Email: Question about taxes/regulations and USA economic growth

Hi Master Malstrom,

 

Since you’re taking open questions, I have a question about taxes and regulations and how they effect the American economy.  

 

I understand why paying high taxes can hurt economic growth, because obviously money is going to the government instead of back into the business.  But I always learned that taxes were much higher in the past than they are now.  (For example, looking at this page http://taxfoundation.org/article/us-federal-individual-income-tax-rates-history-1913-2011-nominal-and-inflation-adjusted-brackets). I also understand why having too many regulations can affect business, for pretty much the same reason why high taxes hurts business.  But again, I learned that with FDR we had in place many more regulations, and that there were more regulations in place on markets (generally) after WWII going up to the Nixon and Reagan years.

 

So in the past we had higher taxes and more regulations than we had now, but we’re obviously not doing well now, and America’s golden years are supposed to be the 1950s to 1990s, right?  Was it just coincidental that the high taxes and regulations allowed America to prosper, or would America be even better off if taxes were lower and regulations were lower in the past?  

 

I know I am simplifying things a lot with this question, perhaps too much.  I would think some of the answer is that America used to produce a lot of its goods (and from what I learned having a service-based economy is not as good as a production-based economy, which is why Germany has done so well despite being ravaged by two World Wars).  Since you lived through these times, your take on it is probably better than what I’d learn through textbooks.Many of the economic policies FDR put in place for the New Deal were quietly removed when World War 2 appeared. When the focus of the United States shifted to making boats, airplanes, bombs, more and more things became militarized. They were trying to win a war. This is why when you hear someone say, “World War 2 ended the Great Depression,” they are referring to the shift in policy changes that World War 2 brought. And after the war, there was an offyear election that the Republicans won big solely because people were unhappy with the continued military rationing or relegating things like butter and grocery items. People put up with that during the great war, but they didn’t want it in peace time.

One major change of World War 2 was how it railroaded (literally) the big Southern state political parties. Those economies were beginning to modernize. Today, the area where the most automobiles are manufactured in the United States is in Alabama.

One thing I think is unique with the United States economy compared to other nations is the competition between the states. When people do not like an economy due to changing times or government policies, they move. The US is a very mobile nation and has been that way since nearly forever. Early on, people kept going to ‘the frontier’. People kept moving around. Even if everything is ‘settled’, people are constantly moving around.

Every ten years, the Census is taken of the population, and electoral votes are reapportioned due to the population shifts. When states decline in electoral votes, this means they are sick states and many people are moving out (more than national population growth). States that increase in population have economies or policies (or even climates) that is attracting people. Here are the state population shifts from ten years ago:

The left side are healthy states. The right side are sick states.

When people first saw the numbers, their first reaction was “WTF is going on in Texas?” As someone there, it feels like the entire country wants to  live in my neighborhood. Twenty years ago, I had to drive on small loopy farmer roads where the only traffic would be a tractor on a road. Today, it is superhighways with traffic worse than LA.

Since I’ve been going through Ohio data, I am so shocked with the depopulation. Everyone I meet from Ohio keeps asking me about what it is like where I am from, what the weather is like, etc. because they are looking to move out. In a couple of election cycles, I expect Ohio to be a battleground state to become irrelevant (like New Hampshire today).

Consider Detroit. In the early 1800s, no one wanted that area because the land was too hard. But in the Industrial Revolution, hard land became valued over soft land because it can hold factories. Detroit became a crown jewel of the Industrial Revolution. As the Industrial Revolution Era melts away, people are moving away. Today, the economics of Detroit is considered like a fourth world nation.

The United States is not a unit. It is many states. The population is extremely mobile, very liquid. This is a phenomenon I know that doesn’t exist in the Asian nations. It also looks like it doesn’t exist in Europe due to the language and cultural barriers between the nations there. In America, people pick up and move to another state all the time.

So if you want to know what state has good laws or state has bad laws, look at the population movement. People don’t move to states that have policies or economies they dislike.