June 13, 2017    10 minute read

Why We’d Be Better Off Living in the 1950s

Chasing Utopia    June 13, 2017    10 minute read

Why We’d Be Better Off Living in the 1950s

Proponents of government and opponents of free markets point out that the Golden Age of the 1950s and 1960s was a time of high economic growth and lower income inequality and since the 1980s, growth has fallen, inequality is higher, the middle class is shrinking, hence disproving the neo-liberal experiment. This article will argue that the 1950s were, in fact, the libertarian/conservative dream as opposed to the liberal dream.

Free Markets = Stronger Middle Class

Many people complain that back in the 1950s, the median male worker’s salary could support his wife and children. Today even two earners can’t even match the ‘middle class’ lifestyle. In theory, a man’s income should be able to buy an even better standard of living. If one were to look at the cost of TVs, electronics, dishwashers, clothing and other household appliances, the number of hours worked to buy these items has fallen. Meaning the median worker is actually able to afford more goods and services and hence a higher standard of living. Unfortunately, all of that is undermined by the fact that the number of hours it takes for the average worker to buy healthcare has quadrupled, which explains why disposable income is falling. Even housing/rent is costing more in terms of labour hours.

Based on this evidence, it is a deviation from free markets that has caused the middle class to struggle. During the 1950s, there was no Medicare, Medicaid, and HMOs and as a result, third party spending on healthcare was down only 40%. Third parties spend 95% of healthcare spending today, so the free market dynamic of a buyer and a seller exchanging goods and services has broken down. Consequently, from 1969 onwards, health care spending began to rise rapidly and hence the middle class has faced lower disposable income.

As for housing, the federal Department of Housing and Urban Development did not exist. As a result, vast public housing did not exist. However, given the increasing role of government in housing, it has led to more planning and zoning regulations, which prevent private developers from building more dwelling units. What’s worse is that the government monopoly on housing has not been successful. According to HUD, government destroys an equal amount of dwelling units as it creates! As a result, housing becomes more scarce and hence the price of rent skyrockets. This explains why the median rent price has increased in NYC by 75% since 2000.


Overall regulations, on the whole, were less extensive. Trump during his campaign talked about cutting regulations across the board by 75%. By that logic, it should be lower regulations and free markets that are the reason why disposable income was higher then. The graph validates this claim.

As shown, toys, software, wireless services and clothing have all fallen in price. They all exist in relatively free markets immune from government subsidies and regulations allowing consumers to reap the benefits of free trade. Medical care, particularly pharmaceutical drugs could be sold worldwide. Unfortunately, both EU and the US citizens cannot import drugs without tariffs. Also, the FDA imposes excessive testing on drugs trying to enter the market. As a result, it takes as much as seven years to get a drug on the market resulting in scarcity. Furthermore, university tuition is subsidised by the government through guaranteed loans, preventing the education system from existing in an efficient free market.

Taxes Weren’t As High As You Think

Many people on the left such as Bernie Sanders pointed out that the top tax rate was 91% in 1958 for people earning more than $3.5 million in today’s money. While the marginal tax rates were higher for everyone (bottom rate was 20%), there were far more deductions and loopholes.

For example in the 1950s, the IRS used to treat real estate as a depreciating asset. As many know, the wealthy own real estate as an investment and the depreciating asset loophole allowed the wealthy to write off their losses. According to the IRS tax code in 1958, real estate value would fall to $0 within 28 years. Consider a person earning $1 million in 1958. If that person owned $2,000,000 worth of property, they could deduct $72,000/year off his taxable income. As a result, the amount of income that was subject to tax was greatly reduced. Furthermore, the millionaire could deduct luxury chefs, yachts and country club memberships. Then, of course, there is the standard deduction.

When you take into account all of these deductions, the effective tax rate wasn’t higher than today’s tax code with fewer deductions and loophole (of course there are still many deductions). Consequently, the average effective tax rate for the top 0.01% of tax filers was 31% in 1958, compared with 26% today. If the effective tax rate were to increase to 31%, that would only gain around $8 billion of revenue, so wouldn’t solve the deficit.

As a result, income tax receipts as a % of GDP had remained flat at around 9% of GDP, even when Reagan brought the top tax rate to 28%. Indeed even total tax receipts, as a % of GDP have remained flat. Left-leaning analysts often argue that the rich in the US don’t pay their fair share. That is not strictly true. In 1958, the top 3% of income earners took home around 15% of income, but paid 29% in federal income tax receipts. Today the top 3% earn 27% of income, but paid around 51% of tax receipts, so the rich bear an equal burden in proportion to income.

