Housing prices have begun to tick back up in many areas across the U.S.  We will have to see if this will continue or if we will see another bottom in the future.

The government and the central bank (the Federal Reserve) caused the unsustainable housing boom in the first place.  In particular, it was the easy money/ low interest rate policies of the Fed that contributed the most.  But there were certainly government laws and tax considerations that contributed also.

I believe that the government and the Fed are helping to prop up prices once again.  This is not really a recommendation to buy or sell real estate.  I am simply pointing out that the housing market is being altered by government policy.

While there has been a pick up in prices, it is curious to me why there are so many empty houses out there.  I see it with my own eyes.  I don’t need to look at any statistics or charts.  I have seen houses that have been sitting empty for at least two years and I would find it hard to believe that the owner is someone other than a bank.

There is something going on that the American public doesn’t know about.  I have heard the explanation that banks are releasing foreclosures onto the market slowly, so as not to crash the prices again.  It is a controlled release of their inventory.  While this might seem to make sense, it really doesn’t make sense, unless it is being encouraged (or forced is more likely) and coordinated by the government.

Imagine if you owned your own small bank.  You own 100 houses that you obtained through foreclosures because the borrowers were not repaying their loans.  At this point, it doesn’t matter whether you lost money on these loans or not.  You own 100 houses.  Does it make sense, for you as an individual business owner, to have some of these houses remain empty and off the market?

Don’t forget, when a house sits empty, you still have to pay property taxes.  You have to pay any association dues, if they apply.  You have to maintain the lawn.  You probably have some electricity bills.  If you shut off the electricity, you are risking mold in the summer time.  You are also risking other problems with the house sitting empty for a long period of time.  In other words, there are considerable expenses to owning a house and letting it sit empty.  For an individual business owner, you would want to get rid of this inventory as quickly as possible, unless you decide to get in the landlord business.

Prices are not going to go down with any significance in this example because of the bank selling 100 houses.  Even if the bank owner thought prices might be a little higher two years from now, it probably wouldn’t make up for all of the property taxes and other costs over that period of time.  So even for a large bank that might move the market significantly with putting a huge number of foreclosures on the market at once, it still wouldn’t make much sense to let these properties sit empty.  They are losing money like crazy.  That is probably why the Fed started QE3 to bail out the banks again.

Letting foreclosed homes sit empty makes no sense from a business aspect.  This is why it is probably being dictated and coordinated by the government, at least upon the big banks.  They are trying to do a controlled liquidation.  They do not want another crash of the housing market and are doing almost anything to keep it from happening.

The housing market is nothing resembling a free market right now.  But that doesn’t mean that it might not be a profitable business for those with capital.

Since the Republicans hold a majority in the House of Representatives, they could essentially prevent any tax increases from taking place.

“No, no, that isn’t right” you say.  “The tax rates are scheduled to go higher, regardless of what the Republicans do.”

For some reason, almost everyone forgets that spending bills originate in the House.  The Republicans in the House can basically dictate spending.  They can’t spend as much as they want, but they can spend as little as they want.  They could simply refuse to pass a budget that is any bigger than $2 trillion per year (or pick any number).

Actually, it is even easier than that.  The Republicans could simply refuse to raise the debt ceiling, which currently stands at just under $16.4 trillion, which the Republicans helped to raise the last time.  Once that limit is reached (which will be shortly), then the federal government will essentially be forced to balance its budget, assuming Obama does not try to obtain pure dictatorial powers.

So what does balancing the budget have to do with tax increases?

There are two things.  First, total spending is really what matters anyway.  That is essentially the total taxes that we pay when it is all said and done.  Every penny that is spent by the government is money that comes from somewhere.  Regardless of where it comes from, it is consuming and misallocating resources.  It makes our standard of living lower.

Second, even tax rates would have to come down with a balanced budget.  While this may not be immediate, it would happen quickly.  If the federal government all of a sudden cut about $1.5 trillion out of the budget to bring it into balance, or even surplus, then the only thing to do with the extra money would be to pay down the debt or return it to the taxpayers.  It would not be hard at that point for taxpayers to demand lower taxes to go along with the reduced spending.

Of course, most people make the wrong assumption that Republican politicians in Washington DC actually want to cut taxes.  Most of them don’t.  They just say they want lower taxes to get support from their constituents.

Now I understand many Republicans will say that the Republicans in the House can’t refuse to raise the debt limit because the media will attack them and it will be political suicide.  But so what?  Then what is the point of electing them if they will never do what they say?

