Memo To: Website browsers, fans and clients
From: Jude Wanniski
Re: The economy then
[I wrote this during President Clinton's first term, following the fall 1994 elections. The Wall Street Journal published it on its Op-Ed page, November 11, 1994. The Reader's Digest subsequently picked it up for their February 1995 issue. I received tremendous positive responses from those two printings. When people say the economy is as good as it gets, we should remember how good it once was and could be again. JW]
"The Way We Were, and Should Be Again"
by Jude Wanniski
The Wall Street Journal, November 11, 1994
"Why do you think President Clinton isn't getting credit for the good economy?" a producer of CNBC's "Business Insiders" asked me as we prepared for the show.
I asked the young man how old he was, and when he replied "29," I told him bluntly that he was too young to know what a good economy looked like — that you have to have lived in the 1950s and 1960s to have experienced a good economy.
By a good economy I mean one that is not only expanding, but is also employing the nation's human and physical resources at a relatively high degree of efficiency. In my experience, in these terms the U.S. economy has been contracting since the late '60s, and is now nowhere near the levels reached earlier.
In the 1950-70 period, it was the rule rather than the exception that an ordinary family, without higher education, could sustain itself decently on the income of a single breadwinner. In 1955, when I was 19, living in Brooklyn, N. Y., my father, who had a sixth grade education, maintained our family of five on a wage of $82 a week as a bookbinder. My mother taught us fairness and compassion; my father, discipline and enterprise.
With my younger brother and sister, we lived in a small apartment in a relatively new apartment building. The monthly rent in 1954 was $65, utilities another $7-to-$10. We had a 1949 Plymouth sedan that my father bought new for $1,200.
My first good suit, bought for my 1954 high school graduation, was $30. In the summer of 1950, I worked as an office boy on Wall Street, for 75 cents an hour, the minimum wage. In the summers from 1951 to 1953, I labored in the bindery for $1 an hour, with time-and-a-half for overtime.
College tuition in 1955 at UCLA was $1,000 for an out-of-stater like me, only $60 a semester for a Californian. In the snooty private schools, like USC and Stanford, tuition was reckoned at $35 per credit. Still, you could work your way through without help from parents or the government.
I worked summers as a common construction laborer in New York City for $85 a week, $83 after deductions for income tax and Social Security. A skilled union carpenter or electrician made $125 per week in NYC, $120 after payroll deductions. The scale was lower elsewhere n the country, but so were consumer prices.
Working as a newspaperman in 1963 in Las Vegas, Nevada, three years out of school, I earned $125 per week. I'd saved $2,000 and bought an upscale, brand new three-bedroom home, with a two-car garage on a quarter acre, carpeted throughout, with appliances, a half mile from the center of town. It cost $20,000. The monthly payment was $120, including principal and interest, taxes and insurance. A brand new tarter home could be had for $12,000.1 bought a new Volkswagen Beetle for $1,600.
The U.S. economy in these years was good, but still John F. Kennedy won the presidency in 1960 with the promise of "Getting the country moving again" after the sluggish Eisenhower White House years, in which living standards were thought to be rising too slowly. The economy boomed in the wake of the Kennedy tax cuts, which brought le top income tax rate down from 91% @ $100,000 to 70%.
Where did this good economy go? The primary answer is that it was inflated away. The price of gold, as a proxy for the prices of all commodities, was $35 in those years. It is at roughly 10 times that level day. In order to appreciate the numbers related above, you simply multiply by 10.
There is a secondary answer, though, which is that the inflation caused the entire work force to be moved into higher tax brackets, with consequent reductions in after-tax purchasing power. That is, my father's bindery job in 1954 paid $82 per week, with $80 after deductions; today, at $820 per week the net would be $662. A carpenter's $125 before deductions was as good as $1,200 today before payroll taxes, but the net pay check was then $120; it's now the equivalent of $91. The average income of professionals — doctors, dentists, etc. - was $200 per week, $10,000 annually.
The $20,000 house now costs at least $200,000, but with interest rates and property tax and wages being what they are, it's way out of the reach of young people just out of college, not to mention high school.
Capital was plentiful. When you sought a loan at the bank, if you looked like a good bet the lending officer would offer more than you thought you needed, at 4 or 5%. If you had physical collateral, your interest rate would be even lower. There was no inflation. Money was as good as gold, at $35 the ounce.
Capital was also plentiful because the gains of capital were lightly taxed for most of the work force. To pay the top tax rate of capital gains of 45% you had to be earning more than $100,000, which is the equivalent of $1 million today before taxes. Today, with capital gains not indexed against inflation, you can hit the top rate of 39%, the combined federal/state rate in California, at not much above the minimum wage.
To ordinary people, the economy doesn't look very good at all. After-tax incomes continue to decline in purchasing power. The jobs offered in the unemployment ads pay close to the minimum wage of about $5 an hour, which, after payroll deductions, yield $4 an hour. Compare that to the plentiful minimum wage jobs of the 1950s and 1960s, when 75 cents was worth $7.50 before and after taxes.
The difference, then and now, goes beyond the time warp of inflation. Thirty and forty years ago, a small percentage of the work force was employed as lawyers, accountants, regulators, bureaucrats, social workers. A member of Congress made $15,000, but did most of what was needed to do in half a year, with a staff one tenth the size he or she has today.
The elections Tuesday are a primal scream from the voters about the terrible inefficiency of our national government, its tax maze and its monetary uncertainty. As long as there was a Cold War, the people put up with all this inefficiency. Now they say, it's time for fundamental change, to put things back they way they should be.
It's not too much to ask to get moving in that direction, a direction other than the one suggested by President Clinton these past two years. It should be no wonder he is not getting credit for the economy as it exists today. By past U.S. standards, it stinks.