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Thursday, November 21, 2013

Is Liberty on the Rise?

History says yes

Some libertarians despair at the prospect of shrinking Leviathan. How can we make meaningful change when the system is stacked against us? And how can we be freer when our political leaders only seem interested in growing government and having more control over the economy?

But the fact is that we’ve already made enormous strides. The history of the federal government since World War II tells a tale of increasing freedom and—believe it or not—decreased intervention. In the great battle of ideas between economic liberty and interventionism, liberty is slowly winning. 

Let’s look at some examples.

For most of the twentieth century, wage and price controls were seen as mainstream “cures” for the excesses of capitalism. Presidents from Kennedy to Nixon sought to centrally manage the economy and to dictate prices in order to shepherd resources away from some industries and divert them into others. 

During the Korean War, President Truman created the Office of Price Administration and the Wage Stabilization Board to dictate the economy’s course from Washington. Their rules mandated price freezes in some areas and allowed increases in others. The official goal was to promote production in some sectors and decrease demand in others. In the 1960s, these methods were replaced with “guideposts”: The federal government set specific wages and quotas of production, and encouraged business leaders to meet them. Meeting the guideposts was rarely mandated, but Presidents Kennedy and Johnson “jawboned” businesses into doing so.

It would be as if today, President Obama suggested that Apple sell its iPad for $600—and then twisted CEO Tim Cook’s arm to make it happen. (I am aware of the President’s complicity in distorting the health insurance and healthcare “markets,” but predecessors succeeded in distorting the entire national economy.)

Price and wage controls continued through the 1970s, especially as a “cure” for recession or inflation. To combat stagflation, President Nixon passed general price controls on everything from bread to gasoline. The predictable result—shortages, queuing, and general misery for the common American—didn’t stop him from continuing the program for four years. He also mandated that wages rise by a maximum of 5.5 percent per year.

Today, “solutions” like Nixon’s—or Kennedy’s or Johnson’s, to say nothing of the central economic planning and interventions of FDR—aren’t even considered. If Obama had proposed controlling the price of bread in response to the 2009 recession, he would have been laughed off the stage by a country that has swung pro-market since World War II.

Of course, officials are still trying to controls wages and prices today. The minimum wage erects a price floor for wages and (again) Obamacare mandates that insurance companies not raise premiums beyond certain levels. But these isolated examples are relatively tolerable compared to the extent of central planning that was being carried out in much of the twentieth century.

Tax rates are another example of liberty slowly gaining ground against government control. Obama’s latest tax hikes are cause for concern, but they are moderate compared to rates Americans faced in the 40 years before the Reagan presidency. In 1944, the highest marginal tax rate of 94 percent was applied to incomes over $200,000 (about $2.6 million in today’s dollars). That was supposed to be a wartime tax, but marginal tax rates above 90 percent stuck around through the 1950s. The highest rate gradually fell to 70 percent when Reagan took office, and even he maintained the top rate at 50 percent for several years.

But that’s just the income tax; surely taxes overall have risen? Well, when you look at federal revenue overall, the picture is still not bad. In the 1950s, tax revenue averaged 17.19 percent of GDP. That number rose to 18 percent in the 1960s and hovered there, or a little higher, through the 1990s.

But after a peak in the Clinton years, federal revenues—total federal taxation—have fallen, at least as a share of GDP. In the 2000s, revenue hovered around 17 percent of GDP. Now it’s at 15.25 percent.

In fact, these numbers undersell the argument that economic liberty is on the rise, because of the Laffer curve. Marginal tax rates of 90-plus percent reduced production, bringing in less revenue. They distorted the economy by disincentivizing production. Because marginal tax rates today are lower, they distort the economy and diminish economic liberty less than those in the 1950s, even though both rates brought in similar net revenue. Tax rates are also a good measure of economic liberty (or lack thereof). After all, taxation deprives you of the fruits of your labors. It also causes economic distortions. 

Admittedly, our government has now chosen increased debt over higher taxes. Our $17 trillion debt is a ticking time bomb, and it’s difficult to predict when it will go off. Presidents Obama and Bush have increased the federal debt by trillions of dollars. This increase is certainly cause for concern, and it is the next great battleground for advocates of economic liberty. But 90 percent marginal tax rates are a political non-starter, and that indicates progress.

Even Austrian economics—the purest brand of economic liberty—is making a comeback. After FDR adopted Keynesian central planning on a vast scale to combat the Great Depression, Austrian economics fell into disfavor. Every major political figure was a Keynesian advised by Keynesians. Austrian economics became the purview of a few thinkers who had been relegated to the fringe. These men, from Friedrich Hayek to Henry Hazlitt, worried deeply about the torch of liberty being extinguished in their lifetimes. The idea that intervention might hurt an economy—a core concept in Austrian economics—was so fringe that most people didn’t even know it existed. The first Austrian conference, in the 1970s, had only 50 attendees.

Since then, Austrian economics has slowly been gaining momentum. Strangely, this momentum increased exponentially with Ron Paul’s 2012 campaign for president, in which Paul stumped regularly about Austrian economics.

Today, with the failure of Obama’s stimulus package to cure the Great Recession, Austrian economics is ascendant. Talk of the gold standard, of letting recessions play out and markets self-correct, of the role of the Federal Reserve in creating the housing bubble—these ideas are becoming mainstream. It’s just one more way the ideas of liberty are gaining strength.

Of course, Leviathan is still a force to be reckoned with. We have an activist Federal Reserve that recently launched its sixth round of quantitative easing. Widespread price controls may be a thing of the past, but in 2011 there were 169,000 pages of federal regulation affecting how we could live our lives. The Affordable Care Act is already making its presence felt in the healthcare industry.

But one can think of the century-plus struggle between interventionism and economic liberty as a football game. Our side got hammered in the first quarter. Between 1900 and 1940, we saw the creation of the Federal Reserve, the passage of an income tax, and the election of a planner’s president in FDR, who shaped economic policy for decades to come. Interventionism racked up a heck of a score in that first quarter.

But since then, economic liberty has been clawing back. We’ve beaten back price controls and high marginal tax rates. We have reintroduced Austrian economics into the mainstream discussion. Since 1940, economic liberty has staged a major resurgence in terms of federal policy. We’re still losing—that is, things having gotten worse over the last 15 years or so—but we’re rapidly gaining ground. Recent administrations have set our progress back. But they’re a blip in a long-term trend toward freer markets.

We libertarians tend to look at U.S. politics and despair. But when we look over longer timescales, our side is mounting a comeback.

  • Julian is a former political op-ed writer and current nonprofit marketer. His work has been featured in FEE, National Review, Playboy, and Lawrence Reed's economics anthology Excuse Me, Professor.