Which Decade Was Better For Poor People?

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Posted: May 02, 2019 8:54 AM
Which Decade Was Better For Poor People?

Source: AP Photo/Craig Ruttle

I have a very low opinion of leftist politicians, in large part because I suspect most of them privately understand their policies don’t work, but they don’t care because their main goal is the accumulation of political power (Crazy Bernie is an exception since he seems to genuinely believe in socialism).

But I don’t dislike ordinary people with statist views. They have good intentions.

All that’s wrong is that they think government intervention and redistribution can improve the lives of the less fortunate. Presumably because they incorrectly assume the economy is a fixed pie and that some people must be poor if some people are rich.

One of my main goals is to help them understand why this is wrong.

A rising tide can lift all boats, which is why I write so often about growth in general and comparative growth between nations in particular.

And it also helps to share evidence about historical growth within a nation.

Amity Shlaes addresses this issue in a must-read article about U.S. growth in the City Journal. She starts with a pessimistic observation about malpractice by historians.

Free marketeers…are not winning U.S. history. …No longer is American history a story of opportunity, or of military or domestic triumph. Ours has become, rather, a story of wrongs, racial and social. …an axiom is taking hold: equal incomes lead to general prosperity and point toward utopia. Teachers, book review editors, and especially professors withhold any evidence to the contrary. …Decades in which policy endeavored or managed to even out and equalize earnings—the 1930s under Franklin Roosevelt, the 1960s under Lyndon Johnson—score high. Decades where policymakers focused on growth before equality, such as the 1920s, fare poorly.

This is upside down, Amity explains.

…progressives have their metrics wrong and their story backward. The geeky Gini metric fails to capture the American economic dynamic: in our country, innovative bursts lead to great wealth, which then moves to the rest of the population. Equality campaigns don’t lead automatically to prosperity; instead, prosperity leads to a higher standard of living and, eventually, in democracies, to greater equality. …growth cannot be assumed. Prioritizing equality over markets and growth hurts markets and growth and, most important, the low earners for whom social-justice advocates claim to fight. …a review trip through the decades is useful because the evidence for growth is right there, in our own American past.

The article looks at several periods, but I want to focus on what she wrote about the 1920s and 1930s.

We’ll start with the 1920s, which began with a deep downturn.

…the early 1920s experienced a significant recession. …the top rate was still high, at 73 percent. …In response, Wall Street and private companies mounted a “capital strike,” dumping cash not into the most promising inventions but into humdrum municipal bonds. …The high tax rates, designed to corral the resources of the rich, failed to achieve their purpose. In 1916, 206 families or individuals filed returns reporting income of $1 million or more… By 1921, just 21 families reported to the Treasury that they had earned more than a million. ….Against this tide, Harding and Coolidge made their choice: markets first. …Harding and Mellon got the top rate down to 58 percent. …In a second round, stewarded by Coolidge, …Mellon and conservatives would get a (somewhat) lower tax rate of 46 percent…in 1924, Coolidge joined Mellon, and Congress, in yet another tax fight, eventually prevailing and cutting the top rate to the target 25 percent. …the tax cuts worked—the government did draw more revenue than predicted, as business, relieved, revived. The rich earned more than the rest—the Gini coefficient rose—but when it came to tax payments, something interesting happened. …the rich now paid a greater share of all taxes. Tax cuts for the rich made the rich pay taxes. …the United States did average 4 percent real growth. …the 1920s economy gave workers something far more important than notional wage equality: a job. Unemployment averaged 5 percent or lower.

Excellent points about overall economic policy and lots of good information about fiscal policy.

The tax cuts were a big successjust like the Kennedy tax cuts in the 1960s and the Reagan tax cuts in the 1980s.

Moreover, the recovery from the 1920-21 recession deserves a lot of attentionbecause it shows that spending reductions are good for prosperity.

Sadly, that lesson was almost immediately forgotten.

Here’s some of what Amity wrote about the many policy mistakes of the 1930s.

The 1930s tell the opposite story. …Hoover responded differently from the way predecessors had responded to previous crashes: he intervened. …Hoover changed policy to focus on social equality… Hoover hauled business leaders to Washington and bullied them…he cajoled Congress into passing laws…the Davis-Bacon Act of 1931…raising the top rate to 63 percent. …Hoover thoroughly intimidated business and markets… Franklin Roosevelt…sent an even clearer signal that in his presidency, equality would come first. …the New Deal’s equality measures prolonged and deepened the Depression. …For ten years, joblessness stuck stubbornly in the double digits. This mattered far more to families than any theoretical envy index. With the coming of World War II, Roosevelt pushed the top tax rate to 94 percent.

From the perspective of economic policy, the 1930s was a trainwreck. Hoover imposed terrible policy. Then FDR takes office and does more of the same.

Let’s now get to the main point of today’s column. Which decade was better for poor people:

Did poor people enjoy better results in the 1920s, when government did less and policy was more focused on growth and opportunity?

Did poor people enjoy better results in the 1930s, when government did more and policy was more focused on equality of outcomes?

The answer should be obvious.

It was better to be a poor person in the 1920s rather than the 1930s.

Just like poor people did better in the laissez-faire 1980s than they did in the statist 1970s. Just like poor people today do better in Chile than in Venezuela. Just like poor people did better in West Germany than East Germany. Just like poor people….well, you get the idea.

P.S. Today’s column is another reminder that Calvin Coolidge was one of America’s greatest presidents.