ends people have in society at large. Consider this analogy to Krugman’s argument. Suppose the government had a mechanism for allocating grant money to the people who made the most valuable scientific breakthroughs. Given that the ability to make scientific breakthroughs was not evenly distributed across all scientists, would Krugman advocate that 91 percent of the grant money be taken from the top 1 percent of recipients?

Second, Krugman seems to think that higher tax rates on the rich mean they pay more tax revenue. But this is not necessarily true. The top rate on federal income tax in 1980 was 70 percent, in 1986 it was dropped to 50 percent, in 1991 it was down to 31 percent, then rose again in 2000 to 39.6 percent, and today stands at 35 percent. The following charts document that even though top income tax rates have fallen from the 1970 and 1980s, the percent of all income taxes paid by the highest quintile has increased from 65 percent in 1979 to 86 percent in 2007.

http://www.cbo.gov/sites/default/files/cbofiles/attachments/Tax_liability_Shares.pdf

Third, Krugman ignores the fact that the richest depend more heavily on their investments for their incomes than the non-richest do. Therefore, their incomes move up and down dramatically over the business cycle. Krugman is a hypocrite. He claims to desire to reduce income inequality but is one of the biggest advocates of Fed monetary inflation and credit expansion, which generates booms and is a leading source of the elevated incomes of the richest. Of course, when the bust comes, their income plummets. This explains why the richest saw their income fall during the Great Depression and the WWII.

[Jthomp76]

Thank you so much for your answer. To follow up, how would the Austrians explain the prosperity of this time period?

[jmherbener]

The 1950s was a period of restructuring the capital capacity of the economy from the war economy to normalcy. The wartime controls were removed, the monetary inflation subsided, the government’s taxes, expenditures and indebtedness were receding. It took a few years in the late 1940s to transform the capital stock and then, the freer economy could operate normally.

Take a look at the seminal work by Bob Higgs:

http://www.independent.org/newsroom/article.asp?id=138

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