Alas, it says nothing about knowing American history.

Good thing for Sen. Lindsey Graham (R-S.C.). He’d have to find honest work.

Interviewed after last January’s State of the Union address, Graham was asked about the situation in Iraq. Trying to put the difficulties in perspective, he said the United States did not get its constitution until 1789.

Buzz! Wrong answer, Sen. Graham. But as a consolation prize you get to take home a copy of Merrill Jensen’s book, The New Nation: A History of the United States During the Confederation, 1781-1789. We’ll also throw in a copy of Herbert Storing’s What the Anti-Federalists Were For. And thanks for playing our game.

Seriously, I realize that children learn virtually nothing about the eight years before 1789 during which the United States existed under the Articles of Confederation. But shouldn’t someone who holds himself qualified to be a U.S. senator know that what we call “the Constitution” was really America’s second constitution?

The Articles were adopted by the Second Continental Congress on November 15, 1777, and took effect after ratification on March 1, 1781. That was seven months before Cornwallis surrendered at Yorktown on October 19, 1781, and two and a half years before the Treaty of Paris was signed on September 3, 1783.

They remained in effect until “the Constitution” displaced them in 1789. The process by which the Articles were scrapped—rather than amended—in favor of an entirely new blueprint was dubious. As the Anti-federalist “Federal Farmer” (most likely Melancton Smith of New York) wrote in October 8, 1787, had the people known that a new constitution creating a strong central government was to be written, “no state would have appointed members to the convention.”

Eight years is a significant period for a nascent country to endure after breaking away from an empire. Sen. Graham’s remarks were meant to suggest that what took place in the United States during that time was similar to what’s taking place now in Iraq. But that is ridiculous. The 13 states did not embroil themselves in civil war or sectarian violence—neither internally nor with one another. Quite the contrary.

How was life under the Articles of Confederation? As Merrill Jensen writes, “Americans fought against and freed themselves from . . . coercive and increasingly centralized power. . . . They did not create such a government when the Articles of Confederation were written, although there were Americans who wished to do so. . . . Thus the American Revolution made possible the democratization of American society by the destruction of the coercive authority of Great Britain and the establishment of actual local self-government within the separate states under the Articles of Confederation.”

Under the Articles, Congress had no power to tax or to erect trade barriers. If it needed revenue it had to petition the states. There was no separate executive branch.

People in the new states, Jensen writes, were full of optimism about the possibilities ahead. Criminal codes were made more humane, with the death penalty removed for all crimes but murder and, in some cases, treason. Property qualifications for voting were abolished over time. Charities and mutual-aid societies were formed, along with library, scientific, and medical associations. Schools were founded. The union of church and state was increasingly opposed.

Of course there was slavery, which contradicted the philosophy espoused in the Declaration of Independence. But “[w]ithin a few years after 1775, either in constitutions or in legislation, the new states acted against slavery. Within a decade all the states except Georgia and South Carolina had passed some form of legislation to stop the slave trade,” Jensen writes. New England states and Pennsylvania took steps toward abolition, and anti-slavery societies flourished.

What about the economies of the states? We can infer much from the fact that those who wanted to overthrow the Articles for a new constitution warned of coming economic turmoil if the central government were not fortified. Hence turmoil was a prediction not a description. Although individuals (white males) were free to a hitherto unknown extent, the states were no models of laissez faire.

Rent-seeking (political entrepreneurship) was rampant in the states, as it has been in every real-world system. Subsidies, loans, trade restrictions, and land giveaways were common. In this largely agrarian society, Jensen writes, “the dominant note was sounded by American merchants and business men who lived mostly in the seaport towns. . . . Their power was born of place, position, and fortune. They were located at or near the seats of government and they were in direct contact with legislatures and government officers. They influenced and often dominated the local newspapers which voiced the ideas and interests of commerce and identified them with the good of the whole people, the state, and the nation.”

Merchants and manufacturers disagreed on what kind of government intervention should exist, but not on whether it should exist. That’s because they had different competitors. Merchants liked imports but wanted barriers to foreign (especially British) shipping, while manufacturers wanted barriers to foreign goods and didn’t care about shipping. Part of the impetus to a strong central government was business’s desire for a uniform national economic policy, since individual states, acting alone, could hurt themselves by having more stringent restrictions than their neighbors and one state could capture the lion’s share of trade by competitively lowering its barriers. In other words, the consolidation of 1789 was part regulatory cartel.

Regional Differences

There were also regional differences. Most manufacturing was in the North, so protectionist sentiment was concentrated there. The South had little manufacturing and wanted access to cheap foreign goods. Thus high protective tariffs found little support. Northerners who coveted the southern market realized that only a nationwide trade policy would serve their interests. On the other hand, southern farmers wanted as many shipping options as possible and had little interest in restrictions on foreign carriers.

State economies suffered booms and busts—and a depression in 1784–85—thanks to paper money, government banking policies, and other intervention. But the crises were not extraordinary. As Jensen summarizes, “There is nothing in the knowable facts to support the ancient myth of idle ships, stagnant commerce, and bankrupt merchants in the new nation. As long ago as 1912, Edward Channing demonstrated with adequate evidence that despite the commercial depression, American commerce expanded rapidly after 1783, and that by 1790 the United States had far outstripped the colonies of a few short years before.”

