Tax Cuts, Roaring Twenties, Farm Prices, Smoot-Hawley Tariff, Stock Market Crash, New Deal, Great Depression and the Great Recession

Posted by PITHOCRATES - November 6th, 2012

History 101

(Originally published March 20, 2012)

Tax Cuts and the Small Government Policies of Harding and Coolidge gave us the Roaring Twenties

Keynesians blame the long duration of the Great Depression (1929-1939) on the government clinging to the gold standard.  Even renowned monetarist economist Milton Friedman agrees.  Though that’s about the only agreement between Keynesians and Friedman.   Their arguments are that the US could have reduced the length and severity of the Great Depression if they had only abandoned the gold standard.  And adopted Keynesian policies.  Deficit spending.  Just like they did in the Seventies.  The decade where we had both high unemployment and high inflation.  Stagflation.  Something that’s not supposed to happen under Keynesian economics.  So when it did they blamed the oil shocks of the Seventies.  Not their orgy of spending.  Or their high taxes.  And they feel the same way about the Great Depression.

Funny.  How one price shock (oil) can devastate all businesses in the US economy.  So much so that it stalled job creation.  And caused high unemployment.  Despite the government printing and spending money to create jobs.  And to provide government benefits so recipients could use those benefits to stimulate economic activity.  All of that government spending failed to pull the country out of one bad recession.  Because of that one price shock on the cost of doing business.  Yet no one talks about the all out assault on business starting in the Hoover administration that continued and expanded through the Roosevelt administration.

Herbert Hoover may have been a Republican.  But he was no conservative.  He was a big government progressive.  And believed that the federal government should interfere into the free market.  To make things better.  Unlike Warren Harding.  And Calvin Coolidge.  Who believed in a small government, hands-off policy when it came to the economy.  They passed tax cuts.  Following the advice of their treasury secretary.  Andrew Mellon.  Which gave business confidence of what the future would hold.  So they invested.  Expanded production.  And created jobs.  It was these small government policies that gave us the Roaring Twenties.  An economic boom that electrified and modernized the world.  With real economic growth.

If an Oil Shock can prevent Businesses from Responding to Keynesian Policies then so can FDR’s all out War on Business

The Roaring Twenties was a great time to live if you wanted a job.  And wanted to live in the modern era.  Electric power was spreading across the country.  People had electric appliances in their homes.  Radios.  They went to the movies.  Drove cars.  Flew in airplanes.  The Roaring Twenties was a giant leap forward in the standard of living.  Factories with electric power driving electric motors increased productivity.  And reduced air pollution as they replaced coal-fired steam boilers that up to then powered the Industrial Revolution.  This modernization even made it to the farm.  Farmers borrowed heavily to mechanize their farms.  Allowing them to grow more food than ever.  Bumper crops caused farm prices to fall.  Good for consumers.  But not those farmers who borrowed heavily.

Enter Herbert Hoover.  Who wanted to use the power of government to help the farmers.  By forcing Americans to pay higher food prices.  Meanwhile, the Federal Reserve raised interest rates.  Thinking that a boom in the stock market was from speculation and not the real economic growth of the Twenties.  So they contracted the money supply.  Cooling that real economic growth.  And making it very hard to borrow money.  Causing farmers to default on their loans.  Small rural banks that loaned to these farmers failed.  These bank failures spread to other banks.  Weakening the banking system.  Then came the Smoot-Hawley Tariff.  Passed in 1930.  But it was causing business uncertainty as early as 1928.  As the Smoot-Hawley Tariff was going to increase tariffs on just about everything by 30%.  Basically adding a 30% tax on the cost of doing business.  That the businesses would, of course, pass on to consumers.  By raising prices.  Because consumers weren’t getting a corresponding 30% pay hike they, of course, could not buy as much after the Smoot-Hawley Tariff.  Putting a big cramp in sales revenue.  Perhaps even starting an international trade war.  Further cramping sales.  Something investors no doubt took notice of.  Seeing that real economic growth would soon come to a screeching halt.  And when the bill moved through committees in the autumn of 1929 the die was cast.  Investors began the massive selloff on Wall Street.  The Stock Market Crash of 1929.  The so-called starting point of the Great Depression.  Then the Smoot-Hawley Tariff became law.  And the trade war began.  As anticipated.

