Paul Krugman weaves a fantasy tale of how high taxes, big unions, and government regulations created a booming 1950s economy — the implication being that in reactionary fashion we can now in a second term return to our heyday under Obama’s envisioned union support, growth in government, tax hikes, and greater regulations. Krugman takes little note of history — that his redistributionist Fifties followed the near-complete destruction of what was then the industrialized world — a devastated Germany and Japan were still emerging from ruin; Russia and China were all but destroyed and suffered 50 to 70 million dead; there was no Taiwan or South Korean economic miracle yet; France, Italy, and most of Western Europe were still reeling from war, ruin, and occupation — all leaving an intact and untouched United States in a unique position in the 1940s and 1950s as the supplier for pent-up demand, and restorer of the world economy — all at a time when America was still almost self-sufficient in cheaply priced gas-and-oil production and cutthroat globalization was still a pipe dream.
In such a landscape of postwar monopoly, the United States, which had not recovered before the war despite eight years of statist policies, could sustain, for a brief time, Krugman’s dream tonics of a top income tax rate of 91 percent (with plenty of loopholes) — or almost any tonics within the broad parameters of free-market capitalism. Yet soon by the mid-1960s and 1970s, America reentered a competitive global economy, became increasingly dependent on soon-to-become-costly imported oil, and found its high-cost unionized labor, high taxes, and highly regulated 1950s economy inflexible and hardly able to adjust to the rise of dynamic competitors like Germany, Japan, South Korea, and later China. That is why the fossilized 1950s paradigm, which Krugman is nostalgic about, by the time of the Johnson, Nixon, Ford, and Carter administrations had stalled and was plagued with periodic bouts of high inflation, high unemployment, high interest rates, stagnant inner cities, a growing rust belt, and a generally stagflating economy. If Obama succeeds in taking us back to Krugman’s 1950s dreams, then he likewise better hope that horizontal drilling and fracking, and in large part on federally leased lands, can return the U.S. to energy independence, that technological breakthroughs increase productivity even more, and that rivals such as Japan, China, and Germany recede either because of demographic ossification or a desire to go backward and command and control their economies even more than we do.