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Growth and Equality

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Growth and Equality

February 7, 2018
Economy, finance, and budgets

Amity Shlaes joins Seth Barron to discuss the competing goals of economic growth and income equality, and to take a look at how American presidents in the twentieth century have approached these issues.

Polls show that support for income redistribution is growing among younger generations of Americans, but such policies have a poor track record of achieving their goals. As Shlaes writes in her feature story in the Winter 2018 Issue of City Journal: “Prioritizing equality over markets and growth hurts markets and growth and, most important, the low earners for whom social-justice advocates claim to fight.”

Amity Shlaes chairs the board of the Calvin Coolidge Presidential Foundation and serves as presidential scholar at The King’s College. She is the author of Coolidge and The Forgotten Man: A New History of the Great Depression.

Audio Transcript

Seth Barron: Hello, and welcome to for the 10 Blocks, the podcast of City Journal.  I am Seth Barron, associate editor of City Journal.  I am joined today by Amity Shlaes, chair of the board of trustees of the Calvin Coolidge Presidential Foundation, and author of three New York Times bestsellers, including The Forgotten Man: A History of the Great Depression, and Coolidge, which Alan Greenspan called one of the best books of 2013.  Amity, thanks for joining us today at 10 Blocks.

Amity Shlaes: Thank you, Seth.

Seth Barron: Now, your new piece in the Winter issue of City Journal is entitled Growth, Not Equality.  We hear a lot about wealth and income inequality, especially here in New York City.  You seem to say that equality as a goal is not necessarily so great, but isn’t inequality bad for society?

Amity Shlaes: Extreme inequality over time is bad for society.  It was the fatal blow to the Roman Republic, for example, way back in the past.  But inequality as a goal doesn’t necessarily lead to growth, and growth is necessary for republics, too.  So, when you target growth, sometimes you get inequality for a while.  Eventually you get more equality, because you get a higher standard of living in which many participate, but in the shorter term sometimes growth leads to inequality or coexists with inequality.  And what this article says is that is alright.  America is not really about equality so much as opportunity.

Seth Barron: I see.  Now, I know you have written a lot about the Great Depression and Calvin Coolidge.  Now, I always learned that the Great Depression was a result of business and unrestrained markets running America off the rails in the 1920s, and that Warren Harding and Calvin Coolidge did a really bad job of keeping things under control, but you praise their policies.  Can you elaborate on that?

Amity Shlaes: Well, yes.  You start with the ‘20s, that is Warren Harding and Coolidge, and I went back and looked at the period, and what you see is their policies were pretty good.  They restrained the budget, so we had a surplus, they cut taxes so that the top marginal rate, which is what we look at, and I know the Manhattan Institute, of course, has looked at through, for example, the work of Larry Lindsey.  The top marginal rate went from a very high level down to 25%.  That is lower than Ronald Reagan, and we had enormous progress in the ‘20s.  What is an example of that?  I think a very obvious one, Seth, is the standard all around the world today of the difference between poverty and okay life.  What is that?  Indoor plumbing.  The first time the majority of Americans had indoor plumbing was in the ‘20s.  Another example of the quality of the ‘20s was productivity.  Productivity is like an abstract word, right?  We are like, what is that, you know?  Unless we are in the economic business, a concrete and happy example of the productivity of the ‘20s was the workers were able to work five days for six-day salary all of a sudden, because products were made faster.  Imagine the Ford assembly line, and that in turn meant that productivity of the 1920s fostered by Coolidge and Harding policies gave us Saturday.

Seth Barron: Now, I have heard the labor movement take credit for the weekend.  You know, I have seen bumper stickers that say oh, enjoy the weekend, thank the labor movement.

Amity Shlaes: Well, at that time Ford was not unionized.  So, this is, say, a story of Ford, but the labor union does give us things, sometimes too much.  A good example, not to jump ahead, would be the 1960s, when labor unions were truly strong, and they got tremendous packages.  Walter Reuther of the UAW, a heroic figure in union land, a wonderful man, just put demand after demand upon employers, and the automakers said yes.  Yes, you can have pay even if you are laid off, yes, you can have prescription drug benefits, it all sounds familiar, but unfortunately the auto makers couldn’t afford that, so, what happened?  The cars were a bit expensive, and that opened the door to the Japanese challenge.

Seth Barron: I see.  Back to the 30s, I have always heard that Herbert Hoover let things get really ugly by not stepping in to save the economy when things got bad after the stock market crashed in 1929, and the country didn’t turnaround until Franklin Roosevelt came in and started fixing things, getting the government involved in the economy.  But, in your piece, you seem to say that Hoover and FDR actually pursued similar policies.  Can you elaborate on that because I think that is something that maybe people don’t know about?

