Nostalgianomics, again

The apparent demise of iconic edible kitsch producer Hostess Brands sends Paul Krugman into a wistful reverie in his most recent column. Ah, the good old days of the 1950s -- when Krugman was young and Wonder Bread was building his body eight different ways, unions were strong, and the top marginal income tax rate was 91 percent.

Krugman recognizes, in a dig at conservative '50s nostalgia, that the days of his boyhood were also "the days when minorities and women knew their place, gays stayed firmly in the closet and congressmen asked, 'Are you now or have you ever been?'" But then he serves up some '50s nostalgia of his own. "America in the 1950s made the rich pay their fair share; it gave workers the power to bargain for decent wages and benefits; yet contrary to right-wing propaganda then and now, it prospered. And we can do that again."

This is nothing new from Krugman. Indeed, a few years back I wrote a paper entitled "Paul Krugman's Nostalgianomics."  It's true that the quarter-century after World War II was a kind of Golden Age for the American economy, with rapid productivity growth matched by strong income gains across the socioeconomic spectrum. But it doesn't follow that the economic policies of that era are a good model for us now -- any more than China's spectacular growth in recent decades means that we would grow faster if we just instituted rampant corruption and oppressive autocracy.

As I noted in that earlier paper:

Krugman’s analysis here rests on a crude conflation of correlation and causation. It is true that, all thing being equal, we should expect better economic policies to generate better economic performance. But in the real world, all things are seldom equal; thus strong performance is not always reliable evidence of good policies.

Economic performance is a function of both economic policies and the underlying conditions for growth. When conditions are highly favorable (as, in China's case, when relative backwardness creates the possibility for rapid catch-up growth), even fairly bad policies (like China's) can produce good results. And it turns out that the conditions in the United States during the early post-WWII decades were highly favorable indeed.

Here again, from my earlier paper:

But several factors were especially conducive to strong performance at that time. There was a pent-up demand for goods and services after the privations of the Great Depression and the mobilization of World War II. There was also a pent-up supply of new products that couldn't be brought to market during the depression and war years. That pent-up supply was augmented by technological and organizational breakthroughs accelerated by the imperatives of total war. Big advances in transportation, communications, and air conditioning stimulated catch-up growth in the underdeveloped South and underpopulated West. And rapid upgrades in human capital (first explosive growth in high school graduates, then explosive growth in college graduates) doubtless helped to spur productivity gains.

When conditions for growth become less favorable, performance deteriorates and pressure builds for new policies. Which is exactly what we saw in the 1970s: stagflation, followed by the dismantling of price and entry controls in the transportation, energy, financial, and communications sectors and a steep drop in marginal tax rates. Together with disinflationary monetary policy, those reforms helped to unleash the Long Boom of the '80s and '90s.

In the sluggish aftermath of the Great Recession, we may well be at another inflection point. There are good reasons to believe that growth is getting harder, in which case only another big round of pro-market reforms will suffice to revitalize America's economic dynamism.

Sorry Paul, you can't go home again.