Of course, the Keynesians ignore this lead up to the Great Depression.  This massive government intrusion into the free market.  And the next president would build on this intrusion into the free market.  Ignoring the success of the small-government and tax cuts of Harding and Coolidge.  As well as ignoring the big-government free-market-intrusion failures of Herbert Hoover.  The New Deal programs of FDR were going to explode government spending to heights never before seen in peace time.  Causing uncertainty like never seen before in the business community.  It was an all out assault on business.  Taxes and regulation that increased the cost of business.  And massive government spending for new benefits and make-work programs.  All paid for by the people who normally create jobs.  Which there wasn’t a lot of during the great Depression.  Thanks to programs like Reconstruction Finance Corporation, Federal Emergency Relief Administration, Civilian Conservation Corps, Homeowners Loan Corporation, Tennessee Valley Authority, Agricultural Adjustment Act, National Industrial Recovery Act, Public Works Administration, Federal Deposit Insurance Corporation, Glass–Steagall Act, Securities Act of 1933, Civil Works Administration, Indian Reorganization Act, Social Security Act, Works Progress Administration, National Labor Relations Act, Federal Crop Insurance Corporation, Surplus Commodities Program, Fair Labor Standards Act, Rural Electrification Administration, Resettlement Administration and Farm Security Administration, etc.  Oil shocks of the Seventies?  If an oil shock can prevent businesses from responding to Keynesian policies then an all out war on business in the Thirties could do the same.  And worse.  Far, far worse.  Which is why the Great Depression lasted 10 years.  Because the government turned what would have been a normal recession into a world-wide calamity.  By trying to interfere with market forces.

Only Real Economic Growth creates Jobs, not Government Programs

The unemployment rate in 1929 was 3.1%.  In 1933 it was 24.9%.  It stayed above 20% until 1936.  Where it fell as low as 14.3% in 1937.  It then went to 19.0%, 17.2% and 14.6% in the next three years.  These numbers stayed horrible throughout the Thirties because the government wouldn’t stop meddling.  Or spending money.  None of the New Deal programs had a significant effect on unemployment.  The New Deal failed to fix the economy the way the New Dealers said it would.  Despite the massive price tag.  So much for super smart government bureaucrats.

What finally pulled us out of the Great Depression?  Adolf Hitler’s conquering of France in 1940.  When American industry received great orders for real economic growth.  From foreign countries.  To build the war material they needed to fight Adolf Hitler.  And the New Deal programs be damned.  There was no time for any more of that nonsense.  So during World War II businesses had a little less uncertainty.  And a backlog of orders.  All the incentive they needed to ramp up American industry.  To make it hum like it once did under Harding and Coolidge.  And they won World War II.  For there was no way Adolf Hitler could match that economic output.  Which made all the difference on the battlefield.

Still there are those who want to blame the gold standard for the Great Depression.  And still support Keynesian policies to tax and spend.  Even today.  Even after 8 years of Ronald Reagan that proved the policies of Harding and Coolidge.  We’re right back to those failed policies of the past.  Massive government spending to stimulate economic activity.  To pull us out of the Great Recession.  And utterly failing.  Where the unemployment rate struggles to get below 9%.  The U-3 unemployment rate, that is.  The rate that doesn’t count everyone who wants full time work.  The rate that counts everyone, the U-6 unemployment rate, currently stands at 14.9%.  Which is above the lowest unemployment rate during the Great Depression.  Proving once again only real economic growth creates jobs.  Not government programs.  No matter how many trillions of dollars the government spends.

So much for super smart government bureaucrats.

www.PITHOCRATES.com

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Tax Cuts, Roaring Twenties, Farm Prices, Smoot-Hawley Tariff, Stock Market Crash, New Deal, Great Depression and the Great Recession

Posted by PITHOCRATES - March 20th, 2012

History 101

Tax Cuts and the Small Government Policies of Harding and Coolidge gave us the Roaring Twenties

Keynesians blame the long duration of the Great Depression (1929-1939) on the government clinging to the gold standard.  Even renowned monetarist economist Milton Friedman agrees.  Though that’s about the only agreement between Keynesians and Friedman.   Their arguments are that the US could have reduced the length and severity of the Great Depression if they had only abandoned the gold standard.  And adopted Keynesian policies.  Deficit spending.  Just like they did in the Seventies.  The decade where we had both high unemployment and high inflation.  Stagflation.  Something that’s not supposed to happen under Keynesian economics.  So when it did they blamed the oil shocks of the Seventies.  Not their orgy of spending.  Or their high taxes.  And they feel the same way about the Great Depression.

Funny.  How one price shock (oil) can devastate all businesses in the US economy.  So much so that it stalled job creation.  And caused high unemployment.  Despite the government printing and spending money to create jobs.  And to provide government benefits so recipients could use those benefits to stimulate economic activity.  All of that government spending failed to pull the country out of one bad recession.  Because of that one price shock on the cost of doing business.  Yet no one talks about the all out assault on business starting in the Hoover administration that continued and expanded through the Roosevelt administration.

