THE BEAR'S
LAIR The missed Eisenhower
moment By Martin Hutchinson
US lovers of high taxes frequently refer
nostalgically to the glories of the Eisenhower
years (president 1953-1961), when the top rate of
tax was 91%, claiming their prosperity proves
there to be no negative supply-side effects from
high income tax rates.
But if you look at
the data more closely, the US economy under Dwight
D Eisenhower was surprisingly unimpressive, while
the supply-side Kennedy tax cuts of 1963-64
actually did "get America moving again". Viewed
from the light of 2013, with what we now know
about taxes, the Eisenhower years become a period
of enormous missed opportunity, with no
supply-side incentives, very little
entrepreneurship and abysmal growth in per capita
income.
The excessively high tax rates of
the 1950s derived initially from
one of the most foolish
policy moves in history, when Herbert Hoover in
1932, the worst year of the Great Depression,
increased the top rate of income tax to 63% from
25%, thus substantially deepening what was already
the deepest depression in US history, losing the
election the following November to Franklin
Roosevelt, and giving Franklin D Roosevelt an
excuse to increase income taxes still further.
This he did with gusto. In 1936, the top
rate was raised to 79% on incomes over US$5
million (about $76 million in 2011 money) with
Roosevelt insulting his victims further (if there
were any of such exalted incomes in the middle of
the Depression) by calling them "malefactors of
great wealth". World War II raised rates further,
so that at the peak in 1944 the top rate of tax
was 94%, incident at an income of $200,000 ($2.5
million today.)
Taxes came down only
marginally after the war; the top rate of tax was
set at 91% from 1946 to 1964, its incidence at
$200,000 being worth less and less in today's
money as the inflationary years wore on.
However in the early post-war years this
did not matter. With two decades of technological
advances since the 1929 crash and only modest
peacetime recovery in 1939-40, the economy was
running far below its technological capacity and a
mass of capital and consumption investment was
needed before it started hitting up against its
technological limits.
Then when those
limits might have been approaching, the Korean War
intervened, which unlike World War II did not
involve the conversion of much peacetime
production capacity. In 1951-53, while inflation
was rampant, so were prosperity and increases in
living standards.
When Eisenhower assumed
office in January 1953, bringing the Korean War to
a conclusion shortly thereafter, the US economy
was thus at a crossroads. One alternative would
have been to use the "peace dividend" from ending
the Korean War as an opportunity for an early form
of supply-side Reaganomics, reducing the top rate
of federal income tax from 91% to 50% or so. That
could easily have been afforded; government
consumption expenditures as a percentage of GDP
fell by 6% in 1953-55, which would have paid for a
massive tax cut.
The other alternative was
what actually happened. A tight control was kept
on non-military expenditure, at least until
Eisenhower's last two years when he was faced with
an overwhelming Democrat majority in congress, but
income tax rates were left at their absurdly high
levels.
Contrary to current rose-tinted
leftist memory (which rose-tinting they don't
accord to the Eisenhower years on cultural or
social issues), the result was a period of
remarkably slow economic growth, with no fewer
than three recessions in eight years, in 1954,
1957-58 and 1960 - the last of which probably cost
Republican Richard Nixon the 1960 election. GDP
per capita, the best measure of economic
performance, rose at only 0.96% per annum during
the seven years 1953-60, or 0.92% per annum during
the eight years 1953-61, depending on how you want
to count the Eisenhower administration's period of
economic control. This was far below
comparable growth rates since. The boom of
1960-68, combined with the Kennedy/Johnson tax
cuts of 1963-64 (which reduced the top rate of tax
to a more reasonable though still extortionate
70%) brought annual growth in GDP per capita of
3.5%. The allegedly sluggish 1970s from 1968 to
1980 still produced growth in GDP per capita of
1.9% (1.7% during the Nixon/Ford administrations,
accelerating marginally under Jimmy Carter).
The Reagan growth years produced per
capita GDP growth of 2.4%, which slowed somewhat
to 2.2% in 1988-2000, including the supposed
miracle growth of the Clinton second term. Only in
the ineptly governed 2000s, also including two
major recessions, did the growth rate per capita
slow to 0.64% in 2000-11, but it must be
remembered that this is a somewhat unfair
comparison, tracking growth between the peak of a
fabulous boom to a year still mired in the deepest
recession since World War II.
It won't
take much growth in 2012-13 to push post-2000 per
capita growth above the feeble Eisenhower level,
even with the current very poor macroeconomic
management.
There is one mitigating
factor, but it shrinks on closer examination. The
1950s were the years of the "baby boom" in which a
historically high birthrate brought a massive
increase in young people, stressing school
facilities and lowering per capita growth, since
most of them were not yet working.
