A Random Observation About the 1970s… and the 1980s
by Mike Kimel
A Random Observation About the 1970s… and the 1980s
People often point to the stagnation of the 1970s, and the Reagan administration that followed, as evidence that cutting taxes leads to faster economic growth. But the same folks rarely look at the flip-side of things, and when they do, they don’t reach consistent conclusions. Here’s an example of what I mean. Real GDP grew 14.5% from the first quarter of 2003 to the last quarter of 2007. That is a 20 quarter period. I started with 2003 because that’s the year that tax rates dropped to 35%, and it was also more than a full year after the 2001 recession. I picked the last quarter of 2007 as the end point because the economy peaked in that quarter.
What followed, of course, was the Great Recession. 2003 Q1 to 2007 Q4 were the years of the Greenspan Put, and the real estate bubble. If it isn’t clear, I am cherry-picking, purposely selecting a period that best showcases the the 35% top marginal income tax rate era.
Now, 14.5% growth over 20 quarters lacks context. So here’s context. Take any consecutive 20 quarters beginning no earlier than Q1 of 1970 and ending in Q4 of 1980. There are 25 such periods. Only seven of them, or 28% of those periods, saw real growth rates below 14.5%. 72% of those periods had real GDP growth rates above 14.5%. (It is worth noting that four of those seven periods began in 1970 or Q1 of 1971 and that Carter didn’t take office until Q1 of 1977.)
Now, the 1970s were the decade of the Oil Embargo, the Iranian Revolution, inflation, stagflation, polyester, the Bee Gees and big sideburns. Big sideburns for crying out loud. They were also an era with top marginal tax rates of 70%. And yet, they compare very favorably to the best years we’ve seen since tax rates fell to 35%.
Now… let us discuss a more recent period. Reagan famously cut taxes – top rates were at 70% when he took office, and by 1986 were down to 50%. In 1987 they were cut to 38.5%, and then to 28% in 1988. They rose slightly to 31% in 1991. Finally, under Clinton, in 1993, top marginal tax rates rose to 39.6%. So we’d expect exceptionally rapid growth from 1987, ending around 1993, right? Well, pick any quarter from 1986 Q1 to 1991 Q4 and consider the growth in real GDP over a twenty quarter period. Every single one comes in with growth in real GDP below 14.5%.
That is, every single one under-performs the period that under-performs the 1970s. (I guess we can say those periods were under-performing squared.) The conclusion is clear, but I’m sure it is different to folks on different ends of the political spectrum.
Data here.
Correlation but not causation.
American GDP is a function of the invention and application of technological innovations and changes in demographic distribution. And is very mildly a demonstration of changes in the standard of living.
Much of our gdp has come from financial services due to irrational high taxation on ilabor employing ndustries that by consequence has penalized the lower classes.
The 90’s growth was due to the on-boarding of hte post communist countries. The late 90’s growth was due largely to speculation over the new internet technologies – which in turn misdirected capital, which in turn was redirected intentionally to the housing sector to soak up unemployment.
The late 80’s growth was due to the advent of inexpensive computing as it increased productivity across the small and medium sized business market – a trend which continued through the late 90’s.
The 70’s stagnation was horrid to live through, but the rest of the world was performing so badly by contrast that we had better markets for our goods, and could flood the market with out dollars with impunity.
Regan had a dramatic impact on the economy by creating a political movement that eradicated the leftward drift that had ruined the country from 1963 to 1979.
THe 50-60’s growth was the product of the appliation of war technoloigies (largely panel products) to consumer goods during a period where worldwide, competitors were experiencing post-war reconstruction, post-colonialism, and present-communist insurgence.
I cannot tell, from this post, as with others in a similar vein, if you are disingenuous or naively err, but it is one of the two – I’ll assume youi’re an honest person and simply err.
Either way it is destructive to the debate and an example of the worst kind of ignorant positivism.
Two things:
First; could not much of the stagnation in the stagflation years be blamed on the very simple lack of any maturing technologies coming into the economy? Does not productivity grow only in step with such? Recent examples of muturing (not just new) technologies being computers and the internet (1990 BusinessWeek reported half a trillion business investment in new computers had yielded no productivity gains at that point).
Pre stagnation maturing technologies included copying machines (is there a room with 25 typists banging away all day at your workplace (used to be every workplace — copiers didn’t get really decent until 1974 in my memory) and jet engines capable of a lot more trips with a log bigger loads with only 5% of the maintainence.
Second; in the late 60s and early 70s powerful labor unions were getting raises beyond productivity — causing some of the inflation. Could this not have been controled by (my answer to everything) sector-wide labor agreements. My usual interest in sector-wide is in ending the race to the bottom — but they were originally designed to avoid labor unions’ race to the top. Could they have helped here?
It doesn’t have to be all about finance and numbers.
“Much of our gdp has come from financial services due to irrational high taxation on ilabor employing ndustries that by consequence has penalized the lower classes. “
Or perhaps the taxes on the growth and profits of the Financial Services sector are set artificially low as there is no history or plan to tax the growth or regulate it. As Summers accused Born in front of Congress, “regulation of the market would throttle its growth (paraphrase). Perhaps, it is time to tax this sector and relieve Labor intensive industry of its burden.
