John Hood, chairman of the John Locke Foundation, claimed that “Spending doesn’t boost growth.” He argued that “Most scholarly studies have found that lower taxes are associated with stronger economic performance. The most consistently negative results involve taxes that affect capital formation such as corporate and personal income taxes.”
Although there are periods where his statements have been true, the historical reality is that government spending does boost economic growth when private investors abandon the economy because the vast majority of consumers have run out of purchasing power, and we’re getting to that point today in many parts of the economy.
In his book “The Great Depression,” award-winning historian T.H. Watkins cited the economy of the 1920s as the cause of the depression, when, in 1929, “…most of the personal wealth in the country resided in the pockets, bank accounts, and stock portfolios of a tiny percentage of the population. But goods had been produced for the millions, not the thousands, and the millions, in the end, simply could not afford them.”
What got us out of the Great Depression and laid the foundation for creating the greatest middle class in history? High progressive taxes on incomes, inheritances and corporations — combined with government programs that put purchasing power into the hands of millions of unemployed and underemployed Americans.
Our entry into World War II gave a liberal President and Congress the moral authority to raise the top income tax to 91 percent, where it remained until 1962, when it was reduced to seventy percent. They raised the top inheritance tax to seventy-eight percent where it remained until 1980. During the war period itself we had an excess corporate tax. Despite Republican objections, President Roosevelt insisted that workers should have the right to organize and share in the increased profits of the defense industry.
Note that from 1941 to 1980 we had the highest taxes in income and inheritance in our history, and the greatest protections of workers’ rights. Our economy grew like crazy and we created a middle class whose incomes increased so much we got “wage inflation.”
The Republican claim that Reagan won his war on inflation is an inaccurate half-truth. The whole truth is that he won his war on working class wage inflation, but not stock market inflation, corporate-executive and investor income inflation or real estate inflation. From 1980 to 1988 the Dow Jones Industrial Average went from 964 to 2,168. The average cost of a new home rose from $76,400 to $138,300. Reagan only stopped the wage inflation that workers enjoyed from 1941 to 1980. For those 40 years, workers’ standard of living had been rising along with America’s upper one percent for a change.
Those who cause inflation always benefit far more than they lose. When the mass of workers made more money, along with the wealthy, everything got more expensive. Republicans, naturally, concluded that workers were benefiting too much from the economy. They felt that unions were too strong, wages were too high, and corporate profits weren’t high enough. To them, a good economy consisted of rising stock and real estate markets.
The U.S. created the best and most vibrant middle class in history between 1933 and 1980, when the federal government implemented progressive economic policies and managed our capitalist system in ways that benefited all Americans — the wealthy, the middle class and the poor.
Those who feel it’s morally wrong to progressively tax “successful” people should read Thomas Pikkety’s book “Capital in the Twenty-first Century.” He documented the historical reality that rich families tend to get richer from generation to generation and working class families tend to get poorer unless government takes action, like the U.S. did from 1933 to 1980. Reason: when rich persons die their income from capital continues to following generations and appreciates. When a worker dies, income stops and following generations begin their income generation activities from scratch.
Republicans want to take us back to the kinds of economic policies we had during the 1920s — low taxes on the rich and fewer government programs that protect and benefit workers — and they’re dividing America into a nation of rich people and poor people.
Chuck Kelly lives in Fairview Forest and is author of The Destructive Achiever; power and ethics in the American corporation and Farewell Fantasyland; time for political and economic reality. He can be reached at email@example.com.