Amity Shlaes: Yes.  Well, first, Seth, what you heard everyone heard, that’s the meme.  The bad free marketeers set the stage, the Depression happened, Roosevelt came and rescued us.  That’s what my mother told me, and I know all of our mothers told us, and maybe even our teachers at school.  There is not a lot of evidence that is so.  It is interesting how much reality diverges from what teachers teach.  I think that, just a footnote, I think that is true because people love Franklin Roosevelt because he led us in World War II.  We all love Franklin Roosevelt, he led us in World War II, that doesn’t mean you have to praise his economics, which were poor.  So were Hoover’s.  So, what happened?  The stock market went very high in the 1920s as a result of this wonderful productivity and the relative success of the United States, Europe was falling apart already, Weimar Republic, and so on.  Well, it went too high.  It does that.  We are looking at some of that now.  In Coolidge’s lifetime, to give an example, the stock market had fallen drastically, like 30% or more a number of times, five, without any big depression.  People were used to that.  Coolidge himself was a little unhappy to see the stock market at 381 when his presidency had started more at the hundred level.  But, we didn’t believe it was Washington’s job to take care of the stock market.  There was no SEC or anything like that, so he thought a crash would come, there would be a recession, panic, recession, recovery.  What was different was the policies followed first by Hoover and then by Roosevelt.  An obvious example that I think the Manhattan Institute, an area Manhattan Institute is pretty good on, is labor price.  Usually what happened in a downturn was employers cut wages.  Why?  Because they didn’t have a lot of money, and it’s always nicer to cut wages than to lay people off.  Under Hoover, that policy changed, and we went to the modern policy, which says push wages up in a downturn, then the consumer worker will spend, and he will buy back the car that he makes, and the economy will have a stimulus and will get going.  That policy in our life, our American twentieth century, first took place under Hoover.  He told business you better not let wages go down.  You better pay a lot, and then we will stimulate, and the downturn will go away.  Well, that was a perverse policy because the employers unfortunately complied with the president’s orders, but they couldn’t afford them, therefore they rehired less, or laid of more, and therefore you get the signal of the Great Depression.  What made it great, after all, was the unemployment.  Roosevelt continued that trend by institutionalizing higher labor prices.  We have heard of the Wagner Act, the great union law of the 1930s which gave labor unions outrageous power, power we couldn’t even imagine now because the Wagner Act was much tamped down with later law, and the mighty unions warred, and they got what they wanted.  But the companies could not afford what the unions demanded, and therefore they failed to rehire.  So, you see unemployment all through the ‘30s higher for a longer time than we could have imagined.  There had been drastic unemployment before, but not for ten years.  And that’s what put the great in Great Depression.  So, labor policy, which changed, was a big factor in making the depression great.

Seth Barron: Okay.

Amity Shlaes: And that’s just one example.  And you can’t hang that on Coolidge, but you kind of can on Hoover, which is why he warrants revision, I’d say downward revisional, and is more like Roosevelt than he is like Coolidge.

Seth Barron: It seems like it would be hard to revise him further downward.  Does he get a lot of praise from historians?

Amity Shlaes: Okay, so you got me there.  I say let’s not revise – let’s shove him over to the other side.

Seth Barron: Okay.

Amity Shlaes: So, he’s classed with the free marketeers, he deserves to be pushed back over with the progressives, Hoover.  He really said he rejected laissez-faire in a book he wrote about the economy in the early ‘20s explicitly.  He said he didn’t like it.  He was more of a control freak, Hoover.  I mean, some of this has to do with temperament, Seth.

Seth Barron: Okay.

Amity Shlaes: It has to do with what kind of a person you are.  Coolidge was a hands-off person, Hoover was a hands-on person, partly because he was so competent in his life in the private sector and feeding Belgium at the end of World War I and so on, and so he was the guy who would enter the room and takeover.  The smartest guy in the – that was Hoover.  Franklin Roosevelt was more like a commander-in-chief than he was like a quiet servant, so he commander-in-chiefed the Great Depression.

Seth Barron: I see.  Well, that’s an interesting way to look at it.  In your article, Amity, you talk a lot about tax rates and economic growth and how they are related.  I often hear, and you hear Bill de Blasio talk about this, and I think Bernie Sanders talked about this, that in the 1950s the top tax rate was 90%, yet we had a great economy, and everything was really good.  What is your response to this, this idea that you can have really high taxes on the wealthy and the economy can still just, you know, chug along.

