great depression

Cut the Capital Gains Tax and Government Spending to Create Jobs and Promote Technological Advances

by Hans Bader on October 17, 2011

in Deregulate to Stimulate, Economy, Employment, Politics as Usual, Zeitgeist

In today’s Wall Street Journal, Amity Schlaes notes that cuts in the capital gains tax were one of the key factors that paved the way for Steve Jobs and other innovators, and increased the flow of venture capital that created jobs and resulted in technological advances. (Schlaes recently wrote an interesting book about the economic history of the Depression, The Forgotten Man: A New History of the Great Depression.)

I wrote earlier about double standards contained in the capital gains tax, which result in it being higher and more burdensome than people commonly assume; and how it effectively punishes investors for investing during periods of inflation, since the government ignores inflation in calculating the cost of your investment. Moreover, while capital gains are taxable, capital losses often are excluded from consideration, and cannot be taken into account, in calculating your overall income for the year in which they occur; for example, you cannot list more than $3,000 in net capital losses on your tax return, but you have to list all of your net capital gains. That results in a “heads I win, tails you lose” situation in which the government effectively rips off investors. This encourages people to hold cash rather than invest in risky start-up enterprises that could create jobs, since it makes sense to hold cash rather than investing if you think you could lose money on a large scale due to either a depression or a jump in investor risk aversion that cuts the resale value of risky stock (for example, a shift by the investing public away from risky assets during a financial panic, or period of falling public confidence in the economy).

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Jerrold Nadler’s Fiscal Fantasies: Herbert Hoover Increased Spending, He Did Not “Slash the Budget” During the Great Depression

by Hans Bader on October 5, 2011

in Economy, Employment, Politics as Usual, Sanctimony

Attacking the idea of a Balanced Budget Amendment, “Congressman Jerrold Nadler (D-NY), the top Democrat on the House Judiciary Subcommittee on the Constitution,” issued a press release on October 4 promoting the falsehood that Herbert Hoover cut spending during the Great Depression, when in reality, Hoover more than doubled government spending as a percentage of GDP:

“Did Herbert Hoover win the last election?” asked Nadler. “If, in the middle of a recession, when tax revenues are down, and unemployment is up, we begin to slash the budget in ways my Republican colleagues are now suggesting, much less the far more draconian measures that this amendment would require, we will go from the Great Recession, right into another Great Depression. It’s been tried before, and if we want the Constitution to enshrine Hooverism for all time, we will get what we deserve.”

Nadler is wrong about the facts here, as he so often is. As I recently noted in the Edmonton Journal:

Former U.S. president Herbert Hoover did not practice austerity, so it is incorrect for politicians to claim that he “helped plunge his country into the Great Depression through austerity measures.”

Hoover’s administration increased federal government spending from three per cent of the U.S. economy in 1929, the year he took office, to eight per cent in 1933, the year he left office.

The U.S. budget deficit became so large as a result that by 1932, the country’s government was spending more than $2 for every dollar it took in.

It was not austerity that caused the Great Depression, but misguided government meddling in the economy, such as the Smoot-Hawley Tariff of 1930.

That increased tariff backed by Hoover ignited devastating trade wars between the U.S. and other countries that wiped out countless jobs.

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A Potentially Bold Fiscal Policy Experiment in U.K.

by Alex Schibuola on October 15, 2010 · 1 comment

in International

The Wall Street Journal reports that the Conservative government of Prime Minister David Cameron plans to cut 192 independent government agencies in an effort to reign in government spending.

I believe this will be the first instance in a Great Depression-like scenario where the government of a developed nation will actually cut spending (if they follow through). Some like to say that federal spending was heavily cut in the U.S. during the early 1930s under the Hoover administration. This is false (it increased 10.8 percent in 1930, 3.4 percent in 1931, and 2.3 percent in 1932).

Assuming that the financial sector remains fairly stable in the U.K. (no explosive inflation or implosive deflation) this will be an interesting development to follow for two reasons:

We will get a better look at who was to blame for the Great Depression’s severity.