Two things:
First; could not much of the stagnation in the stagflation years be blamed on the very simple lack of any maturing technologies coming into the economy? Does not productivity grow only in step with such? Recent examples of muturing (not just new) technologies being computers and the internet (1990 BusinessWeek reported half a trillion business investment in new computers had yielded no productivity gains at that point).
Pre stagnation maturing technologies included copying machines (is there a room with 25 typists banging away all day at your workplace (used to be every workplace — copiers didn’t get really decent until 1974 in my memory) and jet engines capable of a lot more trips with a log bigger loads with only 5% of the maintainence.
Second; in the late 60s and early 70s powerful labor unions were getting raises beyond productivity — causing a good bit of the inflation in stagflation. Could this not have been controled by (my answer to everything) sector-wide labor agreements. My usual interest in sector-wide is in ending the race to the bottom — but they were originally designed to avoid labor unions’ race to the top. Could they have helped here?
It doesn’t have to be all about finance and numbers.
Mike,
Provocative (as usual).
Leaving aside I think I have empirical proof that taxes matter in determining long run growth (for now) allow me to make the following observations.
I decomposed US growth using BLS Multifactor productivity data over 1948-2010 (and other sources) and will note the following.
1) What was so bad from a growth perspective about the 1970s?!?
The 1970s had above average growth in labor input (1.7% versus 1.2%) and capital input (4.4% versus 3.8%). It’s only in multifactor productivity (1.1% versus 1.4%) that the 1970s could even remotely be considered “stagnant”.
2) What was so great from a growth perspective about the 1980s?!?
The six year period (19861991) following comprehensive tax reform experienced worse growth than the average rate of the 1970s by every measure. Labor input growth was 1.6% on average, capital input growth was 3.6% on average, and multifactor productivity growth was 0.4% on average.
3) When were the greatest four year booms in each of these three inputs (labor, capital and technology) in the postwar period?
a) Labor
1976-1979 (3.8% on average)
b) Capital
1997-2000 (6.1% on average)
c) Multifactor productivity
1962-65 (3.4% on average)
(i.e. under Carter, Clinton and JFK/LBJ)
4) By the sole measure (multifactor productivity) that which the 1970s could be considered stagnant (and the 1980s even more so) which era had the most growth?
That would be the 1930s. Multifactor productivity growth averaged 2.8% during 1930-41, a period capped by the New Deal.
I’ll end by noting that Alexander J. Field, who has researched MFP more carefully than perhaps any other person, argues that public investment, that is railroads, and roads (the US route system of the 1930s and the interstate highway system of the 1960s), were mostly responsible for the periods in which MFP experienced profound growth.
Merry Christmas,
Mark
P.S. I won’t even bother exploring the past decade by these metrics. Suffice to say low tax rates have not guaranteed prosperity.
Mike,
Provocative (as usual).
Leaving aside I think I have empirical proof that taxes matter in determining long run growth (for now) allow me to make the following observations.
I decomposed US growth using BLS Multifactor productivity data over 1948-2010 (and other sources) and will note the following.
1) What was so bad from a growth perspective about the 1970s?!?
The 1970s had above average growth in labor input (1.7% versus 1.2%) and capital input (4.4% versus 3.8%). It’s only in multifactor productivity (1.1% versus 1.4%) that the 1970s could even remotely be considered “stagnant”.
2) What was so great from a growth perspective about the 1980s?!?
The six year period (1986-1991) following comprehensive tax reform experienced worse growth than the average rate of the 1970s by every measure. Labor input growth was 1.6% on average, capital input growth was 3.6% on average, and multifactor productivity growth was 0.4% on average.
3) When were the greatest four year booms in each of these three inputs (labor, capital and technology) in the postwar period?
a) Labor
1976-1979 (3.8% on average)
b) Capital
1997-2000 (6.1% on average)
c) Multifactor productivity
1962-65 (3.4% on average)
(i.e. under Carter, Clinton and JFK/LBJ)
4) By the sole measure (multifactor productivity) that which the 1970s could be considered stagnant (and the 1980s even more so) which era had the most growth?
That would be the 1930s. Multifactor productivity growth averaged 2.8% during 1930-41, a period capped by the New Deal.
I’ll end by noting that Alexander J. Field, who has researched MFP more carefully than perhaps any other person, argues that public investment, that is railroads, and roads (the US route system of the 1930s and the interstate highway system of the 1960s), were mostly responsible for the periods in which MFP experienced profound growth.
Merry Christmas,
Mark
P.S. I won’t even bother exploring the past decade by these metrics. Suffice to say low tax rates have not guaranteed prosperity.
Mike,
Provocative (as usual).
Leaving aside I think I have empirical proof that taxes matter in determining long run growth (for now) allow me to make the following observations.
I decomposed US growth using BLS Multifactor productivity data over 1948-2010 (and other sources) and will note the following.