Amity Shlaes: Well, yeah.  The story about the ‘50s is the Democrats want to work in the ‘50s and the Republicans want to live there, right?  It is sort of pictured as an idyllic period.  One answer is that the top rate at that time was paid by very few people.  The tax code was Byzantine because America can’t sustain a 90% rate, a 91% rate.  People don’t want to work more, so there were enormous breaks in the code, even more than we have today, and even more perverse.  But the second answer about the ‘50s is sure, they were lovable, sure, workers were paid well, sure, there was hope – that’s because the United States had no competition.  Asia was rice paddies, Europe was very weak, still on its back, couldn’t easily export, Germans couldn’t even travel outside of the German area for a long time.  The war was still very close and the restrictions of a wartime economy, or of an occupied economy, were heavy upon Europe.  So, we never imagined anyone else could ever make a car as good as our cars in the 1950s.  We wanted to develop Europe, not so they could make things, but so they could buy our stuff.  So, unfortunately, we live in a global economy, or fortunately, and the sort of narrow dream of the ‘50s couldn’t obtain forever because of the expansion of the economies overseas in Asia.

Seth Barron: Okay.  Well, since we are moving, we have moved from the ‘20s, and the ‘30s, and the ‘40s, ‘50s a little bit, let’s talk about the ‘60s and the Great Society, when the federal government really expanded really widely, how it took care of people.  How did that impact opportunity, equality, economic growth?

Amity Shlaes: Just as there are several new deals, different trends in the New Deal at different points, there are several great societies.  So, in my current book, which I am writing now, Great Society, I call the first great society that of JFK.  He called it the New Frontier, but it was the same idea.  His great society involved symbolic achievement.  That would be the Space Race, October Sky, if you have ever seen it.  We can have opportunity through federally supported education, federally supported space program, and a few symbolic projects, but the rest is up to you.  Opportunity as opposed to result.  The early Great Society, which is the program that Lyndon Johnson announced when he became president at the University of Michigan in 1964 was remarkable for a number of reasons.  First of all, it was a giant program, much bigger than JFK’s, at a time of relative prosperity.  The New Deal happened in a time of economic tragedy, so there was a kind of moral imperative, even if the policies were perverse.  The Great Society was a similar intrusion in a prosperous time.  Very different.  And, at first, Johnson concentrated, one can say, on equality of opportunity on civil rights.  Look, blacks in the south can’t vote.  Blacks in the south can’t work.  Blacks in the north can’t get apartments in neighborhoods they want to get apartments, and we want to change that so there’s equality of opportunity to rise.  But the second part, or second stage of the Great Society, was equality of result, and that was out of a frustration – whoa, all of these riots, we have heard of the Watts Riot, or the riot in Newark, or the riot in Detroit which was particularly awful in 1967, oh, we already gave people rights, but that doesn’t seem to be enough.  Now we have to give them things or programs, and we had the war on poverty was part of that, really, even though it came early.  We had housing was a big deal, and the Manhattan Institute has done a lot of work on that.  This giant housing act, we created HUD, a giant housing act, just after that.  We are going to give people houses, or rental apartments, mostly.  We are going to give people this and that, extend welfare, and, of course, Medicare and Medicaid.  So, a lot of things to give people so that the quality of their life is more equal to someone else’s, the quality of result, and then they will be happy, and we will all progress and have strong growth.  That didn’t quite work out, and the best – the spending didn’t make everyone happy, right?  Lyndon Johnson basically had a temper tantrum because America didn’t shower gratitude upon him and he felt hounded out and did not run for election again.  The rage against the government only grew.  It was the time of Vietnam escalation, right, after Gulf of Tonkin, and then things didn’t go well there, either, and it just seemed the government had to do more and more.  In my article, here, and in my book, I concentrate on the economic result.  And what you eventually had was the government overspent itself.  We had serious inflation and unemployment in the ‘70s.  The ‘70s is the morning after the of ‘60s, economically, truly.  One way to look at it, just thinking of the current stock market boom, or recent stock market boom, is where was the Dow Jones Industrial Average, the premier measure of the stock market in 1966?  It was around 1,000.  Where was the Dow Jones Industrial Average in the ‘70s?  It was around 1,000.  It didn’t happen until 1982 that the Dow busted through 1,000 definitively and stayed there, and starred, and went on to strengths.  So, that’s, gosh, almost a generation that the Dow was flat.  Oh, tell that to our young investors now.  Well, you have about 15 years until you are going to see your stocks rise.  That was an incredible blow, and I’m not even counting inflation.  So, when you take into account inflation, your investments are worth a lot less, 1,000 is a nominal number, wow, that was growth that was foregone because the government made interest rates very high to combat inflation, eventually, right?  Because unemployment was great and because of malinvestment, money was flowing to the wrong places because the government was steering the money through its incentives and disincentives, results of the Great Society.  So, it wasn’t always going to the most creative idea.  Property rights weren’t particularly honored.  One result of the Great Society was that the capital gains tax, which is when you buy and sell stocks, was effectively 50% by 1977.  That is an incredibly high take on your profit, right?  And the market just kind of waited that out, for years, and years, and years.  We lost a decade because of the Great Society, the ‘70s.