Was it the ignorant use of monetary policy or absence of proactive fiscal policy? If government spending declines don’t carry the UK into a massive depression, such an observation will take the earlier, more conservative fiscal policymakers of the 1930s off the list of culprits (except for the worldwide slice and dice of international trade and supporting nominal wage freezes). Such an outcome would also diminish the strength of future arguments for Keynesian-style government spending.

We will get to see which sector can better stimulate the economy: private enterprise or government.T

Conventional macroeconomic models suggest that cutting government spending is a bad idea. Doing so causes aggregate demand to fall and will put (more) deflationary pressure on prices and wages leading to lower output (and higher unemployment). It is argued that increasing government spending (holding taxes constant) will create a multiplier effect that increases subsequent output levels.

The crowding out theory holds that consumption and investment should increase one-for-one with the decrease in government deficit spending. If this holds, then the private sector will have more resources at its disposal and means private spending (personal consumption and business investment) will increase. What will be interesting to see is how strong the private sector multiplier is relative to the government expenditures multiplier.

Keep your eyes open on this development given its unprecedented importance.

Fun Fiscal Policy Fact

by Alex Schibuola on October 15, 2010

in Economy, Politics as Usual, Stimulus to Nowhere

Table: Real growth rates of GDP, government expenditures, and federal tax receipts (year-end).

The conventional wisdom is that the Hoover administration cut federal spending and increased its tax revenues. Looking at the data, the conventional wisdom is wrong. Except in 1932 when real government expenditures fell 3.3 percent; after this the Roosevelt administration came in and spending again fell at 3.3 percent in 1933.

Although there were budget surpluses in 1930 and 1931, after this the deficits began.

I surmise the Keynesian response was that this was not enough. Nevertheless, the burden of the Great Depression arose from the gross incompetence of the Federal Reserve.

Hoover and the Great Depression

by Ryan Young on August 31, 2009 · 1 comment

in Economy, Regulation

One of the oddities of U.S. history is that Herbert Hoover is regarded as a free-market president. He grew federal spending by 52% in just four years. Engaged in massive deficit spending. Created the Federal Home Loan Bank. And the Reconstruction Finance Corporation. Signed the Smoot-Hawley tariffs into law. And the Agricultural Marketing Act. And so on. Free-market, he was not.

The Hoover myth is showing some cracks, fortunately. Where most civics textbooks would blame Hoover’s laissez-faire policies for the Great Depression, a new paper by UCLA’s Lee Ohanian fingers Hoover’s labor market interventions.

I’m personally convinced the Depression was more of a monetary phenomenon than a fiscal one. But Ohanian is surely right that Hoover’s dictating to companies what wages shall pay their workers was a net negative for the economy.

It’s certainly possible to blame Hoover’s policies for the Great Depression. Just not on the grounds that those policies were free-market. People shouldn’t have to read obscure academic journals to find that out.

Stimulus Ignites Job-Killing Trade War With Canada

by Hans Bader on May 15, 2009 · 1 comment

in Economy, Employment, Energy, Environment, Global Warming, International, Odds & Ends, Politics as Usual, Stimulus to Nowhere, Trade

The $800 billion stimulus package pushed through by Obama has ignited a trade war with Canada, reports the Washington Post. In response to vague “buy American” provisions in the stimulus, “A number of Ontario towns, with a collective population of nearly 500,000, retaliated with measures effectively barring U.S. companies from their municipal contracts — the first shot in a larger campaign that could shut U.S. companies out of billions of dollars worth of Canadian projects.”

A trade war is also underway with Mexico, thanks to a provision in the stimulus package that blocked a measley 97 Mexican truckers from U.S. roads. That minor NAFTA violation “caused Mexico to retaliate with tariffs on 90 goods affecting $2.4 billion in U.S. trade,” destroying 40,000 American jobs.

Obama’s protectionism echoes Herbert Hoover’s protectionism, which helped spawn the Great Depression. President Hoover signed the Smoot-Hawley tariff, which helped turn a recession into the Great Depression by triggering a trade war with other countries.

