Robert Shiller's column in yesterday's New York Times epitomizes an approach and argument that I find totally fallacious and even silly. The title is "Taxes Needn't Discourage Philanthropy." He begins by asking the question--"How high can taxes go?" He notes that the top marginal rate in 1944 was 94%. Yet, we didn't have class warfare and we didn't have an economic disaster. Of course, we were in World War II at the time, which he acknowledges. He notes that one reason for the high rates was to ensure that the war would not create new millionaires.
After the war, the rate came down a little but not much. In 1963 the top rate was still 91%. Shiller argues that the high rates didn't impact growth negatively since the real GDP growth rate from 1948 to 1963 was 3.7%. This was higher than the overall average growth rate of 3.2 % from 1929 to 2011. He argues that one reason was that we had greater social harmony in those fifteen years, some of which was a hangover from the patriotism felt during WW II. It takes a while, but he eventually gets to his theme of encouraging philanthropy by encouraging positive feelings of reciprocity. While worthy of comment on its own, I want to focus on the idea of using the first fifteen years after the war as evidence of things we could do today. I think it is wrong.
People often regard the way things were when they were teens and young adults as some sort of norm. For people older than I am, this time period was the fifties and early sixties--a time when American business was strong and the economy grew rapidly, as noted by Shiller. However, this "golden age" was not a normal time period. In fact, it was an aberration. The was was not fought on US soil and American industrial facilities were not destroyed. The same can not be said for most of Europe and Japan. We faced no competition for most of that period. In the sixties, Japanese goods were considered to be cheap and junk by most Americans. American business people did not have to be particularly wise or innovative to be successful. Few people talked about the importance of small business since the presumption was that big industry was the norm. Major industries were oligopolistic and the firms often viewed as invincible. General Motors was the quintessential American firm. The economic situation was not viable in the long run. Europe recovered, as did Japan, and new compeition came along. To argue that any government policy that persisted at that time must have had either good or benign effects because of the success of the American economy at the time is misguided. America's role in the world was unique and not sustainable over time.
Another point Shiller makes is that the American public was more harmonious at the time. He writes, "Many people sacrificed their lives during the war, and, for a while, it seemed that the survivors were especially chartiable to one another, on both a personal and an institutional level. I wonder if African Americans in the deep South who lived at that time would agree with Shiller. It was a time of white, male dominance that is totally unacceptable today. Even at the end of the war, Jews still often could not get into Ivy League schools, or at least could not get on the faculty. People thought diversity at the time referred to Italians and Irish, not Hispanics and Cambodians. To me, it is more difficult to see solidarity when society is increasingly diverse.
As the political and economic debate in the country has focused on whether the role of the federal government should be constrained or more dominant, I see references to the early-postwar times as evidence that high marginal tax rates can be associated with strong economic growth. Shiller's piece is just one of a number of examples I could have used. But the world has not stood still since 1963. We need better evidence than appeals to a bygone "golden age."