Some commentators have expressed a nostalgia for aspects of the economic world of the 1950s, as Paul Krugman suggested in his book The Conscience of a Liberal. I can understand the sentiment, since the 1950s brught a lot of growth, based on a lot of low hanging fruit. Yet Krugman wants to mimic some very particular features of the 1950s: high marginal tax rates, high rates of unionization, and a negatively egalitarian distribution of income and wealth. Those are all possible when the low hanging fruit is there to be plucked, but we can’t just wave the policy wand and recreate the crucial features of that earlier world- namely rapid economic growth- by passing laws. Krugman is pushing policies that require high real income growth, precisely when real income growth is relatively low. He is putting the cart before the horse and asking for some burdensome policies precisely when they would be toughest to bear.
From the Great Stagnation – How America Ate All the Low-Hanging Fruit of Modern History, Got Sick, and Will (Eventually) Feel Better by Tyler Cowen
Omitted in Krugman’s The Conscience of a Liberal (which I read) is the fact that in the 1950s we competed with a European and Asian economy that had been devastated by the war. Our products were the only products available. Also omitted is the distinction between statutory tax rates and effective tax rates (after deductions and credits). Effective tax rates dropped much more slowly than statutory. Reagan’ tax reform dropped rates and deductions. When rates were raised later under George H. Bush and Clinton it had a larger effect due to the loss of deductions. Clinton raised income tax rates but dropped rates on capital gains and dividends which had a stimulative effect.