Economists who claim fast growth in the 1950s (when the marginal tax rate was high and government spending was low) indicates high taxes and spending don’t slow growth are playing you for a sucker and shouldn’t be trusted. Extraordinary circumstances in the 1950s overwhelmed economic policy.
From my book The Upside of Inequality:
Even academics, on whom we depend for the truth, write papers with provocative conclusions intended to garner media attention based on simplifying assumptions overlooked by a time-pressed media and their audience. This is how Piketty and Saez can make headlines with research based on income tax returns, which the public understandably assumes represents household income. Yet scholars have shown there are significant differences. Unfortunately, by then, nobody is listening.
Because the academic review process largely focuses on the quantitative findings of a paper, researchers enjoy a great deal of rhetorical latitude when writing introductions and conclusions, which often fail to summarize their papers’ objective findings. For example, International Monetary Fund researchers can report that redistribution doesn’t hinder growth in the introduction and conclusion of their paper, without acknowledging that their own evidence indicated income redistribution policies more aggressive than United States’ hurt growth.[i] A time-pressed media reports no more than the headline.
Critical differences in circumstances are easily overlooked, often intentionally so by propagandists. How else to explain why advocates of income redistribution point to the higher growth in the 1950s when marginal taxes rates were higher as evidence that higher payoffs don’t affect the amount of risk-taking? It doesn’t take a PhD to understand circumstances in the 1950s were vastly different.
In the 1950s, the economy was recovering from the Great Depression and the Second World War. The value of mass production and related capital investment, education, rural migration, and population drove economic growth, more so than today. Corporate investment, where marginal tax rates were lower, drove growth rather than the entrepreneurial success of individuals, where marginal tax rates were higher. The government was much smaller relative to the economy so, ultimately, taxes paid were much lower relative to GDP despite higher marginal rates. Circumstances are very different today.
Winston Churchill understood the problem well. He cautioned, “A lie gets halfway around the world before the truth has a chance to get its pants on.”[ii] Provocative misperceptions leave truth seekers to sort through the complexities long after the audience has moved on to a continual stream of new provocations. Sadly, lies divide us instead of the truth uniting us.
[i] Jonathan D. Ostry, Andrew Berg, and Charalambos G. Tsangarides, “Redistribution, Inequality, and Growth,” International Monetary Fund, Discussion Note, February 2014, http://www.imf.org/external/pubs/ft/sdn/2014/sdn1402.pdf.
[ii] Often attributed to Winston Churchill, BrainyQuote.com, Xplore Inc., 2015, http://www.brainyquote.com/quotes/quotes/w/winstonchu103564.html.