Based on the graph above, the government would not raise additional revenue if marginal tax rates increased to 91% with fewer loopholes and exemptions than the 1950s. As a result, higher taxes would reduce incentives to work. Consequently, we have no idea what high taxes are like – only during WWI and WWII were taxes extremely high. However, during important wars, people are willing to pay such taxes.

Another concern is that the high tax rates of the 1950s were correlated with high paying jobs. Contrast that with, what some have dubbed, the ‘neo-liberal’ era we live in today which has few well-paid jobs. That is not true either. A number of liberal commentators criticise the Reagan tax cuts as the start of this problem. When Reagan left in 1989, 16 million jobs were created. Half of those of jobs paid more than $20,000 (in 1989 dollars), and the median household saw a 10% in real income. Hence the assertion that very high income and corporate taxes led to high wage growth is false.

The Welfare State Was Tiny In The 1950s/1960s

It’s fairly clear that the 1950s were a relatively prosperous period of history. Some, however, make the mistake that the high taxes on the wealthy led to greater redistribution to the poor. Hence the middle class was larger in the 1950s. However, the reality is that the welfare state was very limited in the 1950s. In 1958, only 9% of government spending was in the form of transfer earnings. Today it’s 35%. Likewise, today over 60% of US households take more in benefits than they paid in taxes according to the CBO and this number has been rising rapidly since LBJ’s Great Society.

In fact, had LBJ’s Great Society never come into effect, an estimated $20 trillion of federal, state and local spending would have been saved. That is the size of the entire national debt in the US. So if government spending was structured the same way as the 1950s, fewer people would be on welfare, and the national debt would be much smaller today. As a result, this represents less financial crowding out and more investment in the economy. This was certainly the case in the 1950s. Investment as a % of GDP was higher then, and the national debt was just 33% of GDP by 1962, compared with 105% today. As a result, evidence would suggest that it is the expanding welfare state that has led to bigger government and hence lower rates of growth since the 1980s. In fact, even the main source of the Reagan deficits was actually entitlements. While military spending increased 50%, means-tested entitlements spending increased 105%.

Pensions and Living Standards

Furthermore, some argue that living standards were improving rapidly during the 1950s and early 1960s. They are right. In 1949, the poverty rate was 34%, but by 1963, it had fallen to 18%, and since then has stayed at around 15% since LBJ’s Great Society, so hence the liberals’ frustration is well founded. However, they fail to recognise it is the Great Society programmes of 1965 onwards that have caused poverty to stagnate as opposed to falling. The fundamental flaw is that out of wedlock births have skyrocketed from 6% in 1963 to 41% in 2015. Children that live in poverty with single parents are five times more likely to stay in poverty themselves and ten times more likely to go to prison. As a result, as more people depend on the government, the more the middle class shrinks (based on the evidence presented) and the less socially mobile they become.

Furthermore, the 1950s was an era infamous for its limited public pension. While FDR created social security, it was still restricted. In 1964, LBJ expanded it. Before a guarantee of public pension, people were expected to save money for retirement. This explains why the personal savings rate is currently half of what it was in 1960. Consequently, lower savings has led to lower capital accumulation and lower long-run growth. This explains why people complain about how good-paying jobs no longer exist whereas in the 1950s they did.


The 1950s and 1960s were a great time, but back then government, on the whole, was far smaller. Government spending as a % of GDP is approximately 38% of GDP (federal + state), whereas in 1960 it was only 25% (according to Richard Nixon in the 1960 Election Debates). Hence it is clear from all the evidence, that we must thank small government for the ‘golden age of capitalism’.

Furthermore, the 1950s was not the fastest rate of economic growth. Technically the gilded age (1870-1913) was the fastest period of economic growth. Industrial production grew by 700%, real wages of unskilled workers grew 44%, and overall real GDP/capita growth was 3.8% per annum. Hence it was actually the gilded age that set the stage for the golden age of capitalism. Before 1913 there were no taxes on income – the only form of revenue for the federal government was duties and excise taxes.

However, there is also the monetary system to think about. Before 1971, when the world officially got off the gold standard, wages compared to gold were much higher then than they today. This implies that simply taxing the wealthy or raising the minimum wage will not address poverty. A change in the monetary system is required. In 1965, the minimum wage was $1.25/hr., which when compared to the price and weight of gold, is actually around $15/hour. This would imply that a lack of sound money is the problem. Consequently, a return to free market capitalism/Austrian Economics might replicate the prosperity of 1870-1971. To this end, the world should consider moving from a fiat system to a 100% gold standard system along with free banking.

To conclude, the solutions seem to be less regulation, lower government spending and sound money, all of which are characteristics of pure capitalism.

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