Is Our Economic History Repeating?

Before the election, I was asking myself if history might be repeating, and if we were committing financial suicide as a nation for the reasons that I am about to lay out. Now, I am not sure.

When one looks at the policies that Bush used to finished his last 6 months, and then Obama and the democrats have done, one can but look back at history to see a far too similar situation. Obama is touting the ideas of increasing taxes on the upper income taxpayers, increasing taxes on corporations whom they feel are making too much money, and somehow punishing the companies overseas doing the same, such as OPEC.

While this may all sound good to the general electorate, who, are woefully short on understanding of our own nation’s history, and economics. It is a formula that has been tried before with less than desired results. Nearly 80 years ago if we look back at Herbert Hoover’s administration you see that he took over at a time when the country had been on a long growth streak financially but was starting to show some weaknesses. Hoover’s perspective was that he had the opportunity to end the business cycle once and for all – to use the tools of government to manage minor dips and hiccups. Given the emphasis on planning, couldn’t any obstacle be overcome? With enough information, couldn’t even the economy be controlled?

We are told that on October 29th 1929, the economy simply plummeted off the charts. In fact, several sectors of the economy had experienced slow growth or even stagnation in the 1920s. Then the Federal Reserve failed to expand the money supply at a pace that would support the growth over the long haul. The slow drain caused by the weakened agricultural sector had started to afflict the financial structure. Manufacturing started a natural slow down by mid-1928. These rather hidden factors were greatly exacerbated by the Smoot-Hawley Tariff; then after the crash occurred, the government made almost every poor decision possible.

The nation’s money supply, contrary to the claims of many economists and historians, simply failed to keep up with output. To many have focused solely on the speculation in the market, however securities provided only one snapshot of the economy, whereas the money supply touched everyone no matter what they did for a living. When the availability of loans shrank, business had less cash with which to grow. What was seen as a third factor, the slowing of the manufacturing sector in mid-1928. Contrary to demand-side economists like John Kenneth Galbraith and the renowned John Maynard Keynes, demand did not disappear in the late 1920s, and wages remained high enough to purchase most of the vast number of new conveniences or entertainments. But firms could not add new production facilities without bank loans, which instead of increasing, tightened when the Fed grew concerned about speculation. Evidence suggests that corporations sensed the tightening money supply, and cut back in anticipation of further credit contractions.

A major factor was the Smoot-Hawley Tariff, this tariff increased rates already enacted under the Fordney-McCumber Tariff. by about 20 percent on average. The fact that the passage of this tariff in 1930 discredits assertions that it shaped perceptions in late 1929, unless one takes into account the legislative process. Former Wall Street Journal writer Jude Wanniski raised the argument in 1978 with his book “The Way the World Works” that uncertainties over the effects of the tariff may have triggered the stock sell off. If business leaders became convinced that the tariff, which promised to raise tax on imports of virtually all items by as much as 30%, would drive up production costs, and thus reduce sales, they would have prepared for it as soon as possible.

Hoover, like Obama said he wanted to do, cut taxes on the lower income earners and raised it on corporations and higher income brackets. As a symbol, it may have been laudable, but in substance it offered no incentives to the wealthy to invest in new plants to stimulate hiring. It was, again, a typical Keynesian response addressing demand. After the initial panic subsided, the economic downturn continued. Tariffs made selling goods overseas more difficult than ever. The public quickly went through it’s tiny tax cuts (economic incentives) – whereas a steep cut on the upper tier of taxpayers would have resulted in renewed investment and plant openings, thus more employment. Keep in mind that the “tax-cuts” Obama mislead us with for the middle class would have come after allowing the Bush Tax Cuts to expire, raising the taxes on the average family by 33%.

Hoover then passed the largest peacetime tax increase in history. Whereas the earlier tax cut had proved ineffective because it had dribbled small reductions across too large a population, the tax hike took the form of a sales tax that threatened to further burden already struggling middle class and lower class families, just as Obama’s corporate tax increases would.

Throughout history Hoover has been assailed for his unwillingness to use the powers of government to halt the Depression, but the truth is that his activist policies deepened and prolonged the business downturn. Most believe the assertion that Hoover had stood for small government, when in fact he had more in common with FDR. Honest observers can find little difference between his FDR’s programs and Hoover’s. FDR’s own advisers admitted as much. Rexford Tugwell, for example, noted, “We didn’t admit it at the time, but practically the whole New Deal was extrapolated from programs that Hoover started.”

We have just seen the tiny tax cuts to the lower income people in the stupid 600.00 rebate from Bush. Then we watch as Obama spends us into oblivion. My theory of watching history repeat has been both proven and proven wrong by Obama. It is impossible to imagine that the most ardent anti-Obama person could have imagined in a nightmare how bad his presidency would have been to America. Who could have believed that in only 6 months he could quadruple the deficit, effectively Nationalize the Banking, Insurance, and Auto industry? If you had asked me if he would do this much damage in 8 years, I wouldn't have believed it. If he and the democrats get Cap and Trade and Nationalized Health Care, those will be the two largest tax increases on businesses and every American in history. If they do this, our generation will be telling stories to our grandkids of our Great Depression that hopefully would be over by their time, but with this debt, who knows.