While I despise most of the Republican politicians, I do put some of the blame on the American people in general.  I would be curious to see what would happen if the Republicans in the House really did refuse to raise the debt ceiling (which they won’t).  They would certainly be attacked by most of the media.  But would they lose badly in the next election?  I’m not sure I know the answer to that question.

Unfortunately, the politicians in DC are never going to scale back government on their own.  They will only do it if there is substantial pressure on them.  This means that a large portion of the American people need to withdraw their consent, at least up to a certain point.  It means that Americans must realize that big government is the problem and less government is the solution.

In conclusion, the House Republicans could quickly lower our taxes simply by dramatically cutting spending.  But they have no interest in doing this and they won’t do it until there is significant pressure on them to do so.

I consider myself a panarchist, but I am open to other ways of governance in society.  It is a commonly mistaken belief that libertarians (particularly anarchists) do not believe in law.  It is just that some libertarians do not think that it is necessary to have government in order to have laws.  Every libertarians I know does not accept murder or theft in society.  It is just whether they think it should be handled by government or by private enterprise.

Libertarians generally advocate the non-aggression principle.  You are not supposed to use force or the threat of force, unless it is for defensive purposes.  But it has bothered me that it seems you cannot agree with this principle and be a minarchist (advocating very limited government) at the same time.  Even if the government were to only run the courts and police force, it would still need to collect taxes for this purpose.

I’ve been thinking about this though, and I see no reason that it wouldn’t be possible to have a government and have it funded through voluntary taxes only.  When Hollywood liberals talk about how their taxes should be higher, libertarians and conservatives often respond that they are free to write a check if they want to pay more.  We can say this mockingly, knowing almost nobody will knowingly pay more than they are legally required.  But we know this because taxes are so high already.

The federal government alone spends about 25% of national GDP right now.  State and local governments spend another good chunk.  If you live in a place like California or New York, you are easily paying over half of your income towards taxes in one form or another.  If some rich guy is already paying about 60% in taxes, do you really think he would ever voluntarily pay more?  Maybe you could convince one in ten thousand to pay extra.

Let’s imagine that we did live in a world designed by minarchists.  Let’s say that the government was only in charge of defending people and property and enforcing contracts.  It would need courts and police and maybe a few other minor things.  The total tax to fund this would be less than 1%.  If you put government in charge of roads also (which I don’t think is a good idea), maybe the total tax burden would be around 1% or even slightly higher.

If taxes were only around 1%, you could get most people to pay voluntarily.  You wouldn’t need to track people’s income and have them file forms.  People could simply send in money as they felt appropriate.  Perhaps a few big corporations or donors could pay for it all.  Maybe Coca-Cola and Toyota would donate large sums, just to put advertising on courthouses.  Or maybe they would just donate so that they could brag about funding our government, just for good public relations.

The possibilities are really endless.  The point is, you won’t get voluntary donations when people are already forking over half of their income because of the threat of force.  You don’t hand extra money over to a criminal if you don’t have to.  On the other hand, people donate to charity all the time.

There are other little things that are still debatable, even amongst libertarians.  What about jury duty?  Nobody should be forced to do something he doesn’t want to do, especially without some kind of a contract or agreement.  If someone refuses to serve on a jury, then maybe he doesn’t get the same benefits from the police and court system.  Or maybe there will be enough volunteers that it wouldn’t matter anyway.

We are miles away from this.  The details will be worked out if we ever get that close.  If we get down to a government that only protects people and property and enforces contracts, then the minarchists and panarchists and anarchists can argue all day long about the details.  But if the government were extremely limited, perhaps even I would be willing to pay a miniscule tax each year to fund it, even if it were completely voluntary.  We can all dream a little.

Some of the Republicans in DC are capitulating, including John Boehner, the Speaker of the House.  Some well-known Republicans are suggesting that they would be willing to go along with a compromise that would involve some increases in tax revenue (as if the government is selling something to get “revenue”).

These politicians are now playing word games, saying that they might be willing to eliminate certain tax “loopholes” or deductions.  This way, they can avoid calling it a tax increase.  But the problem is that eliminating or reducing deductions is a way of raising taxes.  Most people filing taxes have some kind of deduction or tax credit, even when not itemizing.  Tax deductions and credits allow us to keep more of what we earn.

