Level & Change

Paul Krugman continues to discuss his debate with Ron Paul, this time ridiculing Ron Paul for pointing too how the massive reduction in government spending following the end of World War II was followed by massive prosperity.

Yeah, it was a libertarian paradise all right — with a top marginal tax rate of 91 percent, a third of the work force in unions, and a minimum wage much higher relative to the average wage than it is today.

First of all, neither Ron Paul nor anyone else has claimed that the late 1940s was a "libertarian paradise", at least not in an absolute sense. What was pointed out was that the economy was changed in a way that indeed makes 1950 look like a libertarian paradise compared to 1944. Total government (including at the state & local level) spending was in 1944 50.6% of GDP, a number that had dropped to 23.5% in 1950. By comparison, total government spending was by the way 37.3% of GDP in 2011.

That 91% figure (which by the way was in place in 1944 as well) is misleading because although that was the formal top rate, it applied to very few and was paid by even less as there was extensive legal and illegal tax avoidance.  The overall tax- and spending burden was a lot lower in 1950 than in both 1944 and 2011.

Note here that the change in the burden of government is often as important or more important than the level. Sweden still has a relatively high level of government spending and high marginal tax rates, but because it has in recent years reduced those things, it has still been able to have relatively high growth.  Similarly, it wasn't just that the level of spending was much lower than now that produced post-war prosperity, but also that the change was so enormously positive.