Unemployment is now even higher than what Obama predicted it would be without the stimulus. The White House now admits that there will be no job growth until 2010. The Congressional Budget Office repeatedly predicted that the stimulus would shrink the economy “in the long run,” but increase it in the short run, i.e., by the next election.

But so little of the stimulus money has gone into sectors of the economy where unemployment is high (like construction and transportation) that it seems to be doing nothing for the economy even in the short run. The $100 billion it pours into education — a sector where unemployment is very low, and where the U.S. also spends more per capita than almost every other country — appears likely to be wasted. Only 5.9 percent of the stimulus will go to transportation, a small amount compared to the amount of money it showers on state governments, which are using it to continue to provide lucrative pension and health benefits for state employees, whose wages continue to rise much faster than private sector workers.

Obama is following in Herbert Hoover’s footsteps on taxes and spending. In the Great Depression, Hoover raised marginal tax rates to 63%, and went on a deficit spending binge. Similarly, Obama has proposed higher marginal tax rates, which will produce another $1.9 trillion in tax increases. One of Obama’s own advisers now says that “the barrage of tax increases proposed in President Barack Obama’s budget could, if enacted by Congress, kill any chance of an early and sustained recovery.” He compares Obama’s tax increases to those that deepened the Great Depression.

Hoover imposed regressive taxes that burdened consumers, like the Revenue Act of 1932. Obama is now doing the same thing through his proposed $2 trillion cap-and-trade carbon tax. Obama privately admitted to the San Francisco Chronicle (which didn’t report it) that under his “plan of a cap and trade system, electricity rates would necessarily skyrocket.” As Obama admitted, that cost would be directly passed “on to consumers” — just the way Herbert Hoover’s 1932 excise tax increase was. Although the tax’s supporters claim it will cut greenhouse gas emissions, it may perversely increase them and also result in dirtier air. It is also chock full of corporate welfare, regional favoritism, political pay-offs, and give-aways to special interests.

Ideologies Are Like Cults

by Hans Bader on April 8, 2009 · 2 comments

in Bailout Watch, Economy, Politics as Usual, Stimulus to Nowhere

Herbert Hoover ran up big budget deficits in response to the 1929 stock market crash, in an unsuccessful effort to stave off the Great Depression. That’s incontrovertible history. Even the web site maintained by the Obama White House, which has proposed record-setting budget deficits over the next decade, says Hoover ran up deficits.

But when someone points out that Hoover was a deficit-spender, liberal ideologues falsely claim in response that Hoover pushed for a balanced budget. Nothing supports those claims. But they are necessary to argue that deficit-spending is a miracle cure for the recession — and to defend Obama’s unprecedentedly-large deficits from criticism by economists and financial experts.

Yesterday, the Washington Post carried my letter to the editor noting that Hoover ran up big deficits. In my letter, I noted that contrary to the claim that

“‘President Herbert Hoover’s response” to the 1929 stock market crash ‘was to balance the federal budget.’ Hoover actually ran up massive deficits, as the federal Office of Management and Budget notes. Hoover inherited a large budget surplus, which he quickly turned into a deficit. By 1932, when he lost his bid for reelection, the deficit had reached $2.7 billion — the third-largest budget deficit America had ever experienced. Hoover increased government spending from $3.1 billion to $4.7 billion in a failed effort to stimulate the economy. And he increased marginal tax rates to 63 percent.”

When I cited to the federal Office of Management and Budget, it was to a document on the White House’s own web site, “Historical Tables: Budget of the United States Government, Fiscal Year 2009.” Most of my figures came from Table 1.1 on page 21 of that document.

But all this evidence was to no avail. A hostile commenter on the Post’s web site asserted just the opposite, based on — nothing. He wrote, “Check out the ‘Competitive Enterprise Institute’ website . . . It’s a right-wing organization whose kookiness is akin to the Flat Earth Society. Hoover DID try to balance the budget in the middle of a recession and, consequently, trigered [sic] the Great Depression.”

