Historians and economists, most heavily subsidized, are very good at creating and perpetuating mythologies serving their financial masters. At times the myths are about nationalism, falsely suggesting that economic miracles have been due to the genius of people living within arbitrary national borders. At other times they are about the extremely beneficial roles of foreign aid.
The post-World War II West Germany miracle fits more the pattern of being brought about by incentives and a large population influx of "vital fews", though in popular memory its success is associated more with the US's Marshall Plan. Taking a closer
look though, the impact of that aid has been greatly exaggerated.
Economists have estimated that from 1948 to 1950 Marshall Plan aid amounted to between 5% and 10% of European gross national product (GNP), though one must be extremely skeptical of these high numbers. European statistics - in fact, all statistics everywhere following wars - were characterized by rationing, price controls and extensive black markets. The mismeasurement has the effect of overestimating the Marshall Plan's impact.
There were, after all, no miracles in Europe after World War I, when aid and loans to Europe were also estimated to amount to about 5% of its GNP. True, the world moved toward lowered tariffs after World War II, which it did not after World War I. One inference would seem to be that miracles may be linked with lowered tariffs rather than foreign aid. Such inference though does not play well for politicians and local interests wedded to territory.
So what fueled the West German miracle? From 1945 to 1961, Western Germany accepted 12 million, for the most part, well-trained immigrants. About 9 million were Germans from Poland and Czechoslovakia. Others fled East Germany's communist paradise.
Although the movement of that capital did not appear at the time on the books, its importance can be inferred from the significantly higher ratio of working persons to total population in West Germany than in other countries in the 1950s and 1960s: 50% in Germany versus 45% in France, 40% in the UK, 42% in the US and 36% in Canada.
Also, after a few years of bad fiscal and monetary policies immediately after the war, Ludwig Erhard abolished production and price controls, was instrumental in the introduction of the Deutsche mark in 1948, and lowered taxes significantly. When the inflow of human capital stopped, new waves of hardworking young employees arrived from Mediterranean lands.
In other words, the West German miracle was due, not to foreign aid, but to the same features that brought about earlier and later miracles elsewhere: migration of hard-working, skilled people, stable money and significantly lower taxes.
And taxes were significantly lowered. In the Germany of 1948, marginal income taxes stood at 50% for a US$600 income, and a confiscatory 95% for $15,000. In 1948, the tax code was drastically revised, and the 50% bracket applied for income of $2,250, though effectively lower because of numerous deductions for savings and investments. By 1955, the top rate was lowered to 63% for incomes over $250,000, and 50% for brackets starting at $42,000.
These taxes are not low by today's standards. But things are relative: when neighboring countries experiment with communism and other disastrous political experiments that tax people's hopes, aspirations and ambitions, a 50% tax rate will induce levels of efforts that they would not induce if neighboring countries pursued similar or even lower-taxed policies.
Those now advocating returning to 60% or even 80% marginal taxes, noting that Western countries did not do badly with such rates from the 1950s to the 1970s, are seriously mistaken.
During those decades, there were roughly 12 democratic countries with degrees of openness of their financial markets in the entire world. The rest of the world was closed to fueling entrepreneurial ambitions. Capital and people were lining up to get into these countries: even an 80% tax is better than chances of being sent to gulags, or forced on "cultural marches".
That is not the case today, when people and capital are far more mobile. French President Francois Hollande - who declared himself an "enemy of finance" (which should be expected from anyone with strong ideological background and no experience of ever being anything but a political apparatchik: after all, the more one closes financial markets, the more governments must play the role of "matchmaker" between people and money - by default) - saw it promptly when not only prominent French citizens announced their move out of France, but also with the British Prime Minister, David Cameron, announcing a rolling out of the red carpet for France's tax exiles.
Cameron probably remembered the lessons the UK learned from pre-Thatcher days, when the marginal taxes in Britain reached the roughly 95% level - leading in the 1970s to the then much discussed brain drain from the UK, which led the Rolling Stones among others rolling out of the UK to live under more favorable tax regimes elsewhere (the Stones, ironically, to France).
It is surprising that when "globalization" and increased mobility of people and capital is on everyone's lips, economists recommend policies from a relatively immobile world - which is gone with the wind.
Next: Uniqueness of the Scottish miracle
This series of articles draw on Reuven Brenner's recent speeches and on his Force of Finance, History - the Human Gamble, and other books.
Reuven Brenner holds the Repap Chair at McGill University's Desautels Faculty of Management, and serves on the Board of the McGill Pension Fund, and is member of its investment committee. Professor Brenner this month was awarded the Queen Elizabeth II Diamond Jubilee Medal for his dedication to his peers, his community, and to Canada.