Despite the heavy intervention, the states still had virtually an unprecedented degree of economic freedom. A person could easily get a plot of land and take care of his family by farming. There was no distant overbearing central bureaucracy to worry about. Contact with government was minimal. Imagine what the economic growth and the justice of income patterns would have been had the states practiced laissez faire!

Thus contrary to Sen. Graham, pre-1789 America had a constitution, almost no central government, prosperity, and peace. Not too shabby.

The reasons for junking the Articles of Confederation for the Constitution are worthy of study but too big a topic for this column. Suffice it to say, as Jensen did, that “the founding fathers who wrote the Constitution of 1787 were quite a different set of men from those who signed the Declaration of Independence in 1776.”

Marx’s famous dictum was “From each according to his ability to each according to his need.” And how does Will justify this tax increase? This increased tax, he writes, “would be paid mostly by Republicans—but also by the people most able to put substantial sums into the personal accounts that might become politically feasible only by raising the cap.” In other words, the tax is justified, in Will’s eyes, by ability to pay, which is the essence of communism.

Yet there is a strong economic, and a strong moral, case against the tax increase. First, the economics. Increasing the amount of taxed income would massively raise marginal tax rates for many of the most productive people.The marginal tax rate is the rate on the last dollar of income; non-economists typically call it their tax bracket. The marginal rate on those whose incomes are between $90,000 and $200,000 would increase by 6.2 percentage points for employees and by a whopping 12.4 percentage points for the self-employed. (Part of the 6.2 points paid by the employer would be borne by the employee. The actual split in the real burden of the tax between employer and employee depends not at all on who nominally pays the tax; it depends entirely on the relative elasticities of supply and demand. But that’s a longer story.)

Most people with earned income between $90,000 and $200,000 face a marginal tax rate of 31 to 40.5 percent. They are in a 25-to-33 percent federal income tax bracket. Their state tax bracket is probably about 6 to 9 percent. Of course, many high-income people itemize their deductions and thus can deduct their state taxes in arriving at their taxable income. So adjusted for the deductibility of state taxes on their federal tax form, the marginal state tax rate relevant to them is 4.5 to 6 percent. They also pay a 1.45 percent Medicare tax (2.9 percent for the self-employed) on all earnings. Thus raising the cap would increase the marginal rates of high income employees by 15 to 20 percent. Raising the cap for the self-employed would increase their marginal rates by a whopping 31 to 40 percent.

A salaried worker making $200,000 a year would pay $6,820 more in taxes every year, while a self-employed worker would pay $13,640 more. This would be the biggest tax increase on high-income people since President Clinton’s and for many people would be a bigger tax increase than that. A rise in marginal rates would discourage work. The person previously in the 40.5 percent bracket would keep only 53.3 cents of an additional dollar earned, down from 59.5 cents before the tax increase. People would also find ways of being paid other than by taxable income, such as by receiving a company car. The employee considering a move to a less-desirable location for more pay, if he was just slightly inclined to make the move before the tax increase, might well say no.

It’s not just the economics that makes the tax increase a bad idea. The tax increase is also morally wrong. Consider the fact that high-income people already get a lousy deal from Social Security. Of course, almost everyone gets a lousy deal: that’s the nature of a Ponzi scheme, legal or illegal, for the latecomers, and today we’re all late-comers. But high-income people get an even worse deal because the formula for Social Security benefits is heavily weighted in favor of low-income people. This is offset somewhat by higher-income people’s longer life spans, but the net effect is still that high-income people, per dollar of taxes, do worse than low-income people. Presumably, benefits for higher-income taxpayers would not rise in line with taxes. Otherwise, why raise the tax in the first place? The purpose of the tax is to generate more revenue to solve the long-term funding problem. It would solve none of this problem if the government raised Social Security benefits dollar for dollar.

Furthermore, even if the government planned to raise Social Security benefits to help high-income people, that’s little comfort. Many people are happy to save their own money for retirement. Currently, a few million Americans can look forward every year to reaching the existing threshold and knowing that the feds will keep their FICA hands off any additional income. We should be free to save that money or spend it as we wish.

How did we get in this situation where a President committed to tax cuts is considering a huge tax increase? The answer illustrates the old saw “Be careful what you wish for.” Bush started with privatization as his goal. He wanted to figure out how to fund the budget hole left by letting people save in private accounts some of what would otherwise be taken in Social Security taxes. And then he noticed a juicy target: those who can well afford to pay the tax increase.

Wrong Goal

Some analysts have commented that Bush erred by having privatization as his goal rather than solving Social Security’s long-term funding problem. Well, they’re half right. Privatization is the wrong goal: at best, it’s a means. But solving the long-term funding problem is the wrong goal too, because it takes as given that Social Security should be funded long-term. In other words, it accepts a program that is a form of perpetual intergenerational abuse. Each retired generation gets to tax the younger working generation, and when that generation comes of age it does the same, and so on. This intergenerational abuse must stop.

Bush would not have gone wrong if instead of asking, “How can I privatize?” he had asked, “How can I alter Social Security to reduce the size, intrusiveness, and injustice of this horrible government program?” Instead, he is poised to make Social Security more intrusive. What a tragedy it would be if a president who claims to believe in the “Ownership Society” ended up further violating our rights to our own income.