1) What was so bad from a growth perspective about the 1970s?!?
The 1970s had above average growth in labor input (1.7% versus 1.2%) and capital input (4.4% versus 3.8%). It’s only in multifactor productivity (1.1% versus 1.4%) that the 1970s could even remotely be considered “stagnant”.
2) What was so great from a growth perspective about the 1980s?!?
The six year period (1986-1991) following comprehensive tax reform experienced worse growth than the average rate of the 1970s by every measure. Labor input growth was 1.6% on average, capital input growth was 3.6% on average, and multifactor productivity growth was 0.4% on average.
3) When were the greatest four year booms in each of these three inputs (labor, capital and technology) in the postwar period?
a) Labor
1976-1979 (3.8% on average)
b) Capital
1997-2000 (6.1% on average)
c) Multifactor productivity
1962-65 (3.4% on average)
(i.e. under Carter, Clinton and JFK/LBJ)
4) By the sole measure (multifactor productivity) by which the 1970s could be considered stagnant (and the 1980s even more so) which era had the most growth?
That would be the 1930s. Multifactor productivity growth averaged 2.8% during 1930-41, a period capped by the New Deal.
I’ll end by noting that Alexander J. Field, who has researched MFP more carefully than perhaps any other person, argues that public investment, that is railroads, and roads (the US route system of the 1930s and the interstate highway system of the 1960s), were mostly responsible for the periods in which MFP experienced profound growth.
Merry Christmas,
Mark
P.S. I won’t even bother exploring the past decade by these metrics. Suffice to say low tax rates have not guaranteed prosperity.
1) What was so bad from a growth perspective about the 1970s?!?
The 1970s had above average growth in labor input (1.7% versus 1.2%) and capital input (4.4% versus 3.8%). It’s only in multifactor productivity (1.1% versus 1.4%) that the 1970s could even remotely be considered “stagnant”.
I don’t think anyone seriously denies that the 1970’s had high labor input — the working age population was swelling rapidly due to the entry of the boomer demographic into the workforce. Growth in U.S. working age population averaged nearly 1.7% between the late 1960’s-early 1980’s, but has not even managed to reach that level for even a single year since. However fast the growth in labor input, it appears to not been enough to absorb the labor supply at least judging by the unemployment rate during the Carter adminstration.
Changes in the level of working age population can have enormous influence on the level of aggregate GDP — from 1990-2007 Ireland, had the fastest real GDP growth in the OECD and Japan the lowest, but Ireland also had an enormous bulge (nearly 40%) in working age population while Japan’s working age population actually shrunk. The annual rate of growth of U.S. working age population has been trending sharply lower since cyclically peaking in 2000 and is porjected to show less than 0.5% growth by decades end. That’s OK, though, because Mike Kimel’s work shows us that we can have higher aggregate real GDP growth with slower labor force growth if we just raise the top personal MTR to roughly 65%.
The 1970’s were stagnant beyond a great number of things beyond MFP. Median family income was stagnant, especially disposable after-tax incomes because inflation and a stagnant tax code contributed to bracket creep and the erosion of the basic exemption. The maximum FICA tax owed rose more than fivefold. The value of the nation’s capital stock (as measured by various stock indices) was stagnant. Mike Kimel obviously doesn’t think any of this matters because aggregate real GDP was not so bad (even though it should have been much higher due to expanding labor input from simple demographic trends).
P.S. I won’t even bother exploring the past decade by these metrics. Suffice to say low tax rates have not guaranteed prosperity.
High tax rates don’t either, although Kimel insists that they do. Mark, it would be interesting for you to present your empiricial evidence on taxation and long-run growth so readers could compare and contrast with Kimel’s work.
If we explore the past decade and compare the U.S. to jurisidictions with high personal MTR’s, it is not obvious that any such countries do better than the U.S.. Belgium for instance has a top MTR on gross labour income of 66% (right at the Kimel sweet spot for maximizing real GDP) but has grown slower from 2003-2007 and also from 2003-2011. Ditto for France, Austria, Finland, Denmark and any other eurozone country with high MTR’s on gross labour income (except Sweden which has its own currency and has recovered much faster from the Great Recession due to looser monetary policy than both the U.S. and the EU — nominal GDP trends can effect short-run real GDP).
These countries are already poorer on a real per capita basis than the U.S., meaning slower real GDP growth contradicts Kimel’s assertions. If high MTR’s cause faster RGDP, most of these nations should have converged with and surpassed the U.S. in the past three decades. The excuse that these nations have less labour force hours cannot be used because Kimel doesn’t look at labour input — in fact I believe he has suggested that high MTR’s raise capital input because income is shunned in favour of capital reinvestment (where is the evidence of such?).
Furthermore, as Tim Worstall pointed out in an earlier post, Kimel pays no attention to tax thresholds, which seems to indicate that he believes that the very existence of a 65% tax rate regardless of income level will raise aggregate real GDP. In mid-1960’s America, the top MTR was at a level of 25-30 times median family income — but modern day Belgium et al. impose MTR’s at levels at or near the average wage.
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