Needless to say, the hostile commenter didn’t cite any evidence or any sources for his claims about Hoover, because there aren’t any. And the evidence I cited was from the White House’s own web site. (By the way, I have an economics degree, a law degree from Harvard, and graduate level econometrics coursework, not signs of belonging to the “Flat Earth Society”).

Earlier, I noted the parallels between Obama and Herbert Hoover on international trade, taxes, and spending. I linked to source after source supporting my argument. For example, I noted that

“In the Great Depression, President Herbert Hoover raised marginal tax rates to 63%, and went on a deficit spending binge. He also signed the Smoot-Hawley tariff, which helped turn a recession into the Great Depression by triggering a trade war with other countries.

“Obama is on the same path. His deficit-exploding $800 billion stimulus package blocked 97 Mexican truckers from U.S. roads. That NAFTA violation “caused Mexico to retaliate with tariffs on 90 goods affecting $2.4 billion in U.S. trade.” The CBO admits that the stimulus package will actually shrink the economy in the long run.”

Confronted with these incontestable facts, found in newspapers and government reports, an Obama-phile simply asserted that everything I said was false, and that Hoover caused the Great Depression by cutting government spending. After regurgitating Obama Administration talking points, he claimed that “Hoover’s downfall was largely that he CUT spending rather than making sound investment in STIMULATING the already reeling U.S. economy.”

Keep in mind that Hoover increased spending by roughly 50% from $3.1 billion to $4.7 billion from the year he took office in 1929 to his last year in office, 1932. (That increase actually understates Hoover’s big-spending proclivities, for two reasons. First, deflation occurred during the Great Depression, so the increase in the budget after inflation was actually bigger than 50%. Second, Hoover’s influence on the budget wasn’t really felt until well after he took office. When it finally was, spending rose at a much more rapid rate.)

The commenter also claimed that Obama’s $800 billion stimulus package was “much-needed.” The Congressional Budget Office says that package, despite its enormous cost, will actually shrink the economy over the long run, by exploding the national debt and crowding out private investment. That contradicts Obama’s apocalyptic claims that the stimulus package was necessary to avert “irreversible decline” and economic “disaster.” (Note that the Congressional Budget Office’s figures cannot be dismissed as “radical” or right-wing “garbage,” since it is generally non-partisan, but subject to oversight by liberal Congressional leaders).

Economic Hype We Can Believe In?

by Cord Blomquist on January 20, 2009 · 3 comments

in Economy, Features, Stimulus to Nowhere, Zeitgeist

As millions gather on the national mall today to witness the inauguration of Barack Obama, many are looking to the new president not only as a role model and the fulfillment of Martin Luther King’s dream for America, but also as a leader capable of saving us from economic disaster.

Yet, it seems that the economy may not be in as bad a shape as some would have us believe.

The Minneapolis Federal Reserve says that things aren’t that bad. In fact, they’ve made up some handy charts to prove it.

The charts place the current economic downturn into historical (post-WWII) perspective and show that currently the recession is mild.  Of course, we won’t know the length and severity of the recession until it’s over, but right now signs aren’t pointing to it being the worst economic situation since the Great Depression.

Yet that’s what we’re hearing from officials in the Obama administration.  Rahm Emmanuel said so on Meet the Press this weekend.

Even if all of this bluster were accurate and the economy were in a tailspin, there is plenty of reason not to CHANGE as Mr. Obama would have us change. In fact, many are saying that the Great Depression was extended, not curtailed, by FDR’s policies. If Mr. Obama seeks to fashion himself after Mr. Roosevelt, he may extend this recession into a depression no matter how much he “stimulates” the economy.

Hat Tip: Thanks to Bureaucrash Social member Ryan Evans for giving me the heads-up on the Minneapolis Fed charts.

EU Climate Agreement All Smoke and Mirrors

by Iain Murray on December 15, 2008 · 5 comments

in Environment, Global Warming, International, Politics as Usual

So if the EU has just put together an agreement to reduce emissions by 20% by 2020, why are the climate alarmist groups calling it “a dark day” and “an embarrassment”?

