Says the Left: We Were Rich and Awesome When Taxes Were Higher

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John Kenneth Galbraith said in 1965 that there was no problem in New York that couldn’t be solved by doubling the city’s budget. By the 1970s the budget had been tripled, and the city’s budget crisis was worse than ever.

That embarrassing moment came to mind when I read this bit of nonsense circulating on the Internet: “In the 1950s and 1960s when the top tax rate was 70-92%, we laid the interstate system, built the Internet, put a man on the moon, defeated Communism, our education system was the envy of the world, our middle class thriving, our economy unparalleled. You want that back? Raise taxes on the rich.”

It is precisely this kind of inanity that Liberty Classroom was created to help people to answer — and not just answer, but smack down mercilessly.

We’ll pursue this topic further on our Forums, but a few preliminary thoughts here.

(1) Via loopholes or outright tax evasion, these tax rates were not paid. (UPDATE: See also this link.)

(2) Big spending programs are not evidence of prosperity; the U.S. government could duplicate any of these programs today.

(3) Left out is that when our education system was supposedly “the envy of the world,” it was spending far less per capita, adjusting for inflation, than it does today. From the early 1970s to 2003 alone, spending per capita doubled. So the Left has actually gotten its wish, though it pretends it hasn’t. Meanwhile, Japan, spending one-third as much per capita, and with much larger class sizes, vastly outperforms the U.S.

There is no connection between higher education spending and higher SAT scores. In fact, some of the highest scores are earned in states that spend the least on education. Washington, D.C., which spends the most, is dead last. (Statistics here.)

(4) The prosperity of the 1960s was fueled in good measure by the inflationary policies of the Federal Reserve. In John F. Kennedy’s three years as president, M2 growth averaged about 8 percent per year, far higher than in the 1950s. This produces resource misallocation that can look like prosperity. This false prosperity is self-reversing. By 1970 — just as Arthur Okun, influential White House economist throughout the 1960s, was boasting that the business cycle had been tamed forever — the recession began.

Americans paid for that false prosperity with a decade of inflation and stagnation. As economist Mark Thornton points out, “From the beginning of 1946 to the beginning of 1965 the consumer price index increased by 71.4%, but then increased 20% by the end of the decade. From 1965 — when the experiment began in earnest — to the end of 1980 the CPI increased by 176.6%. The experiment had tripled the rate of inflation experienced by consumers.”

It’s not just price inflation and unemployment we should look to for the full story, though.

Again Thornton:

A better indication is to be found in the fact that in May 1970, a portfolio consisting of one share of every stock listed on the Big Board was worth just about half of what it would have been worth at the start of 1969. The high flyers that had led the market of 1967 and 1968—conglomerates, computer leasers, far-out electronics companies, franchisers—were precipitously down from their peaks. Nor were they down 25 percent, like the Dow, but 80, 90, or 95 percent. This was vintage 1929 stuff, and the prospect of another great depression, this one induced as much by despair as by economic factors as such, was a very real one.

The stock market as measured by the Dow did decrease 25% between 1969 and 1971 and then…lost another 20% by mid-1975. However, the real losses in the stock market were larger and longer lasting than an ordinary chart of the Dow might suggest. In the graph below, the Dow index shows that stocks tended to trade in a wide channel for much of the period between 1965 and 1984. However, if you adjust the value of stocks by price inflation as measure by the Consumer Price Index, a clearer and more disturbing picture emerges. The inflation-adjusted or real purchasing power measure of the Dow indicates that it lost nearly 80% of its peak value.

No wonder the tax-raisers want to talk about the 1960s, but then pretend that the equally high-tax 1970s never occurred.

I discuss all this in more detail in my lecture on JFK and in my lecture on the 1970s malaise in our course on U.S. History Since 1877.

(5) Kennedy used the economy of the 1950s against Vice President Richard Nixon in the election of 1960. Economic growth averaged 2.4% per year under Dwight Eisenhower (see The Presidency of Dwight D. Eisenhower) — not a bad record, to be sure, but hardly the earth-shattering, historically unique figure one might expect in light of the constant references to the 1950s.

(6) It was not unthinkable in the 1950s that a family might not have a telephone, a refrigerator (some still had iceboxes), or a television. (Bearing in mind that Ralph was a cheapskate, the Kramdens in The Honeymooners lacked all these things, and the program was not laughed out of court as silly or implausible.) Anyone wanting to live at that standard of living today can do so with precious little effort.  Today, by contrast, 85% of Americans own cellphones, a technology that would have seemed out of science fiction in the 1950s.

(7) Government and its predation on the economy have grown far greater in the meantime; the top marginal tax rate is hardly the only relevant change that has occurred over the past 50 years. The overall tax burden for ordinary families has grown dramatically. These things are not good for the economy.

(8) Going for the jugular, economist George Reisman has a good piece called “Why Everyone Should Be in Favor of Reducing Taxes on the ‘Rich.'”

(9) Even if we were to accept that the 1950s were the summit of human happiness, correlation does not prove causation. How do we know there wouldn’t have been even greater prosperity had taxes been lower? Supporters of this view would have to provide us with a causal mechanism explaining why the violent seizure of property and its expenditure on economically arbitrary projects would make a country more prosperous than employing those funds in capital investment to increase the productivity of labor.

I can point to plenty of relatively limited-government places around the world that are doing very well economically. My critics would refuse to accept that this proves anything. They are partly right. Without a theoretical understanding of what produces prosperity, we can’t know if country A is prosperous because of or in spite of policy B.

(10) The U.S. “defeated communism” in the 1950s and 1960s? Isn’t the timing a bit off? And when the system did collapse, it collapsed because it defeated itself, as free-market economists had predicted it would.

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