Thursday, May 10, 2012

History 101: The 1950's Misconception

Hopefully I can get you all on the road to rational, informed
For our first History 101 topic, we're going to discuss the 1950's economic boom, and why I think it's silly that Democrats like to use it as proof that government spending works.  Let me preface this whole discussion by disclosing the fact that I hate economics, and I try to stay away from the subject as much as possible.

Anyway, whenever the subject of taxes comes up in discussion and debate, particularly increasing the marginal income tax rate on the "rich," I've noticed that the Democrats often bring up the marginal tax rates during the 1950's.  The richest Americans in the top bracket were taxed at or above 90% for the whole decade.  To be in the top bracket during the 50's meant that your annual income had to be $400,000 or greater.

The logical conclusion, as they see it, is that when the government taxes the rich heavily and spends that money, the economy benefits immensely.  Afterall, the 1950's is considered a boom period (for the most part), and the government did spend a lot of money.  There are two factors, however, that are overlooked.

Thing one is that what the money was spent on is not mentioned often (although to his credit, Jersey did mention this the other day).  The money was spent on projects that improved America's infrastructure: highway construction, grants for airports and the like.  So yeah, that was money well spent.  There is no argument against the notion that an improved infrastructure can spur economic growth.

But what is the government spending most of its money on these days?  Over 50% of the budget goes to entitlements.  Social welfare programs don't really spur growth, and they're not designed to spur growth.  They're designed to keep people afloat.  Sorry, but doling out a clothing stipend to some idiot who blows it all on a new pair of Jordans (yes, that does happen) is not the same as dropping money on building a sorely needed highway.

"But Jack, that's not all the money was spent on!  Eisenhower was committed to the continuation of a lot of the New Deal social welfare programs!"  Fortunately, that little factoid leads me to thing two.  Why were the marginal tax rates so high in the 50's?  Because Eisenhower believed in a balanced budget.  Taxes were so high because he believed that the government should actually be able to pay for what it's buying.

As Joe mentioned, we had budget deficits during World War II.  While true, those deficits did not necessarily lead to the prosperity of the 50's.  When the war ended, a lot of people who found work during WWII found themselves out of work again.  So it's not as if the WWII spending was the panacea to the depression.  In fact, the Federal Government was deeply concerned about inflation, so they adopted the seemingly crazy notion of keeping a balanced budget.

An excerpt from this article sums up quite succinctly the reason for our success during the 50's:
A commitment to classical budget principles was adopted by the Federal government in an attempt to reduce the size of the Federal budget, improve operating efficiency of departments, and to reduce waste. A reliance was put on private investment in the belief that economic growth would therefore take care of itself.
Lo and behold, that's what they did.  In 1958:
In fiscal year 1958, Eisenhower's budget of $73.3 billion sparked debate because it marked an increase of $2.8 billion over the previous fiscal year, despite analysts' predictions of a slight surplus. A Battle of the Budget ensued over the highest expenditure proposal in peacetime, with fears of an upcoming depression if spending continued at current levels.
That year, they had run a $12 billion deficit, and unemployment rose to 7.5%.   The budget had grown to the largest Federal Government expenditure during peacetime ever, ever.  And as the budget grew, growth slowed.  Why?

I don't know, to be honest.  But government spending does not automatically produce huge economic growth and/or prosperity.  Running deficits certainly has not helped us.  We've been running budget deficits ever since GWB took office, and what do we have to show for it?

"But Jack, that's because the money was spent on war!  It was spent on things that don't spur growth!"  Hmm, that argument seems familiar . . .

So there you have it.  It doesn't seem so cut and dry to me.  Perhaps I'm leaving something out?  All I know is that the logic doesn't seem to hold up.  If you read the article, the fear over budget deficits is not a new thing.  Eisenhower was just as concerned about inflation as many people are now, and many people feared that huge deficits would lead to a depression. 

Given that we've had high deficits for the last 12 years and have yet to see meaningful improvement, perhaps it's safe to say that they were on to something in the 1950's?

*Taken from data provided by the National Taxpayer's Union


Joe Markowitz said...

I agree with a lot of what you are saying, but I think to some extent you are mixing up the issue of deficits with the government spending. You can have high deficits without necessarily having the government make up a huge proportion of the economy. You do that by having low taxes and spending more than you take in. And you can have low deficits and a high proportion of government spending. You do that by making sure you raise enough revenue to cover your spending. So I think you have to analyze those two issues--government spending and deficits--separately.

The part I agree with is that it does matter what the government spends money on. Infrastructure spending should be the least controversial kind of government spending, because those projects can return benefits to the economy many times over, the Interstate Highway System being a great example. But there are lots of other examples, such as satellites developed by the space program, or the technology of the internet, or great public universities. Not all these public works projects are going to create benefits--some of them might even be wasteful or unnecessary--but others create enormous returns on investment. And we can't always rely on the private sector to make these investments, because the private sector does not have the incentive to build things for which the company making the investment will not see a return, such as a highway that benefits a whole region.

As for social welfare spending, you can make the argument that it is wasteful economically because arguably you are taking from the most productive members of society and rewarding the least productive. But you can also make the argument that this kind of spending benefits the economy because you are helping people who receive unemployment insurance or food stamps or student loans eventually become more productive. You can also make the argument that this kind of spending is neutral economically, because all whatever it takes from one person is exactly balanced out by what it gives to someone else. That's why those kinds of payments are sometimes called transfer payments.

Jack Camwell said...

Excellent response.

Perhaps I was a bit unclear about what I was trying to say. High government spending is okay so long as we've got the money to cover it.

However, high government spending is only okay if it's being spent on things that will create some meaningful return. The idea behind welfare is that it's a temporary safety net, at least that's what I think the original premise was.

It's not a temporary safety net anymore. As I said it's designed to keep people afloat. However, it's not designed to help people improve their lot in life. It would be great if every person on welfare eventually improved their economic potential, got off of welfare, and then started adding more to the economy.

But that's not how it happens. Like I said, it's designed to keep the status quo, not necessarily to improve them. So I would argue that in its current form, welfare is not an investment that gives us a meaningful return, nor does it really spur growth. I would argue that a majority of people on welfare do not eventually become more productive, but that's an entirely different discussion, I think.

And you are an intelligent guy, so you understand the difference between the 1950's and now. THis article wasn't really directed at you, but rather people who don't udnerstand the difference. Some people give the impression that government spending is great, even if we're running up the deficit. I think deficit spending has not really helped us, and given the unintended consequence of inflation, I think it has hindered us.

Jersey McJones said...

And don't forget the GI Bill here, guys! The payoffs from that are inestimable!

The deficits and unemployment of the 1950's are nothing like what we have today - different causes, different reactions. These are the apples and oranges I think Jack is sensing.