Tuesday, April 16, 2013

Reality Check

No matter how much we may hope and wish for a return to it, the reality is that the post-World War II American economy was an anomaly brought about by a series of circumstances that won’t be occur again. Sorry, the 1950s US economy of strong unions, plentiful manufacturing jobs, and sky-high taxes isn’t coming back:

It was a time of strong labor unions, plentiful manufacturing jobs, and high taxes. If it worked before, why not go back to the future? Some new research shows why America likely won’t, and why liberals are wasting their time pushing nostalgia economics:

1. The decline in manufacturing jobs, though not manufacturing output, stems from globalization and automation. And this is a phenomenon hardly restricted to the US. Lane Kenworthy:

Protecting existing manufacturing jobs, bringing back lost ones, and creating new ones is a perennial aim of the left. But possibilities here are limited … manufacturing’s share of employment has been shrinking steadily in all rich nations. Even South Korea, which didn’t industrialise until the 1970s and 1980s, has joined the downward march. … Two decades from now, manufacturing jobs will have shrunk to less than 10 per cent of employment in most affluent countries.

The good news here is that while this may problem for income growth, it doesn’t have to be one for job growth: “There is no tendency for those with a larger share of employment in manufacturing to have a higher employment rate.

2. As with the decline of manufacturing jobs, the decline in unionization is widespread. Again, Kenworthy:

Unionisation has been falling in most affluent nations. Only five now have rates above 40 per cent, and four of those (Belgium, Denmark, Finland, and Sweden) are countries in which access to unemployment insurance is tied to union membership. … Even if there is no further reduction in bargaining coverage going forward, in all but a handful of the rich countries 20 percent or more of the employed already are outside the reach of collective agreements. And in half of the countries it’s 40 per cent or more.

3. As Paul Krugman has enthusiastically noted, “[In] the 1950s incomes in the top bracket faced a marginal tax rate of 91, that’s right, 91 percent, while taxes on corporate profits were twice as large, relative to national income, as in recent years.”

In short, the rich paid more and the system was fairer. But in a study for the Manhattan Institute (from which the above chart is taken), Arpit Gupta argues the facts say otherwise:

1. In the 1950s, very few people paid the very high income-tax rates aimed at the wealthiest.

2. Claims that wealthy people paid more taxes rest instead on the assumption that the rich, as stock owners, bore the entire burden of higher corporate taxes of that era. There are good reasons to doubt this assumption about corporate taxes.

3. Even if we leave these assumptions unchallenged, the economy of the 1950s was so different from our own that its tax structure cannot be reproduced today. …The collapse of the global economy after World War II and the nature of postwar industrial capitalism, created a period of high corporate earnings in the United States. American firms did not vie then, as they do now, with competitors on every inhabited continent. Both law and convention supported large, monolithic corporations in an environment in which disruption was rare. Capital was relatively immobile, and corporate profits were high—boosting redistribution in the forms of union activity (resulting in higher wages and benefits for workers) and government taxation.

Half a century later, the nature of global capitalism has drastically changed. Though the U.S. still has a high statutory corporate tax rate by developed-country standards, corporate tax revenue today is far lower as a percentage of GDP. Greater competition within industries, the spread of corporate tax loopholes, and the global spread of business and capital mean that domestic capital and corporate earnings are no longer a “captive” source of revenue that can be easily taxed away. Additionally, the holders of capital have diversified. They now include pension funds and ordinary investors. Therefore capital taxes no longer fall so sharply on the very top end of incomes.

4. The most plausible viable paths to higher taxes in today’s economy would render the tax system less fair, not more so.

Gupta’s bottom line: “It is potentially misleading to imagine that U.S. taxes in the 1950s can serve as a model for a better approach in 2013. Income tax rates actually paid in the U.S. have remained stable for decades.

Corporate taxes may have played a role in pushing up the total tax burden for the rich during the 1950s, but this is not as clear-cut as is claimed. And even if high corporate tax rates did lead to high tax burdens on the rich in the past, it is unlikely that we can replicate that experience today.

Time for a new model.