I heard the despicable Karl Rove on Hannity’s radio show.  I could only stand about two minutes of it, but I heard him say that Republicans should stand against tax rate hikes.  This is his slick way of saying that he favors getting rid of deductions and tax credits, which means that people will keep less of what they earn.

I often hear Republicans talk about how our tax system is so complicated (to which they have contributed) and that we need a simpler system.  While this is certainly true, it is not the number one concern of most libertarians when it comes to tax policy.  The biggest issue is not how complicated the tax system is.  The biggest issue is how much money it takes out of our pocket.  I would rather save $10,000 per year on my taxes than save an extra 5 or 6 hours per year preparing them.

Perhaps I would be in favor of eliminating deductions and credits if the tax rate were brought down to 2% or less.  But most Republicans aren’t talking about reducing tax rates any more.  They are talking about lowering deductions and credits with the existing tax rates.

Don’t believe that Republican politicians are really interested in low taxes.  Most of them only say this because this is what their constituency wants to hear.

Of course, this whole talk about taxes is ridiculous in the first place.  The federal government has a spending problem, not a taxing problem.  The big problem is that politicians refuse to cut any significant spending and the voters keep letting them get away with their promises of a free lunch.

Libertarians should not be focused on taxes.  Libertarians should be focused on the spending side.  If we want the economy to improve significantly, then we need massive cuts in government spending.  Once spending is cut, then taxes can follow.  But as long as the federal government is spending close to $4 trillion per year, then it doesn’t really matter much in the end on how it is collected.

There is a lot of talk in the news about secession.  With the re-election of Obama, there are petitions in all 50 states that are being signed by people who think they would be better off if their individual state were to secede from the union.

As a libertarian, I have a lot of mixed thoughts on the subject right now.  Of course, decentralization is usually a good thing for liberty and it is ridiculous to think that 545 people (535 in Congress, 1 president, and 9 Supreme Court justices) should rule over a population of over 300 million people.

It is important to remember that the American Revolution was really a war over secession.  The colonies declared independence.  They were, in effect, seceding.  The British crown did not want this and a war broke out.

I also don’t think it is unconstitutional for a state to secede.  But even if that were the case, I wouldn’t care.  I never signed the Constitution, nor did anyone else alive today.  In fact, most of the American colonists did not sign the Constitution either.  If it is supposed to be some kind of a contract, it is a very bad one with no effect.  Anyway, it is not like anyone is actually following the Constitution today.  It is laughable when some statist tries to use a constitutional argument against secession.  Not only are they wrong, but they are extremely hypocritical too.

It would also be ridiculous if secession weren’t allowed by the Constitution.  If secession were never a possibility, then you almost have a dictatorship.  You are going to trust the federal government to write its own laws, enforce its own laws, interpret its own laws, and determine if its own laws should stand?  Without secession, there is essentially no recourse.

With all of that said, there are a few things about this secession movement that bother me.  First, I’m not sure how many of these same people would have signed a petition had Romney been elected.  Even though the policies of the Republicans and Democrats are nearly the same, all of a sudden many Republicans are giving up on their government with Obama in office.  Did they have this same attitude when Bush was in office?  So in that regard, I really only agree with the consistent libertarians who signed a petition, not the anybody-but-Obama crowd.

The other thing that bothers me about these petitions is that we are nowhere near ready for this movement.  The American colonists of the 1770’s were very well educated on the subject of liberty.  Most of them were well-read and understood what was happening.  Aside from the issue of slavery, most of the American colonists already believed strongly in liberty before independence was ever declared.

Although the internet has helped a great deal and it will continue to help in the future, Americans are simply not ready for a secession movement.  Most do not understand what liberty is.  Before libertarians start advocating secession, we have to do the dirty work of educating our fellow citizens.  As Downsize DC recently wrote, you can’t put the cart before the horse.  You can’t skip steps.

In conclusion, I don’t think this secession movement is going anywhere right now.  There are not enough truly liberty-minded people yet.  As the libertarian message spreads and Washington DC gets closer to default, then secession may become a real possibility.  But we aren’t there yet.  We must first continue to spread the message of liberty.  At least these petitions to secede are getting more people to think about not needing a federal government.

I consider virtually all government spending to be a waste of resources.  I suppose it could be argued that government spending on courts, police activity against crime, and a few other things are not wasteful because they may actually be protecting property and enforcing contracts.  So without arguing these points, then radical libertarians should be able to at least agree that 99% or more of government spending is wasteful, since most of what the government does (at all levels) is beyond property protection and contract enforcement.

