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Liberalism’s darkest decade

Summary:
Perhaps you are a boomer, currently outraged that millennials seem unable to understand that it’s not OK to sign a petition to have your boss fire one of your colleagues. You wonder what’s wrong with the younger generation. Have they no sense of basic human decency?Or perhaps you are a member of the Greatest Generation, who were appalled that the young boomers reacted to all their sacrifices (WWII) and accomplishments (1960s prosperity) by becoming a bunch of drug addled hippies who rejected conventional morality.But no generation was betrayed worse than the liberals of the late 19th century. In a period of 7 short years, a supposedly “liberal” president presided over the most appalling string of policy outrages in US history. Here are just some of the highlights:1. In

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Perhaps you are a boomer, currently outraged that millennials seem unable to understand that it’s not OK to sign a petition to have your boss fire one of your colleagues. You wonder what’s wrong with the younger generation. Have they no sense of basic human decency?

Or perhaps you are a member of the Greatest Generation, who were appalled that the young boomers reacted to all their sacrifices (WWII) and accomplishments (1960s prosperity) by becoming a bunch of drug addled hippies who rejected conventional morality.

But no generation was betrayed worse than the liberals of the late 19th century. In a period of 7 short years, a supposedly “liberal” president presided over the most appalling string of policy outrages in US history. Here are just some of the highlights:

1. In 1913, Wilson issued an order segregating the federal government. This was done so that whites would not have to suffer the supposed “indignity” of working next to blacks.

2. In 1913, Wilson signed the first income tax. At first, the tax was not that unreasonable. Most people didn’t have to pay any tax. The upper middle class and rich paid a 1% income tax, while the super rich paid 7%. But in the long run it became a monstrosity.

3. In 1913, Wilson signed the Federal Reserve Act, creating an institution with power to influence monetary policy but lacking the skill to do so wisely. The Fed played a major role in causing the Great Depression, which led directly to the success of the Nazis in Germany.

4. In 1914, Wilson signed the Harrison Act, which regulated (and later banned) narcotics. This led the the horrific War on Drugs, which has destroyed so many lives, and even entire countries.

5. In 1916, NYC enacted the nation’s first citywide zoning laws. The early rules (for things like setbacks) didn’t do much harm, but as with the income tax these laws eventually became very destructive.

6. In 1917, the US entered WWI. This tipped the balance against Germany, assuring that the most powerful country in Europe would lose the war. That made a rematch almost inevitable. Thus both the creation of the Fed and the US decision to enter WWI indirectly contributed to WWII and the Holocaust.

7. In 1917 and 1918, Wilson signed a series of laws that made it a crime to criticize the US decision to enter WWI. Free speech was effectively dead for the duration of the war.

8. To his credit, Wilson vetoed the Volstead Act in 1919, a law banning the sale of alcohol, but only because he objected to one narrow provision. It passed over his veto.

Some progressives might raise an eyebrow over my Fed and income tax views. To be clear, I’m not in the “Abolish the Fed” camp. The Fed we have today was basically created in 1935. The original Fed was a disaster, presiding over (and helping to cause) both the most unstable 20 years of monetary policy in US history and the worst banking crises. It was an utter failure. (Even the revised Fed has made serious mistakes, but it’s gradually learning from its errors.)

As far as the income tax, most of the harm done is not from the work disincentives (I favor a progressive consumption tax, which has basically identical work disincentives.) It’s not even the bias against future consumption (which hurts high savers like me.) Rather the biggest problems are the distortions it creates, the things people do to avoid paying taxes.

Thus the income tax deduction for health insurance has played a major role in pushing US spending on health care from 5% to 18% of GDP. And that plays a major role in reducing growth in our living standards.

Most people have a “follow the money” approach to economic analysis, whereas you actually want to follow the output. All the labor and materials going into that wasted 13% of GDP (above Singapore’s 5% of GDP) could have been used to provide average Americans with better housing, nicer cars, more restaurant meals and more trips to Disney World. Because we produce lots of medical goods that don’t make us happier, our living standards suffer.

As Noah Smith recently point out; it’s not so much about the money as it is about what we produce, and the ways in which we are making that production excessively costly. The income tax is far from the only problem, but its a big one. We should have a progressive consumption tax.

Progressives are feeling their oats right now, and I can’t blame them after the Trump fiasco. But this is the party that repealed a luxury tax a few decades back because they worried it was reducing output in the yacht making industry. (No, I’m not joking.) This is the party that at a local level often wants to stop big bad housing developers from building houses. Good intentions are not enough. If you don’t understand EC101, you aren’t going to be able to help anyone.


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Scott Sumner
Scott B. Sumner is Research Fellow at the Independent Institute, the Director of the Program on Monetary Policy at the Mercatus Center at George Mason University and an economist who teaches at Bentley University in Waltham, Massachusetts. His economics blog, The Money Illusion, popularized the idea of nominal GDP targeting, which says that the Fed should target nominal GDP—i.e., real GDP growth plus the rate of inflation—to better "induce the correct level of business investment".

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