A Lay Person's View Of The Economy
By Rev. Robert Emerick
12 July, 2012
I am not an economist. But I am interested in the claims being made about how to create jobs and strengthen the entire U.S. economy. About ten months ago I decided to investigate this issue myself, because the experts seem to disagree on how we, the people, can best address our economic situation. Using easily accessible government and non-government websites, I compiled data on nine economic indicators, including top tax and capital gains tax rates, unemployment rates, federal deficits, federal debt, and GDP (Gross Domestic Product), from 1900 to 2011.
This very brief report focuses on the 66 years from 1946 to 2011. Regarding the Great Depression and World War II, it should be noted that the New Deal policies reduced unemployment from 24.9% in 1933 to 14.3% in 1937, and GDP rose from $56.4 to $89.8 billion during those five years. WWII pushed the federal debt to 120% of GDP.
In the 26 year period from 1946 to 1971, the top tax rates on wages and unearned income, and the capital gains tax rate, remained virtually unchanged. The top tax rate on wages and unearned income averaged 80%, and the capital gains tax rate averaged 25.8%. The unemployment rate in this period averaged 4.6%, with a low of 2.9% in 1953 and a high of 6.8% in 1958. Budget deficits averaged 0.7% of GDP, and there were eight years of budget surplus (30.7% of the 26 years in the period).
Even with the added expense of the Marshall Plan, the GI Bill, the Korean War, the Vietnam War, and the Eisenhower Federal Interstate Highway System, the federal debt consistently declined during this period – measured as a percentage of GDP, the debt declined from 120% of GDP at the end of 1945 to 37% of GDP in 1971. Annual federal revenue averaged 96.7% of annual federal spending. Data on the size of the total federal workforce – uniformed and civilian – is available starting in 1962. From 1962 to 1971, the federal workforce averaged 5.7 million, with a high of 6.6 million in 1968.
In the 40 year period from 1972 to 2011, the top tax rates on wages and unearned income, and the capital gains tax rate, varied significantly. The average top tax rate on wages and unearned income was 44.1%. The average capital gains tax rate was 18.9%, with a low of 8% from 1982-86 and a high of 29.2% in 1993-96. The unemployment rate averaged 6.4% during this period, with a high of 9.7% in 1982, and a low of 4% in 2000. Budget deficits averaged 3% of GDP, and there were four years of budget surplus (10% of the 40 years). Federal debt rose during this entire period – from 37% of GDP at the end of 1971 to 99.7% of GDP in 2011. Annual federal revenue averaged 86.4% of annual federal spending. The total federal workforce averaged 4.7 million, with a period high of 5.3 million in 1987-89.
From all of the above information, I draw three conclusions. First, higher top tax rates on wages and unearned income and higher capital gains tax rates consistently correspond with lower unemployment, lower budget deficits, and reduction in the federal debt.
Second, we should follow Adam Smith's advice and use public funds to invest in what he called “fixed capital” – things like roads and public education. Fixed capital is a great expense which stimulates the entire economy in the short run and the long run (personally, I think we should understand that the health of the population is also a fixed capital).
Third, we should understand that the economy is like the circulation system in the body. The body is healthiest when optimum resources are flowing to - and through - all of its parts. Our economic circulation system has a “heart” with two chambers - the public and private sectors. Each chamber has a unique and vital function in the economy. The health of our economy requires that both chambers perform their unique and vital functions, to keep the system in balance to benefit everyone. This balance simultaneously promotes prosperity, liberty, and the common good.
Robert W. Emerick holds degrees from Albright College in Pennsylvania, Union Theological Seminary, and Yeshiva University in New York City. An ordained minister and Licensed Clinical Social Worker, in his thirty-five-year career he has worked as a pastor in New York City, a psychotherapist, an instructor in graduate and undergraduate psychology and clinical education for clergy, hospice social work, and military chaplaincy. He is the author of 'Soul Affirmation': Dorrance Publishing Co. Inc. (August 13, 2010). Rev. Emerick currently resides in Brooklyn, where he serves as pastor of the Bay Ridge United Methodist Church. He can be reached at: email@example.com
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