To the Editor:

T

he quasi-optimistic picture painted by James Pethokoukis in his analysis of the U.S. economy largely ignores the extreme income and wealth inequality that now confront the United States (“How Bad Is the Great American Slowdown,” October). According to the Federal Reserve System’s most recent triennial Survey of Consumer Finances, the bottom half of Americans—about 160 million people, including more than 40 million children under the age of 18—own about 1 percent of the private wealth in the country. By way of contrast, the Forbes 400, about 800 people, own about 3 percent of the private wealth in the country. This means the top 800 people own about three times as much private wealth as the “bottom” 160 million.

Growth is difficult to sustain when inequality becomes as profound as it now is in the United States. Growth was greatest, compared with what came both before and after it, from the late 1940s to early 1970s, when progressive taxation was at its highest. Growth has decelerated since the 1980s, when top marginal income-tax rates were dramatically cut.

As Mr. Pethokoukis indicates, growth will be difficult to sustain at previous and accustomed levels as a result of having proportionately fewer Americans in their working years. For this reason, it is vital that pro-growth policies incorporate restored progressive taxation—the tax policies that prevailed when the United States was at its peak in the world and at home.

Lanny Ebenstein

Santa Barbara, California


James Pethokoukis writes:

H

ere’s a fun fact: High-end income inequality is roughly where it was at the end of the 1990s, a decade of economic growth that was both quite speedy and broadly shared. And even progressive columnist and Nobel laureate Paul Krugman has conceded there’s “not much evidence that failure to reduce inequality kills growth,” as much as the left would prefer otherwise.

Did the American economy grow faster in the past when inequality was less and tax rates were higher? Sure. But the immediate postwar decades were notable for other reasons as well. For starters, global war left the U.S. as the planet’s dominant industrial power. War, along with the 1930s baby bust, also restricted labor supply and helped produce higher wages. And while top income-tax rates were quite high, few paid them. Indeed, tax revenue as a share of GDP before the Kennedy tax cuts—which slashed the top rate to 70 percent from 91 percent—was lower then than today.

And again, a big reason the economy grew faster in the past than today was that labor-force growth was multiples higher. Replacing the demographics of the past with those of the present produces sluggish growth rates sadly familiar to those fretting about a 21st-century “great stagnation.” Finally, the American tax system is considerably more progressive than the tax systems in Europe because we rely more heavily on income taxation versus consumption taxation in the form of a value-added tax.

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