Seth Barron: Well, some people say that we have kind of lost a decade, you know, over the last ten years, you know, since the Great Recession of 2009 and that we have had a very weak recovery since then.  I mean, I guess we have seen the stock market go up, but economic growth has been kind of tepid.  And now, we just had tax reform, where we have slashed – I mean, it seems like a major, I am no expert, but it seems like a fairly major cut in the corporate tax rate and a lot of the personal tax rate.  Do you see that, I mean, people say oh – this is going to jumpstart the economy.  What do you think?  Where are we at?

Amity Shlaes: Well, what happened in ’78 was they cut the cap gains rate in half.  There was a congressman named Bill Steiger who led the revolt, and it was a bipartisan revolt.  So, they – and the economy did much better.  The Dow, just to use the same measure in the conversation went to, eventually went to 5,000, and some of that was that change, the ‘80s, right?  Now, what has happened, it can’t be bad that we cut rates on business, because business has to compete, and we weren’t competitive with other countries in terms of the corporate tax, which is what the recent tax reform addressed.  A strong follow on, optimally, this would be a one-two punch, and there would be a second tax reform which would regard capital gains untouched by the recent move, it would significantly cut the income tax back to Ronald Reagan’s level, which is 28, right?  Now, they had a tiny, sort of symbolic rate cut from 39.6 to 37 under their recent law, so that would give us a lot more confidence that recovery can be sustained.  One reason the Dow might go down now is we haven’t completed our economic work.  And that would be further tax cuts and it would also be a signal from our government that it is for a strong and stable currency.  When you go back to the Reagan era, they didn’t just cut taxes.  It was always a twin offer, or a twin goal.  We are going to cut taxes, pull government back on the physical side, and we are going to stabilize our money.  That means we are going to have a commitment to reducing our debt and it means we are going to have a commitment to a stable dollar.  We are not going to just say the dollar goes up and down like a stock.  That is not the view that you see yet from the current administration.  What you see is oh, well, I don’t know, the dollar will go up and down.  So, you kind of have a deep squishiness, a sort of swamp consistency to our monetary policy.  Clearly, we have never addressed – we haven’t addressed, in recent years, the possibility of inflation.  Well, people have been mocked for predicting inflation that didn’t materialize recently.  Eventually inflation comes when you have huge debts, as the United States does, eventually.  The only question is when that sogginess is a deterrent to solid growth that may be – I’m not a market analyst, but that may be what is affecting the market.

Seth Barron: So, just in terms of American society and economics, I mean, coming back to the question of equality, inequality, and growth, it does seem as though growth in America is, you know, concentrated in some regions and not occurring in other places.  So, if that results in increased inequality, say, you know, between the coasts and the heartland, I mean, at some point we could arrive at a late Roman Republic type of scenario, with massive inequality that is really detrimental to the society.

Amity Shlaes: We don’t have massive inequality like the Roman Republic, where many people starve while other people decorated their goldfish with diamonds, or with pearls, actually.  So, but we do have is a problem, and that problem can mostly be solved with education and educational opportunity.  That education isn’t happening.  So, why not?  The onus is largely on the families.  There is a limit to what you can do with spending on education, but what is clear, you see it in the recent story about Amazon and Google, and so on, getting together to form together their own healthcare company.

Seth Barron: Right.

Amity Shlaes: Why would they do that?  They do that because they want to keep their people.  That market is tight.  The market for educated employees is tight.  Companies are scrambling to keep those people.  That is serious tightness.  So, what is clear to all of us, and this is like October Sky, it is like the Kennedy era, is that you have got to get education in order to succeed now.  It is not like the ‘70s or the ‘60s where a steelworker without too many skills could say this is good enough.  Unfortunately, because we are in an international world, you do have to educate your kids more than you were educated.  So, that is where the burden is.  It is not so much in federal policy, it is in the decision by individual families to recognize what you have to do to advance your kid.  And the second acknowledgement that has to come, and this is from government, state governments particularly, that they have to have a tax fiscal business environment that people want to do business in, and by which we don’t mean one weaning enterprise zone, or one giant development project to lure one company to your town, but which we mean an overall free environment that makes working in Illinois attractive relative to Germany, relative to California, relative to – right?  And the states haven’t wrapped their minds around that yet.

Seth Barron: Right.  You have been listening to 10 Blocks, the podcast of City Journal.  Follow us on Twitter, @CityJournal.  If you enjoyed what you heard, why not give us a five-star rating on iTunes and tell your friends to tune in, too.  I am Seth Barron, and our guest has been Amity Shlaes.  Amity, thank you so much for joining us today.  It was fascinating.

Amity Shlaes: Thank you, Seth.

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