Woodrow Wilson, FDR, Progressivism, Great Depression, Creeping Socialism, Social Security, Baby Boom and Baby Bust

Posted by PITHOCRATES - January 15th, 2013

History 101

The Policies of Herbert Hoover and FDR caused and prolonged the Great Depression

Franklin Delano Roosevelt (FDR) took Rahm Emanuel’s advice.  Long before Rahm Emanuel gave it.  FDR did NOT let a good crisis go to waste.  And as far as crises go, none were better than the Great Depression.  After the government’s bad policies (wage and price controls, higher taxes, Smoot-Hawley Tariff Act, etc.) caused the Great Depression and then their monetary contraction caused the massive bank failures the poverty rate soared for senior citizens.  FDR saw that suffering and thought here was a way to forever lock in the senior vote.  Give seniors a government pension.  And put the fear of God in them that the opposition wants to take it away.

At the turn of the Twentieth century the new thing in politics was progressivism.  Smart government people intervening into our private lives to make things better.  The size of the federal government exploded during the presidency of Woodrow Wilson.  He gave us the Federal Reserve System.  America’s central bank.  That would prevent anything like the Great Depression from ever happening.  Which it failed to do.  As the Great Depression happened on their watch.  He gave us a permanent federal income tax.  He attacked the U.S. Constitution.  Making the case for expansive presidential powers.  And used the courts to get around Congressional opposition.  As well as the U.S. Constitution.

The political opposition fought back against Wilson’s power grab.  Defeating the progressive successor in the next election.  And returning the country to normalcy.  Warren G. Harding and Calvin Coolidge undid much of the anti-business policies of the Wilson administration.  Returning the nation to prosperity.  And giving us the Roaring Twenties.  Where the nation modernized with electric power, the automobile, radio, etc.  Unlike the speculative dot-com bubble of the Nineties.  Where investors poured money into dot-com companies that never made anything to sell.  The Federal Reserve was a little loose with their monetary policy causing some inflation in the Twenties.  But the economic activity was so robust that it absorbed that inflation.  Then the progressives got back in power.  First the Republican Herbert Hoover.  Then the Democrat FDR.  Whose policies caused and prolonged the Great Depression.

When FDR gave us Social Security it only cost Employer and Employee each 1 Cent of every Dollar up to $3,000

FDR was picking up where Wilson left off.  Expanding the federal government.  And the power of the presidency.  Using the federal courts like Wilson to bypass Congress.  And the U.S. Constitution.  Marking yet another departure from the free market capitalism that founded the country.  And made it the world’s number one economy.  It was a creeping socialism.  At least, that’s how the political opposition saw.  Especially with Social Security.  Which helped tip the power from the states to the federal government.  Just as Thomas Jefferson feared a strong executive would do.

Of course, the progressives played on our emotions.  These were, after all, destitute seniors.  We had to take care of these people.  Our fathers.  Our mothers.  Our grandparents.  Who sacrificed for us.  Now it was time to sacrifice a little for them.  And they promised it would be a little.  Both employer and employee would only pay 1 cent on every dollar earned up to $3,000 a year.  That’s all.  Only $30 a year (about $483.58 today).  And how could such a small amount be socialism?  The problem was that it didn’t stay only 1 cent on every dollar earned up to $3,000 a year.  The tax rate went up.  As well as the maximum taxable earnings.  The government has increased them both.  Often.

(source: Historical Social Security Tax Rates)

That low tax rate lasted barely a decade.  Then they started raising the maximum taxable earnings.  Not much for the first 30 years or so.  But once the Seventies arrived that maximum amount grew at an accelerated rate.  Despite the increasing tax rate.  Thanks to President Nixon decoupling the dollar from gold.  And ushering in the era of out of control Keynesian economics.  Where the government inflated the money supply like there was no tomorrow.  Devaluing the dollar at an alarming rate.  Which is why they increased the maximum amount of earnings at an accelerated rate.  Because constantly devaluing the dollar reduced what those Social Security checks could buy.  So they had to keep making those checks bigger.  And that required more tax revenue.

The Social Security Tax Rate held Steady during the Nineties thanks to the Dot-Com Bubble and Japan’s Lost Decade

But it’s worse than that.  For it’s just not bad monetary policy forcing the increases in the tax rate as well as in the maximum taxable earnings.  Something else happened during the Seventies.  Birth rates fell.  The baby boom ended in the Sixties.  But not the baby making activities.  They just continued along without producing new taxpayers.  Thanks to birth control and abortion.  Also, over the years they expanded the Social Security program to provide for more than just those destitute seniors.  So the benefits of the program greatly increases just as the falling birth rate reduce the growth rate of tax revenue.  As the number of people leaving the workforce grew at a greater rate than those entering the workforce.  Which is why when you convert the dollars into constant dollars the graph doesn’t change much.

