Krugman Forgot How the World is Now Flat

A broken clock is right twice per day, Save Jerseyans, and therefore boasts a better track record for accuracy than economist Paul Krugman.

He’s been discredited over and over again — in print and in person — only to continue dispensing utterly worthless, overtly biased opinion from his ivory tower.

His latest mental belch? Advocating a 91% top marginal tax rate:

Consider the question of tax rates on the wealthy. The modern American right, and much of the alleged center, is obsessed with the notion that low tax rates at the top are essential to growth. Remember that Erskine Bowles and Alan Simpson, charged with producing a plan to curb deficits, nonetheless somehow ended up listing “lower tax rates” as a “guiding principle.”

Yet 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. The best estimates suggest that circa 1960 the top 0.01 percent of Americans paid an effective federal tax rate of more than 70 percent, twice what they pay today.”

There’s plenty to hate about Krugman’s analysis.

He doesn’t get it. Newsflash: the world has changed since the 1950s… big time.

For starters, our country’s socioeconomic pulse is much weaker than 50+ years ago.

Mr. Krugman doesn’t account for, among other factors: (1) our swelling national debt, (2) our busted entitlement system, (3) an acute education/skills-to-work placement ratio crisis, (4) an insufficient reservoir of “rich” folk revenue to address the long-term fiscal cliff, (5) the much higher number of homes subject to taxes “on the rich” under Obama’s regime than immediately after WWII thanks to, ironically, the successes of our free enterprise system over the past 100 years, and (6) the proximate causation of our fiscal woes: a population pyramid that is narrowing (in other words, after WWII, there were dozens of working age Americans to support each retiree. Today? More like 3-to-1 and shrinking).

Federal government spending as a percentage of GDP went from roughly 40% at the end of WWII to just over 10% immediately afterwards.

Now? 26% and climbing.

In other words, even if you bought into Krugman’s Keynesian delusion that we don’t have a spending problem, and that there’s no negative revenue bend in the Laffer curve, Krugman’s tax hike would still be tantamount to squeezing blood from a stone teetering on the edge of a cliff. The American economy  — and the American nation writ large — simply don’t enjoy the groundwork for economic growth which we did following WWII.

But consider a perhaps even more significant difference between then and today, Save Jerseyans:

Increased global competition.

We’ve all read Thomas Friedman’s classic The World is Flat, wherein the popular commentator catalogues the ways by which technological, financial, and informational advances of the post-Cold War era have democratized geopolitics and economics, too. If countries fit into the “golden straightjacket” for growth (e.g. political transparency, courts capable of enforcing contracts, competitive business climates), then they are equipped to prosper in a way that only the great, resource-laden naval powers could’ve achieved before this late-century revolution took hold.

We’ve arrived at the critical flaw of the Krugman thesis. Notwithstanding the merits of all of the other completely valid academic/empirical/philosophical arguments weighing heavily against his “soak the rich” tax proposal, there’s no getting around the fact that America can’t afford uncompetitively high tax rates, voluminous regulatory schemes, extortion tactics from politically-powerful labor unions (resulting in overwhelming “legacy” costs), and expensive health care mandates in a globalized economic playing field.

These factors conspire to push labor rates beyond what the market is willing to reward. Consider how in the post-WWII universe, the economies of Europe, Japan and China were in ruins. Most of the rest of the globe was either (1) radically underdeveloped, (2) hopelessly oppressed, or (3) enduring some combination of the two. Only America had a healthy, educated and growing workforce having benefited from wartime production advancements and unparalleled infrastructure for commerce.

No more. And the same dynamic applies to competition among U.S. states, by the way.

We could get away with sky-high tax rates when corporations and large-scale job creators had no where else on the map to turn, much like how a merchant need not worry about keeping his or her prices “competitive” when there isn’t any other competition in town!

Heads up, folks: the world is now FLAT. Our global monopoly is long over, and the Krugman way of doing things is consequently no longer tenable if we’re serious about pursuing a second American century.

 

Matt Rooney

Matt Rooney

Save Jersey’s Founder and Blogger-in-Chief, Matt Rooney is a widely-respected New Jersey political commentator, practicing attorney at the law firm of DeMichele & DeMichele in Haddon Heights, and a graduate of the Rutgers Camden School of Law.

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