Conversely, the 1950s, before the
liberalized 1965 Immigration Act, saw very little
immigration of unskilled workers, tending to bring
down average productivity, but instead a modest
flow of very highly qualified people fleeing the
tyrannies of the Soviet bloc or the poverty of
East Asia. However, even with immigration low the
slack Eisenhower-era labor market affected
African-Americans disproportionately, slightly
reversing their long-term improvement in relative
incomes compared to whites and worsening their
disadvantage in unemployment rates.
The
Eisenhower years were a period of remarkable
scientific advance, from the Salk polio vaccine to
the space program. Furthermore, during those years
US industry was almost without serious competition
in world markets, a technological leader in almost
all fields, except a very few such as jet aircraft
where an enfeebled Britain clung to a modest
pre-eminence. Macroeconomic policy was sound and
monetary policy, in the early years of William
McChesney Martin at the Federal Reserve, was even
sounder. Inflation was gradually declining and
budgets were close to balance.
The 1950s
had massive expenditure on the Cold War, but much
of that spending was highly productive by
government program standards, producing weapons
systems that remained viable for decades into the
future and rarely suffered intolerable budget
overruns. Meanwhile the private sector was almost
unhampered by excrescences like the Environmental
Protection Agency PA and the Occupational Safety
and Health Administration and so was able to
produce the magnificent automobiles of the tailfin
era without government interfering in the process
- or wanting to; opposition to tailfins was at
that time confined to a tiny minority of
pointy-headed intellectuals and Beat poets.
It was the Golden Age of science fiction,
when a superb honor roll of authors produced Hugo
awards during the Eisenhower years for Robert
Heinlein, Poul Anderson, Fritz Lieber, James
Blish, Robert Sheckley, Kurt Vonnegut, Clifford
Simak, C M Kornbluth, Arthur C Clarke and Daniel
Keyes (for Flowers for Algernon) with Isaac
Asimov, John Wyndham and Frederic Pohl also active
but neglected by the Hugo jury during these years.
The period thus represented a peak in
thinking about the future and imagining technology
that the future would contain. According to 1950s
science fiction, we should by now be colonizing a
rapidly expanding interstellar empire while at
home robots would cater for our every need,
eliminating poverty and drudgery.
Yet
economic growth in the Eisenhower years was
pathetic, around the levels of our own far more
troubled years. Very little of the intellectual
ferment represented by science fiction translated
itself into entrepreneurial activity. Venture
capital was in its infancy; the first such fund,
American Research and Development, was founded by
Harvard Business School professor Georges Doriot
in 1946, but made its signature investment of a
mere $70,000 in Digital Equipment Corporation only
in 1957.
Most technological activity took
place in large companies, with the transistor
invented by William Shockley at AT&T's Bell
Laboratories in 1948 and the integrated circuit at
Texas Instruments in 1958. The era's leading
technological thinkers were probably Richard
Feynman and Shockley; Feynman remained in academia
throughout his career, while Shockley's attempt at
entrepreneurship was a dismal failure.
One
can't help thinking that Feynman, Shockley and the
more scientifically capable of the science fiction
writers would today be spinning off start-ups,
aided by massive Silicon Valley funding. Shockley
was arrogant and a poor manager, but these
qualities would hardly have held him back from
success and wealth in the era of Peter Thiel and
Mark Zuckerberg. Part of the change is
technological - the 1950s' industry lent itself to
mass standardization in very large units, since
with only primitive information systems costs
could not be reduced to competitive levels by any
other means.
Yet you have to come back to
the fact that a 1950s Peter Thiel, perhaps
juggling advances in semiconductors, would have
had great difficulty in getting going, since there
were almost no venture capital sources. His own
earnings, even if at the top end of what was
available in US industry, would after the punitive
Eisenhower-era taxes not have enabled him to pull
together the necessary entrepreneurial grub-stake.
After all Ken Olson and Harlan Anderson,
the founders of Digital Equipment, had to sell 70%
of their company to AR&D to raise a mere
$70,000, equivalent to less than $600,000 today -
the after-tax bonus of a mid-level employee of
Goldman Sachs. In such an environment, why would
the 1950s Thiel have bothered with
entrepreneurship? - so maybe the world would have
gained some incomparable science fiction!
Eisenhower was an admirable man, and in
many ways a good president. But one can't help
feeling that a more free-market president, maybe
Robert Taft, would have produced a much more
dynamic US economy, with faster growth in living
standards. Far from being a paradigm to follow in
economic policy, the Eisenhower years were a
waste.
Martin Hutchinson is the
author of Great Conservatives (Academica
Press, 2005) - details can be found on the website
www.greatconservatives.com - and co-author with
Professor Kevin Dowd of Alchemists of Loss
(Wiley, 2010). Both are now available on
Amazon.com, Great Conservatives only in a
Kindle edition, Alchemists of Loss in both
Kindle and print editions.
(Republished
with permission from PrudentBear.com.
Copyright 2005-13 David W Tice & Associates.)
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