Wednesday, November 12, 2008

How to avoid another depression: don't raise taxes

Amity Shlaes has a great article today that draws on the lessons from the Depression.
One reason the Depression lasted until World War II ... is that the New Dealers sabotaged their own plan. With one hand the New Dealers gave, spending to stimulate the economy. In fact, they put through the same kinds of infrastructure projects that Obama and congressional Democrats are considering today. With the other hand the New Dealers took away, by raising tax rates -- just as the new president and Congress are likely to do in 2009.

President Franklin D. Roosevelt specialized in persecuting the rich via taxes, telling the upper class, point blank, that they had ``met their master.''

The Clinton years also offer a tax story. President Bill Clinton raised taxes, of course, but not back to pre-Ronald Reagan levels. His late 1990s capital-gains rate cut, enacted with the Republican Congress, helped make the decade sizzle.

In Ireland, unemployment began to drop following cuts in the personal income tax. It rose again before falling dramatically as the Irish government cut capital-gains taxes and then corporate taxes. It's worth noting that Ireland was enduring Depression-level rates of unemployment -- 16 percent to 17 percent -- at the outset of its tax experiment and managed to get down to the five- percent range even as the nation found its way to a budget surplus.

So what might an ideal American reform look like?

It would include a lower capital gains rate, to be sure. This should be a no-brainer, since capital gains revenue seems especially responsive to rate cuts. The current slump is a great argument for Obama to give up his campaign-trail suggestion that he would increase the capital- gains rate to as high as 28 percent.

What about the hoped-for recovery of 2009? The planned tax increases would diminish the effect of those billions for infrastructure, just as tax increases undermined the Public Works Administration or the Works Project Administration in the 1930s. ... the Democratic Party will now have to decide which is more important: its eagerness to trash the Bush-Reagan tax legacy, or its eagerness for recovery.

5 comments:

Tom said...

If you read FDR's Folly, or The Roosevelt Myth you will see that FDR's administration did a heck of a lot more than raise taxes. They established a cartel for damn near every industry in the US, complete with price controls, wage controls, work rules, and other sundry controls.

The "beneficial" stimulus that was offered on the one hand, was in fact distributed primarily where Roosevelt needed to pick up votes.

Not just through higher taxes did Roosevelt conduct his terror campaign against private property. His program was an extensive and accurate copy of Musolini's fascist economic organization. His confiscation of privately owned gold is a minor foot note in this period of government sponsored mayhem.

And when he ran out of obvious public works projects he decided that military spending was the one "stimulus" where he couldn't be faulted -- and began to lay the ground work for entry into WW II.

There were many reasons why the Great Depression didn't end until after WW II. Taxes and tariffs were only a part of the sorry tale.

Tom Burger

Scott Grannis said...

Excellent points, Tom, thanks for adding this to the discussion. I would highly recommend FDR's Folly.

CDLIC said...

Soctt,

What is you take on the following?

http://www.moneyandmarkets.com/the-g-20s-secret-debt-solution-2-27999

Thanks,

CDLIC

Scott Grannis said...

CDLIC: It's true that a massive devaluation of the dollar and other currencies would wipe out the burden of debt for the world's debtors. That would solve the housing problem overnight, as all prices rose and it became easier to pay existing debts with cheaper dollars. But it would also represent such a massive confiscation of wealth (from all of the world's lenders to all of the world's debtors) that it is almost unthinkable.

I lived in Argentina in the late 1970s when the government practiced this very same strategy, massively devaluing the peso against the dollar. It's not pretty. It destroys the economy, wipes out life savings, undermines confidence, and sets living standards back by many years.

There is no easy way out of the current situation, but doing it the hard way is infinitely preferable to trying to do it the inflationary way.

CDLIC said...

Scott,

Thanks for reviewing the article and providing your answer. I too agree that inflation is a disaster; however, the way politicians are at little to no risk for their actions, I was curious if you thought the scenario presented may be something already in the works.

I say let the free-market (Capitalism) take care of the mess; let GM go bankrupt; let banks fail, etc. As you have written: others will come in and buy up assets, take over failing business, thus clearing the way for more efficient operation leading to future profits.

Bottom line: get the politicians/bureaucrats out of the way and let the Capitalism do its job....and we are ALL Capitalists.