Microsoft founder Bill Gates used the occasion of his Harvard commencement speech earlier this month to expound on the new philanthropic phase of his life’s work. In doing so, he referenced a commencement address given at that same school sixty years earlier, a speech in which General George Marshall discussed his plan for the rebirth of war-torn Europe.
The consensus view is that the “Marshall Plan” was the catalyst for Europe’s economic revival after World War II. Today, that plan has taken on an almost generic quality, as it is used to describe high-toned schemes meant to tackle big problems — such as Gates philanthropic venture. In front of 15,000 graduates, Gates said that “reducing inequity is the highest human achievement.” Ignoring for now his flawed view on inequity, it should be asked whether the Marshall Plan is a worthy model for Gates to emulate in the first place.
While countries have traditionally revived themselves economically through lower taxes, tariffs, and regulations, along with more credible currencies, the Marshall Plan was about offering financial aid to a devastated Europe — specifically $13 billion that was distributed between 1947 and 1951. As economist Reuven Brenner pointed out in his 2001 book, The Force of Finance, total aid amounted to roughly 5 to 10 percent of European GNP, about the same amount given to Europe after World War I. Brenner noted that no miracles occurred due to aid after the first war, so it seems a bit of a reach to assume Marshall Plan funds were any more effective.
More realistically, Brenner points to the influx into West Germany of 12 million mostly well-trained immigrants escaping the “promise” of the Communist-bloc countries, not to mention rapidly falling income-tax rates, as the cure for what ailed Germany. In 1948, the marginal tax rate there was 50 percent for annual income of $600 and above, and those who made more than $15,000 were taxed at 95 percent. Conversely, by 1955 the top tax rate was lowered to 63 percent for incomes of more than $250,000, and the 50 percent bracket started at $42,000.
Though Japan did not fall under the Marshall Plan umbrella, the U.S. offered the nearly destroyed country financial aid, along with lots of economic “solutions” including wage and price controls, greater government oversight of industry, and a heavily devalued yen. But as Nathan Lewis wrote in Hard Money, it was only when Japan ended “wage and price controls, liberated industry from government control, demolished subsidies, ended U.S. economic aid, and brought the central government’s budget into balance” that its economy began to grow.
According to Lewis, Japan’s government cut taxes every year from 1950 to 1974, and contrary to those who liken tax cuts to “free lunches,” government revenues skyrocketed. Though revenues were 1.8 trillion yen in 1960, they rose to 7.75 trillion yen in 1970, despite the yearly cuts in taxes.
So much for the notion that balanced budgets (Japan’s, as a rule, was balanced every year) don’t mesh with tax cuts.
Then there’s the monetary contribution of the United States, which gave the free world a stable dollar to peg its currencies to, as per the 1944 Bretton Woods agreement. The happy result was that from 1947 to 1967, real gross domestic product averaged 6.4 percent in Britain, France, England, and Germany. During the 1960s, Japan experienced annual growth rates of 20 percent.
The lesson to take from Japan and Western Europe’s post-war economic revival is that tax cuts and stable money, rather than financial aid, are the certain cures for economic devastation. Simple financial aid, as evidenced by the limited impact in post-WWII Europe and more recently in Africa, has yet to prove its effectiveness.
Back to Bill Gates.
While the mogul-turned-philanthropist believes reducing inequity is the highest human achievement, it should be noted that it is thanks to the inequitable distribution of ability that the “vital few” create life-enhancing innovations that we all can enjoy and which enable us to prosper.
For instance, it could be said that Gates’s greatest philanthropic success was the creation of Microsoft. While aid and charity patch over short-term difficulties, it is economic growth that feeds us, and which makes us healthier all the time. Though Gates surely will accomplish some amazing things with his charitable foundation, it is capitalism that continues to lift people out of poverty, and it is the profit motive underlying capitalism that will lead to pharmaceutical innovations that will solve the myriad health problems that concern him.
Gates should be lionized for directing his wealth towards the poverty and disease that vex us. But he might be most effective in his newfound career if he uses his well-earned influence to lower the governmental barriers to economic growth, all while offering up as much of his capital as possible in the form of investment for tomorrow’s entrepreneurs.
Basic aid surely will help the needy for a time, but economic growth will enhance their financial and physical health for much longer.