Herbert Hoover may have been a Republican.  But he was no conservative.  He was a big government progressive.  And believed that the federal government should interfere into the free market.  To make things better.  Unlike Warren Harding.  And Calvin Coolidge.  Who believed in a small government, hands-off policy when it came to the economy.  They passed tax cuts.  Following the advice of their treasury secretary.  Andrew Mellon.  Which gave business confidence of what the future would hold.  So they invested.  Expanded production.  And created jobs.  It was these small government policies that gave us the Roaring Twenties.  An economic boom that electrified and modernized the world.  With real economic growth. 

If an Oil Shock can prevent Businesses from Responding to Keynesian Policies then so can FDR’s all out War on Business

The Roaring Twenties was a great time to live if you wanted a job.  And wanted to live in the modern era.  Electric power was spreading across the country.  People had electric appliances in their homes.  Radios.  They went to the movies.  Drove cars.  Flew in airplanes.  The Roaring Twenties was a giant leap forward in the standard of living.  Factories with electric power driving electric motors increased productivity.  And reduced air pollution as they replaced coal-fired steam boilers that up to then powered the Industrial Revolution.  This modernization even made it to the farm.  Farmers borrowed heavily to mechanize their farms.  Allowing them to grow more food than ever.  Bumper crops caused farm prices to fall.  Good for consumers.  But not those farmers who borrowed heavily.

Enter Herbert Hoover.  Who wanted to use the power of government to help the farmers.  By forcing Americans to pay higher food prices.  Meanwhile, the Federal Reserve raised interest rates.  Thinking that a boom in the stock market was from speculation and not the real economic growth of the Twenties.  So they contracted the money supply.  Cooling that real economic growth.  And making it very hard to borrow money.  Causing farmers to default on their loans.  Small rural banks that loaned to these farmers failed.  These bank failures spread to other banks.  Weakening the banking system.  Then came the Smoot-Hawley Tariff.  Passed in 1930.  But it was causing business uncertainty as early as 1928.  As the Smoot-Hawley Tariff was going to increase tariffs on just about everything by 30%.  Basically adding a 30% tax on the cost of doing business.  That the businesses would, of course, pass on to consumers.  By raising prices.  Because consumers weren’t getting a corresponding 30% pay hike they, of course, could not buy as much after the Smoot-Hawley Tariff.  Putting a big cramp in sales revenue.  Perhaps even starting an international trade war.  Further cramping sales.  Something investors no doubt took notice of.  Seeing that real economic growth would soon come to a screeching halt.  And when the bill moved through committees in the autumn of 1929 the die was cast.  Investors began the massive selloff on Wall Street.  The Stock Market Crash of 1929.  The so-called starting point of the Great Depression.  Then the Smoot-Hawley Tariff became law.  And the trade war began.  As anticipated.

Of course, the Keynesians ignore this lead up to the Great Depression.  This massive government intrusion into the free market.  And the next president would build on this intrusion into the free market.  Ignoring the success of the small-government and tax cuts of Harding and Coolidge.  As well as ignoring the big-government free-market-intrusion failures of Herbert Hoover.  The New Deal programs of FDR were going to explode government spending to heights never before seen in peace time.  Causing uncertainty like never seen before in the business community.  It was an all out assault on business.  Taxes and regulation that increased the cost of business.  And massive government spending for new benefits and make-work programs.  All paid for by the people who normally create jobs.  Which there wasn’t a lot of during the great Depression.  Thanks to programs like Reconstruction Finance Corporation, Federal Emergency Relief Administration, Civilian Conservation Corps, Homeowners Loan Corporation, Tennessee Valley Authority, Agricultural Adjustment Act, National Industrial Recovery Act, Public Works Administration, Federal Deposit Insurance Corporation, Glass–Steagall Act, Securities Act of 1933, Civil Works Administration, Indian Reorganization Act, Social Security Act, Works Progress Administration, National Labor Relations Act, Federal Crop Insurance Corporation, Surplus Commodities Program, Fair Labor Standards Act, Rural Electrification Administration, Resettlement Administration and Farm Security Administration, etc.  Oil shocks of the Seventies?  If an oil shock can prevent businesses from responding to Keynesian policies then an all out war on business in the Thirties could do the same.  And worse.  Far, far worse.  Which is why the Great Depression lasted 10 years.  Because the government turned what would have been a normal recession into a world-wide calamity.  By trying to interfere with market forces.