One point that is important though is that not all government spending is unproductive.  It is just that government spending is less productive than it would have been had it been left in the hands of the people who earned it.  Governments can spend money to build bridges, manufacture electric cars, maintain parks, and an endless list of other things.  Of course, governments can also destroy resources with spending, if it is on something like war.  And government spending can create dependency and wreak much havoc in that sense.

But even if government limited its spending to producing goods and services (and not destroying them), it would still not be an efficient use of capital.  When the government spends money, it is not allowing the market to determine what should be produced and sold.  It is not that entrepreneurs don’t make mistakes.  It is just that entrepreneurs are sent market signals such as prices and profits and losses.  The entrepreneur must quickly adjust or else risk losing his money and going out of business.  Governments do not have to adjust as there are no signals telling if something is a good idea, and governments can keep taking more money through the threat of force to fund projects.

So again, it is not that all government spending is completely unproductive.  It is just that government spending misallocates resources.  The government could spend money to make an iPod for every single American and have them distributed.  It is not completely wasteful.  I’m sure most Americans would probably use their new government iPod.  But the problem is that many people would have preferred to keep their money and spend it on their next top priority.  That priority could have been paying down debt, saving more money, buying clothing, buying food, or millions of other things.

The best case scenario for an individual in the above example is that he or she would have gone out and bought an iPod with their money had the government not done it for them.  I suppose it would have been a wash in this case (assuming no government administration fees).  So perhaps a few million Americans would have been satisfied with their government iPod, while the rest would have preferred to use their money for something else.

Unfortunately, if the government used the Fed to create new money, or even if the government used general tax money (instead of having a special iPod tax), then many millions of Americans would be quite happy to receive their “free” iPod.  (I should note that I would rather the government use my tax money to make iPods than to “educate” children, fight wars, or arrest people for drug use.)

In conclusion, virtually all government spending is a misallocation of resources.  This makes us poorer and lowers our standard of living.  It is not that all government spending is completely unproductive.  It is just unproductive in comparison to leaving it to the free market.  A free market allocates resources according to the needs and wants of the millions of consumers who are using their own money to buy goods and services.

Libertarians, while still a small minority, are growing in numbers.  This is not in reference to Libertarian Party members, but philosophical libertarians.  This, in tandem with a poor economy, leads to many libertarians being asked what their solution is to the bad economic conditions.  There are many people out there who still don’t know much about libertarianism and are genuinely curious.  Unfortunately, there are also many people who do not like the answers.  The reason is because people want to believe there is such a thing as a free lunch.

I consider myself to be a radical libertarian.  But for the sake of this discussion, I am going to suggest some dramatic changes, without going all the way to a minarchist, panarchist, or anarchist society.  These are solutions that could be adopted without eliminating the state.

The biggest drag on the economy is government spending.  Everything that is spent by government is not being spent by the people who actually earned it.  Everything the government spends is a misallocation of resources or a redistribution of wealth or both.  In order to increase our standard of living and increase savings and production, there must be a dramatic reduction in overall government spending.  For this discussion, I will just focus on federal spending for the U.S.

All wars must be ended.  Not only are they immoral, but they are extremely expensive.  In addition, most of the bases overseas should be closed and the troops should come home.  (I did not say ALL bases, as I am trying not to be too radical for this post.)  All foreign aid should be ended.  The military budget should be cut by at least two-thirds.  If there are no more wars and interventions, then the number of military personnel can be reduced dramatically.  Even if it is just done through attrition, that process must start.  But even employing a troop in America would be far cheaper than employing a troop in a country thousands of miles away.

Domestic spending must also be cut dramatically.  The Department of Education should be eliminated.  It would be up to the states if they want to make up the difference.  The Departments of Labor, of Housing, of Agriculture, and of Energy should all be eliminated in a short amount of time.  The federal government has no constitutional authority or any other business in these matters.  There are many other departments and agencies that must go also.  The federal war on drugs must also be ended.

So-called entitlement spending like Medicare and Social Security are more difficult because there are so many Americans currently depending on these programs.  But something still needs to be done as they are unsustainable in their current fashion.  The retirement ages to collect must be increased.  It should be announced now and should be started soon.

The current tax rates must not go up.  At the very least, they should be maintained and then lowered as spending is dramatically cut.  While the tax code should be simplified and hopefully eliminated eventually, the amount of taxes being paid is more important than the method in collecting them.

