Pour a little sugar on it honey, pour a little sugar on it Baby. I’m gonna make your life so sweet, yeah yeah yeah, Pour a little sugar on it yeah. Pour a little sugar on it honey. Pour a little sugar on it baby. I’m gonna make your life so sweet, yeah yeah yeah. So goes the bridge to Sugar Sugar, a song performed by the Archies, a band of fictional cartoon teenagers from 1969.
Once again, our favorite Keynesian, Paul Krugman has come up with a sugary and nonsensical idea in today’s column entitled The Twinkie Manifesto. In this bit of nonsense, the good Mr. Krugman harkens back to the golden age of cartoons and the Howdy Doody Show, and claims that in those wonderous times all was better because nefarious corporate executives (maybe Don Draper) were taxed at a reasonable marginal rate of just 91 percent, and because mythical union bosses were ensuring that America’s workers were receiving good wages and guaranteed middle class lifestyles.
Cartoon characters are not real, and neither are Krugman’s claims. While we all hearken back to when we were kids, the facts are always not what they seem. Krugman is 59 years old and his glory days were in the early 1960s – the Mad Men years. These were the years of Camelot, and moon launches. Of course they were also the years of VietNam – though we really did not pay much attention to the war until after Tet in 1968. In Krugman’s wonder years you could not get strawberries at any time of the year, you rarely experienced the wonder of air conditioning, and if you were lucky there were 4 channels on your TV.
Subjective memory is one thing, but subjective statistics are another. In Krugman’s case, the claim that labor was better compensated in the glory days is simply not correct. Examining data from the Bureau of Economic Analysis, it is easy to see that the percent of national income going to capital has remained pretty constant since Krugman’s glory days, peaking in 1989 at just under 27 percent. More recently the percentage of national income going to capital is closer to 22 percent. This does not tell all of the story. In fact, as more and more individuals have entered the stock market, and as more people rely on pension income – that in part comes from capital investment – a much larger portion of middle class income is actually capital income.
The interesting statistic is the one that Krugman fails to mention. The percentage of national income made up of government transfer payments has literally exploded since his glory days, rising from just 5.6 percent the year Krugman was born to a whopping 27.4 percent last year. Knowing the good doctor’s twisted use of statistics, I’m amazed that he has not claimed that his birth led to the growth in the Welfare State. Interestingly, as government transfer payments have grown, wages have fallen.
Part of this shift is demographic – the population has gotten older over this period and a larger share is reliant on Social Security, but the real truth is that the Welfare State is crowding out work. From and economics perspective this makes sense. As the growth of entitlements have made more marginal employment a poor choice for the less educated and qualified, they have turned to welfare, and abandoned work. Employers will only pay up to the marginal productivity of workers – and since workers can substitute welfare for work at a price point higher than their marginal productivity they do.
The real issue is not that low taxes on capitalists have pushed wages down – it’s that high taxes on capital, and incentives not to work have led to a shift from labor income to rent seeking.