Well, the answer is because the actual agreement is for a 4% reduction (also explained in the last link, but Roger Pielke Jr does it better). And that may be null and void if a global agreement doesn’t emerge at Copenhagen next year, which it probably won’t.

Note also that the “rich” countries of the EU-15 have actually failed to make any dent in their emissions since the early 90s and that the former Eastern bloc countries have also not really lost much ground since 2000 either. Of course, they have a recession that will reduce emissions over the next couple of years, and if they’re silly enough to adopt the policies that will turn it into a Great Depression, they might just hit their targets. There will be singing and dancing among the ruins, I am sure, when that takes place.

Stimulus Follies

by Hans Bader on November 30, 2008 · 6 comments

in Economy, Legal, Politics as Usual, Precaution & Risk

President-elect Obama wants a massive stimulus package of $700 billion or more.  But previous attempts to artificially stimulate the economy have generally been failures.  The $160 billion in stimulus rebates early in 2008 failed to stimulate the economy, much less prevent the financial crisis that followed, even as they drove up the federal deficit and the national debt, while punishing hard work and providing pork for left-wing special interest groups.

During the Great Depression, Herbert Hoover and Franklin Roosevelt attempted to artificially stimulate the economy by pushing up wages — Hoover through pressure on industry, and Roosevelt through unionization and the cartel-enforcing National Recovery Act, which the Supreme Court later declared unconstitutional in the Schechter Poultry case.

The net result, according to economists, is that the Great Depression, which might otherwise have ended by 1936, instead lingered on until 1943 (a phenomenon for which President Roosevelt escaped responsibility, as he cleverly scapegoated and demonized industrialists and businessmen as “economic royalists” and “malefactors of great wealth,” and attacked critics as being unpatriotic).

By contrast, the sharp recession of 1920-21 swiftly ended and gave way to an economic boom, when the government did nothing to meddle in the economy.

As George Will notes in today’s Washington Post, “stimulus” measures largely failed in the Great Depression, policies that ”included encouraging strong unions and higher wages than lagging productivity justified, on the theory that workers’ spending would be stimulative. Instead, corporate profits — prerequisites for job-creating investments — were excessively drained into labor expenses that left many workers priced out of the market.”

“In a 2004 paper, Harold L. Cole of the University of California at Los Angeles and Lee E. Ohanian of UCLA and the Federal Reserve Bank of Minneapolis argued that the Depression would have ended in 1936, rather than in 1943, were it not for policies that magnified the power of labor and encouraged the cartelization of industries. These policies expressed the New Deal premise that the Depression was caused by excessive competition that first reduced prices and wages and then reduced employment and consumer demand. In a forthcoming paper, Ohanian argues that “much of the depth of the Depression” is explained by Hoover’s policy — a precursor of the New Deal mentality — of pressuring businesses to keep nominal wages fixed.”

Current bailout proposals also seek to artificially prop up wages.  Liberal lawmakers and the President-elect plan to bail out the automakers, at a cost to taxpayers of tens of billions of dollars.  But the automakers wouldn’t be going broke if they didn’t pay their workers so much more than the average American worker — a whopping $70 an hour.  The auto bailout proposals contain largely symbolic limits on CEO pay, but nothing limiting the inflated compensation packages of unionized auto workers — which exceed those of non-union auto workers at Toyota’s American factories by more than $20 per hour.  Even without such a bailout, the automakers would keep operating after filing for bankruptcy under Chapter 11 – using a bankruptcy discharge to get rid of their ruinously expensive labor contracts and liabilities to auto dealers under state laws designed to milk automakers for the benefit of dealers.  A taxpayer bailout only delays the day of reckoning and makes the painful adjustments needed for the auto industry’s survival even more painful when they finally happen.

In 1993, Republican Senators filibustered President Clinton’s “stimulus package,” correctly arguing that it was just pork for special interest groups that was unnecessary for an economic recovery (which then occurred without any “stimulus,” despite cuts in deficit spending).  Today, however, Democrats have such a commanding majority in the Senate that a similar filibuster may not be possible.

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