We finance most wars with inflation.  By printing money to expand the money supply.  To give the government all the cash they need to buy the instruments of war.  And to pay, feed and clothe their military personnel.  We can see this rapid inflation during World War II as the real dollar amount of the maximum taxable earnings fell.  That changed in 1951.  When they started to increase that maximum amount.  That and the higher tax rate stabilized things for awhile.  Then the Seventies came along.  Where both the tax rate and the maximum taxable earnings amount continued to rise.  Even in real dollars.  Reflecting the growth in benefits.  And the fall in tax revenue.  Thanks to the baby bust following the baby boom.

The tax rate held steady during the Nineties thanks to the surpluses of the Clinton administration.  Due to that dot-com bubble.  And Japan’s Lost Decade.  Whose bad economic times helped boost the American economy.  Still they had to keep raising the maximum earnings amount.  As the baby boomers started retiring.  Then Clinton’s dot-com bubble burst.  Giving George W. Bush a recession to start his presidency.  His tax cuts pulled us out of that recession.  Then Bill Clinton’s revamping of the Community Reinvestment Act caught up with us.  Giving us the subprime mortgage crisis in 2008.  And the Great Recession.  Which President Obama tried to ameliorate by reducing the employee’s Social Security tax rate from 6.2% to 4.2% in 2011.  For his near trillion dollar stimulus bill failed to end the Great Recession in 2009.  As his Social Security tax cut failed to do in 2011.  Which was not enough to overcome his anti-business policies (such as Obamacare).  All he did was starve Social Security of hundreds of billions in revenue.  Making the Social Security funding problem worse in the long run.  Requiring even higher tax rates than that once promised 1% (for both employer and employee).  On earnings more than that promised $3,000 (about $48,000 today).

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China’s Largest Port Builder cuts its IPO Funding Target by 75%, China’s Boom Times Over?

Posted by PITHOCRATES - February 4th, 2012

Week in Review

Could the bloom be off the Chinese economic rose?  Perhaps (see China Communications Construction Cuts IPO Offering by 75% by Reuters posted 1/30/2012 on CNBC).

China Communications Construction, the country’s largest builder of ports, launched its long-delayed Shanghai initial public offering on Tuesday, with the IPO’s fundraising target slashed by 75 percent to as much as 5 billion yuan ($789.76 million)…

China’s stock market [.SSEC  2330.41    17.85  (+0.77%)   ] slumped 22 percent last year under the weight of monetary tightening and global economic uncertainty, forcing many Chinese companies to postpone their listing plans or cut fundraising targets.

China Communications Construction will sell up to 1.6 billion shares in Shanghai, or about 10 percent of its enlarged capital, and will use the proceeds to fund construction projects and equipment purchases, according to its prospectus.

A slumping stock market and global economic uncertainty?  Things that don’t bode well for an economy based on manufacturing for export.  The boom times may be over.  When they cut the funding expectations by 75% for a company that will use those funds for construction projects and equipment purchases tells you one thing.  Investors don’t think there will be much more construction or equipment purchasing in the not so distant future.  And, perhaps, that there is a surplus of capacity in Chinese manufacturing.

The Chinese were pumping so much easy credit into their economy that they got inflation worries.  Which could be the least of their worries.  Their greatest worry is, or should be, an asset bubble.  Their coordinated effort to raise economic activity with their state capitalism built like there was no tomorrow.  And all those ghost cities built without anyone to live in them may come back to haunt them.  Making Japan’s Lost Decade look more like an unpleasant weekend.  For that’s one thing the Japanese didn’t do.  Build cities for people who weren’t there.

Japan’s Lost Decade was a boon for Bill Clinton and the United States.  For it helped to make the Nineties a prosperous time.  Until those irrational expectations spoiled the party.  Those dot-com investors looking for the next Microsoft.  But a Chinese lost decade may not be as beneficial for the U.S.  Without the Chinese to buy the exploding U.S. debt they will have to find other means to fund that debt.  Either with taxes.  Or with a hidden tax.  Inflation.  Either way is sure to tank economic activity in the U.S.   Dragging out this Great Recession into depression-like waters.

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