November 23, 2012
Some people miss the 1950s because of the era’s simple pleasures like Twinkies and Howdy Doody. Paul Krugman misses the decade’s high tax rates on the rich. In a recent column, he harks back to the days of drive-in movies and Pat Boone for lessons he says “remain relevant” – namely that an economy can prosper even with extraordinarily high taxes. More broadly, Mr. Krugman argues that the postwar years show that you can “have prosperity without demeaning workers and coddling the rich.”
Mr. Krugman should get out more. He would find that women no longer wear poodle skirts and the United States is no longer the globe’s free-range economic powerhouse that it was after World War II. In the 1950s, the U.S. was leagues ahead of its economic rivals, most of which had blown up their budgets, and their industries, during the long years of destruction.
Though the U.S., too, had ramped up spending to fund the war effort, and subsequently raised taxes to pay down debt, its necessary industrialization leap-frogged the country ahead of its rivals. Productivity soared; in 1950 it hit 6.7 percent and for the decade it averaged 2.75 percent per year – the best ten-year record to date – allowing, among other benefits, generous worker pay. The country also benefited from pent-up demand: in the early 50s we had three successive quarters of GDP growth above 10 percent.
The U.S. was the world’s largest market for nearly every kind of good, and to a large extent we supplied our needs. In 1950, we were actually a net exporter. In those halcyon economic days, the nations that would come to take our jobs had not yet entered the ring.
These days, we are thrust into a do-or-die contest – something those on the left like Mr. Krugman refuse to acknowledge. Ironically, leaders in Spain, Italy and even Socialist France – architects of the kind of overburdened state that Republicans in the U.S. oppose -- understand the need, above all, to boost their competitiveness.
When Moody’s just this week cut France’s debt rating one notch below triple-A – the same mark-down accorded the U.S. by Standard & Poor’s last year -- the ratings agency noted that the downgrade would have been tougher but for a “strong commitment to structural reforms and fiscal consolidation.” Faced with its own fiscal cliff – or possibly a valley of long-term decline – France’s Socialist leaders have adopted measures to boost their industries’ competitiveness. For the U.S., the message from S&P was just the opposite – we were downgraded because we continue to ignore our problems.
France is not the only EU country facing up to reality. Italy’s Finance Minister Vittorio Grilli said last week, “We need to keep cutting spending in order to reduce taxes…this will improve growth prospects.” Reporting the fifth consecutive quarter of GDP shrinkage apparently concentrates the mind.
Mr. Grilli suggested that in the next decade, the moribund Eurozone, now “slow and behind the curve” would be “ahead of the pack.” He looked to privatizations and better control of government spending as essential to that achievement. Italy and France are not the only countries engaged in overhauling their economic underpinnings; impressed by Germany’s relative success, numerous EU countries are borrowing from that country’s playbook in cutting taxes and regulations to energize businesses. How ironic it will be if the Eurozone is driven to make the tough choices that our leaders abhor, and jumps ahead of us.
It would be ironic, and quite a turn-about. Ronald Reagan became President in 1980 and set about undoing the economic mischief that had brought about sky-high interest rates and slow growth under his predecessor. Reagan lowered marginal tax rates from 70 percent at the upper end to 28 percent and deregulated railroads, banking and airlines. He reined in government spending and unleashed the energies of the private sector, creating above-average growth. The U.S. prospered.
Europe was left in the dust, guided by policies aimed at wealth redistribution and raising worker protections. In recent decades, the EU countries have lagged, with their share of global GDP dropping from nearly 36 percent in 1969 to 26 percent in 2011 (while the U.S. managed to hold its place with about 26 percent over that period.)
With the financial crisis knocking out the region’s fragile economic scaffolding, Eurozone leaders are reappraising the durability of their social safety net, the wisdom of the region’s commitment to high-cost green energy and the affordability of its high-cost labor. They now view Europe’s growth as tied to reenergizing its private sector; they recognize that the welfare of their people cannot be guaranteed by governments with declining revenues. Our leaders – and especially the Obama White House – has yet to get the message. Neither has Paul Krugman.
A recent survey by the Financial Times showed executives rating China, India and Russia as less friendly to business than in years past. Economists at ISI recently noted that foreign direct investment in China fell 0.2 percent in October to $8.31 billion from a year earlier, the 11th decline in 12 months.
While there may be myriad reasons for the drop, chief among them could be the perceived frostier welcome from Beijing authorities. European nations should leap on this opening. We in the U.S. should as well; attracting investment is pivotal to growth. The U. S. has cheap energy, the rule of law, minimal corruption, reasonable infrastructure and an educated workforce; we can compete.
U.S. politicians seem to be looking for common ground. Furthering our competitiveness is not only common ground, but fertile as well. Streamlining and strengthening our worker training programs, overhauling our dysfunctional H1B visa program, creating private-public partnerships to build advanced port facilities or other needed infrastructure, tackling the roll-back of overlapping regulations – efforts like these could attract bipartisan backing.
Like children learning how to ride a bike, our leaders could practice working together on such relatively non-controversial issues. The training wheels (and the harmony) could come off when we get to really tough choices – like entitlements reform. But who knows, maybe with some success under their belts, the two parties could begin to find their balance after all.