The monetary system must change.  The Fed should stop buying all government debt (which won’t be necessary if there is no longer any new debt to buy).  It should stop all monetary inflation.  Legal tender laws should be repealed and all taxes on gold and silver should be repealed in order to allow for competing forms of money.

Regulations must be scaled back on a huge scale.  It is extremely difficult to do business in America compared to what it once was.  It is much easier now in other places like Hong Kong or Singapore.  There are enough regulations at the state and local levels.  We don’t need a one-size-fits-all scenario where Washington DC is dictating the lives of over 300 million people.

If all of this were done in a short time span, then we would have a deep recession to clear out all of the previous malinvestment.  But things would quickly recover and we would see a new prosperity that can only be dreamed of, especially when it is combined with current technology.

The one problem that is still difficult is the banks and the FDIC.  Perhaps the government would have to bail out  depositors (not banks) and the FDIC would have to be slowly phased out of existence.  This is probably the hardest problem to solve for a libertarian right now.

Of course, none of this will happen, or at least not in the near future.  But libertarians need to be ready with an answer on what to do about the bad economy.  Our current system is very far away from a free market system.  When government is cut dramatically and people are free to trade peacefully, then a strong economy will follow.  Otherwise, we can count on more struggles ahead.

I hope everyone out there has a happy Thanksgiving and that you get to enjoy it with good food and good family and friends.

During this time of year, many people recognize what they are thankful for and sometimes this is the only time of year that it is done.  Some people don’t even do that much.  Most people who do say their “thank you’s” will usually cite family and friends.  This is appropriate.

In addition, I like to point out that we should be thankful for the times we live in.  I know that the economy is really tough right now on a lot of people.  But if you are reading this, then you have some kind of an electronic device with internet access.  This would have been unheard of just twenty years ago.  If you have this much, then you probably also have food on the table every day and clothes to wear and a warm place to sleep.

There are still a lot of people in this world who do not have those “luxuries”.  I suppose the good news is that there is a higher percentage of people in the world today than at any other time who do have plenty of food and clean drinking water and a good place to sleep.

I think recognizing this can help you in your own life.  It can make you less scared and make you feel like you can conquer most anything that comes your way.  If you are struggling financially, at least you can recognize that you don’t live in a world where you have to go out and hunt for your own food or else starve.

I think there is also a good balance to be found in enjoying our 21st century luxuries and also staying humble.  This economy has humbled a lot of people.  I am optimistic that we will find liberty again and we will see a new prosperity that cannot even be imagined today.  I am thankful that I see a libertarian spirit starting to arise, particularly in the American people.  Let’s hope it continues.

Happy Thanksgiving!

One of the most popular pieces I have ever written was on collecting nickels.  If you type “collecting nickels” into the google search engine, my post appears on the first page.  It was written in February 2011 and it still gets many hits.  It is obviously a somewhat popular subject.

My thoughts on collecting nickels is almost the same as pennies, except pennies are a little more complicated.  As I mentioned with nickels, it is one of the few investments that is a hedge against both inflation and deflation at the same time.  The same is true of a penny.

One of the big problems is that pennies are not worth much.  While they are a little less bulky than nickels, you would also have to collect 5 times as many to get the same monetary value (not necessarily metal value) as the nickel.

Pennies are also a little more complicated because the metal value will depend on the date the penny was minted.

If you find a “wheat penny” that is dated from 1909 to 1958, then it is mostly copper (95%), with the exception of the 1943 penny.  I told you it is complicated.  These pennies are easy to spot because the back has a design of wheat heads, instead of the current day pennies that have the Lincoln Memorial on the back.  It also says “ONE CENT” in big letters.  The metal content in these older pennies is currently worth about 2.5 times the face value of the coin.  In other words, the copper is worth about 2.5 cents.  However, some of the older pennies may be worth substantially more due to rarity.

Pennies dated 1959 to 1981 (and some 1982) are made of 95% copper and 5% zinc.  These are worth more than pennies made in 1982 to the present day.  If it is worth it to sort through these, then it may pay off one day.  But it will take a lot of time.  I would only suggest doing it if you are multi-tasking.  If you are just sitting there watching a football game, then maybe spending some time sorting through your old pennies is not a waste of time.  Again, currently the metal content in these pennies is about 2.5 cents, but it will vary depending on the metal prices, particularly copper.  It was over 3 cents at one point.

