Tuesday, February 02, 2010

How To Make a Weak Economy Worse: Raise Taxes


From "How to Make a Weak Economy Worse" by Amity Shlaes in today's WSJ:

"Mr. Obama might want to stick to a moderate approach. FDR's war against business played to the crowd, but it hurt the economy. While monetary policies impeded recovery in the late 1930s, it was the administration's assault on companies and capital that ensured the Depression's duration. By 1935, FDR decided that firms, especially big firms, were impeding recovery. They must now redeem themselves and save the economy by sacrificing—or else.

The attacks started with taxes. In 1935, well before the "hatred" speech, FDR led Congress in passaging a law that replaced a flat rate on corporate income with a graduated rate—itself a penalty on larger firms. Personal income taxes went up, as did other rates (see charts above). In 1936 FDR signed into law the undistributed profits tax, which aimed to force reluctant firms to disgorge cash as dividends or by paying higher wages. This levy too was graduated, with a top rate of 27%.

The result of it all was the Depression within the Depression of 1937 and 1938, when industrial production plummeted (see chart below) and unemployment climbed back into the higher teens.

The 1930s story suggests not that any individual reform is wrong per se. It reminds us rather that frustrated presidents are inconsistent, that antibusiness policies are cumulative, and that hostility yields more damage than benefit. Presidents can choose between retribution and recovery. They cannot have both."

MP: In other words, the 1930s story suggests that if you want to have an unhappy ending, a "double-dip" recession, and stalled economic growth there's one sure way to do it: raise taxes during a fragile period of economic recovery. Like 2010.

12 Comments:

At 2/02/2010 9:21 AM, Blogger juandos said...

Well apparently Obama and the Dems want to make the economy weak...

From the Tax Prof blog: President Obama's Budget Contains $1.9 Trillion in Tax Increases...

 
At 2/02/2010 10:02 AM, Blogger juandos said...

President Obama's Pledge Never to Raise Taxes on Anyone Making Less Than $250,000 a Year

 
At 2/02/2010 10:32 AM, Anonymous morganovich said...

amity schlae's book "the forgotten man" is an excellent economic history of the depression. the parallels in government policy to our current situation are frightening.

 
At 2/02/2010 11:28 AM, Anonymous Sphynx said...

We are not in a recovery, we are still in recession. The subsequent submersion will not be a "double dip" because we never came up for air in the first place.

And you don't get to blame Obama when this comes to fruition because all this "recovery" crap is just Obama's deficits talking. Any fool can raise GDP by increasing G.

 
At 2/02/2010 1:04 PM, Anonymous Norman said...

Its a little known fact that if you had held your stocks at the Sep 1929 peak that by Dec 1936 (when the marginal rate was increased to 79%) you would have been exactly even on an inflation adjusted total return (ie, adding in dividends) basis. But then the government got into 'helping' us.

 
At 2/02/2010 1:20 PM, Blogger Marko said...

He is hoping to copy FDR - trash the economy, blame your enemies for it, use populism to get more socialism, and get re-elected over and over again!

I have the audacity to hope it doesn't work this time. Better information sharing.

 
At 2/02/2010 2:55 PM, Blogger sethstorm said...


FDR's war against business played to the crowd, but it hurt the economy.

Well, the businessfolk that wished to make it worse did. They had to learn the painful lesson that they are not The Almighty. They had the choice and chose poorly to counter FDR.

Those who chose the path of not using their business as an economic weapon fared better.

It's a shame that FDR doesn't exist in this era, given offshore entities and their influences. I'd not mind a certain fear being struck into entities that use offshoring/outsourcing as if it were a weapon.

 
At 2/02/2010 3:11 PM, Blogger juandos said...

"Well, the businessfolk that wished to make it worse did. They had to learn the painful lesson that they are not The Almighty. They had the choice and chose poorly to counter FDR."...

Well I can see that sethstorm's grip on reality is as tenuous as ever...

FDR's policies prolonged Depression by 7 years, UCLA economists calculate

 
At 2/02/2010 3:23 PM, Blogger sethstorm said...


FDR's policies prolonged Depression by 7 years, UCLA economists calculate


Quoting a UCLA hitpiece won't help explain things. It only demonstrates what side Ohanian supports. He ignores the effects of the upcoming war in order to score some cheap points. He might as well said "I hate FDR enough to revise history" and saved the university's resources.

 
At 2/02/2010 5:55 PM, Blogger juandos said...

"He ignores the effects of the upcoming war in order to score some cheap points. He might as well said "I hate FDR enough to revise history" and saved the university's resources"...

Well sethstorm it seems that your grip on history is every bit as tenuous as your grip on basic economics is...

Pull your head out of the revisiont text sethstorm and try a dose of Milton Friedman...

If reading about it isn't your cup of tea consider the two video clips...

 
At 2/02/2010 6:44 PM, Blogger sethstorm said...


Pull your head out of the revisionist text sethstorm and try a dose of Milton Friedman...

Read it and saw the videos. The first three parts were more or less talking about the Federal Reserve. I have no issue with the views portrayed against the Federal Reserve.

The article itself?

3) the federal government also instituted all sorts of “public works” programs, beginning under Herbert Hoover and increasing dramatically under FDR; the programs removed hundreds of thousands of people from the labor market and engaged them in economically wasteful activities, such as carving faces of dead presidents into the sides of a mountain, preventing or delaying necessary labor-market adjustments; 4) another federal policy that prevented (labor and other) market adjustments was the price and wage controls enacted under the National Recovery Administration and in effect from 1933 until 1935 (when ruled unconstitutional); this policy massively distorted relative market prices, impairing their ability to function as guides to entrepreneurs;

Retaliation on the part of business against the National Recovery Administration, mixed in with some lack of perspective as to the situation of the unemployed.

The people that were employed by the government at that time had no market to go to or be a part of; the market all but disappeared. There really was nowhere that could be expanded, adapted, or able to accept these people- 1929-1933 or 1937. The hands were more or less tied in acting as the government did.

It was a bailout of the people and not a bailout of Wall Street. 2007-2010 was a bailout of Wall Street and foreign debt-holders with some breadcrumbs reaching Main Street of the United States.

 
At 2/02/2010 8:45 PM, Blogger PeakTrader said...

The government created the "Great Recession." Dollars were drained out of the U.S. economy through current account deficits (when foreigners sold their goods to the private sector and bought government bonds), restrictive monetary policy (keeping the Fed Funds Rate at 5 1/4% too long), and contractionary fiscal policy (shrinking budget deficits that reached $162 billion in 2007).

Households and banks should've received refunds, but the government spent their money instead. The masses will be bailing out government (if there are jobs). Also, I may add, I doubt helping businesses with tax relief to keep them afloat until demand picks-up is the best policy. State and local government are also waiting for demand to pick-up to collect tax revenues.

 

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