The pennies from 1982 to the present are mostly made of zinc.  Only about 2.5% is copper and most of that is in the plating.  This may still end up being a good investment one day, depending on how much the Federal Reserve inflates the currency.  But zinc is not as valuable as copper, so the pre-1982 pennies should serve as a better investment.  Right now, the mostly zinc pennies have a metal content that is worth just over half a cent.

I understand that a lot of people think it is crazy to save pennies.  Perhaps it is crazy.  But you can’t judge it based on what they are worth now.  You could save 100,000 pennies and that would still only be worth $1,000.  That is a lot of pennies to store (2,000 rolls), but the question is what they may be worth one day in the future, based on their metal value.  If the Fed goes crazy with monetary inflation, then maybe the metal content will be worth $10,000 one day, or even more.

And again, even if you are completely wrong and there is no monetary inflation in the future (highly unlikely), then you can always just trade your rolls in at the bank in exchange for bills.  However, I’m not sure that I would bring in 2,000 rolls at one time.  You may want to split it up into a few trips.

While it is illegal to melt your coins, this probably won’t matter.  As I mentioned with the nickels, it is actually preferable to leave them in coin form so that the value can be easily assessed.  It is the same with pre-1965 silver dimes and quarters.  These are now traded at coin shows for their metal content.

In conclusion, collecting pennies is a personal choice.  If you have a lot of time and some space to store them, then you aren’t going to lose anything by holding them.  Interest rates aren’t paying enough right now to worry about that lost opportunity.  But I also wouldn’t spend a lot of time sorting through your pennies if your time is better spent on your career or other projects that may be much more profitable.  But if you do decide to collect pennies, then you better hurry, because there will come a day when pennies will be made of steel or else they just won’t be used at all due to the continuing devaluation of the dollar.  Either way, expect pennies, especially those dated prior to 1982, to slowly disappear from circulation.

Paul Krugman – the Nobel prize winner, the Keynesian economist, the face of big government economics, and the face of centralized planning and monetary inflation – has written an article in the NY Times that has gotten quite a bit of attention.  He points out that the 1950’s were a prosperous time in America, yet the higher marginal tax rate was at 91%.  He is wondering what all the fuss is about right now with tax rates.  He almost implies that we can just go back to 91% marginal tax rates and everything will be great.

This is an interesting point and I think it is important and deserves a libertarian response.  He is actually correct that the 1950’s were a relatively prosperous time considering the high tax rates.  So how can this be explained by free market economists?

This is why economics is so hard.  It is because there are so many variables.  We don’t live in a vacuum where we can keep everything the same and just experiment with different tax rates.

But it is ironic that Krugman, champion of government spending, is citing the 1950’s as a prosperous time.  Because aside from the tax rates, the 1950’s looks like a free market paradise compared to what we have now.  There was no Medicare or Medicaid.  There was no EPA.  There was no Americans with Disabilities Act.  It was also a relatively peaceful time in America, with the exception of the Korean War wrapping up in 1953, which did not consume anywhere near the resources that were used in World War 2 or in today’s wars.

The list of things could go on, but I think there is one hard statistic in general that can be pointed to that makes Krugman look bad here.  It is government spending.  The 1950’s is actually strong evidence that total government spending and monetary policy are more important factors to the economy than tax rates.  If you look at federal spending for the 1950’s, it was a fraction of what it is now.  Total federal spending never exceeded $100 billion annually for every year in the 50’s.  It was only $42.6 billion in 1951.  Adjusted for inflation, total federal spending was only about one-fifth of what it is today.

Even as a percentage of GDP, it was lower than 20% in all years except one (1953), whereas it is now about 24% or 25%.  And because spending was relatively low in the 50’s, the deficits were relatively low.  And because the deficits were relatively low, monetary inflation from the Fed was relatively low.

So while marginal tax rates on high income earners were extremely high, there was still relative prosperity because of the lower government spending and the stable money.  While the high tax rates were discouraging to entrepreneurs and workers, the relatively tight money policies were a great incentive.  Businessmen could plan and could count on the dollar maintaining its purchasing power.  It was an incentive to save.  As a result, there was not a giant misallocation of resources as we see today.  While there were downturns in the economy, there was not a severe boom and bust cycle like we see today.

So Krugman was right that the 1950’s were prosperous during a time of high marginal tax rates.  But if you look at the rest of the picture, it is actually a case against Krugman’s big government/ big spending theories.  If government spending and monetary inflation are kept under control, then you can have prosperity even with confiscatory tax rates.  This should be a lesson to Tea Party conservatives that they should focus more on government spending and less on taxation.