Only Real Economic Growth creates Jobs, not Government Programs

The unemployment rate in 1929 was 3.1%.  In 1933 it was 24.9%.  It stayed above 20% until 1936.  Where it fell as low as 14.3% in 1937.  It then went to 19.0%, 17.2% and 14.6% in the next three years.  These numbers stayed horrible throughout the Thirties because the government wouldn’t stop meddling.  Or spending money.  None of the New Deal programs had a significant effect on unemployment.  The New Deal failed to fix the economy the way the New Dealers said it would.  Despite the massive price tag.  So much for super smart government bureaucrats.

What finally pulled us out of the Great Depression?  Adolf Hitler’s conquering of France in 1940.  When American industry received great orders for real economic growth.  From foreign countries.  To build the war material they needed to fight Adolf Hitler.  And the New Deal programs be damned.  There was no time for any more of that nonsense.  So during World War II businesses had a little less uncertainty.  And a backlog of orders.  All the incentive they needed to ramp up American industry.  To make it hum like it once did under Harding and Coolidge.  And they won World War II.  For there was no way Adolf Hitler could match that economic output.  Which made all the difference on the battlefield.

Still there are those who want to blame the gold standard for the Great Depression.  And still support Keynesian policies to tax and spend.  Even today.  Even after 8 years of Ronald Reagan that proved the policies of Harding and Coolidge.  We’re right back to those failed policies of the past.  Massive government spending to stimulate economic activity.  To pull us out of the Great Recession.  And utterly failing.  Where the unemployment rate struggles to get below 9%.  The U-3 unemployment rate, that is.  The rate that doesn’t count everyone who wants full time work.  The rate that counts everyone, the U-6 unemployment rate, currently stands at 14.9%.  Which is above the lowest unemployment rate during the Great Depression.  Proving once again only real economic growth creates jobs.  Not government programs.  No matter how many trillions of dollars the government spends. 

So much for super smart government bureaucrats.

www.PITHOCRATES.com

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The UK and Canada get Spending under Control while the USA is in Denial

Posted by PITHOCRATES - May 1st, 2011

Teacher Pensions too Generous in the UK, Too

It’s not just in Madison, Wisconsin.  Or Detroit, Michigan.  Those public sector benefits busting budgets in city and states throughout the United States are causing fiscal pain in the UK, too (see Heads vote for industrial action ballot over pensions by Angela Harrison posted 5/1/2011 on the BBC).

A review led by Lord Hutton called for final salary schemes to be replaced by those based on the average salary in a career and said public sector workers should retire later, in line with a rising state pension age…

Schools minister Nick Gibb recently told a teachers’ conference that public service pensions should remain a gold standard – but that rising costs and greater life expectancy meant reform was needed.

These generous public sector benefits are no longer sustainable.  There’s a cost to this kind of spending.  High taxes.  Which don’t create jobs.  Or economic activity.  Which is the source of all taxes.  So raising taxes to pay for this generous spending ends up reducing economic activity, job creation and total tax receipts.  Which creates unemployment.  And deficits. 

So conservative Prime Minister David Cameron is trying to reverse this trend.  He and his coalition government with the Liberal Democrats are implementing austerity programs throughout the UK.  A la Margaret Thatcher.  The great conservative from the Eighties.  Who helped to put the ‘great’ back into Great Britain.  By cutting taxes.  And spending.

The Canadian Government becoming more American

The trend is the same in Canada.  Where Stephen Harper may just win an outright parliamentary majority for his conservative party.  Courtesy of the New Democratic Party (NDP) no less (See Stephen Harper and that elusive majority by The Economist posted 4/28/2011 on The Economist).

THE hitherto sleepy campaign for Canada’s general election on May 2nd was jolted awake over the Easter weekend by a surprising surge by the New Democratic Party (NDP), a leftish amalgam of trade unionists and farmers…

So is Canada about to go socialist? Although the Canadian dollar wobbled this week, the answer is almost certainly not.   Indeed, by splitting the centre-left vote more evenly, the NDP’s rise—if sustained—may provide Stephen Harper, the Conservative leader, with the parliamentary majority that has eluded him ever since he became prime minister in 2006. In the ensuing years Canadian politics has become an unusually shrill, partisan and intransigent affair.  Frequent elections—this is the fourth since 2004—have seen falling voter turnout, while polls show that public trust in politicians is also declining.

This cynicism seems to have helped Jack Layton, the NDP leader. He is seen as the cheerful underdog, who, despite suffering from prostate cancer and hip problems that require he walk with a cane, appears relaxed and smiling. Although based in Toronto, he grew up near Montreal. In colloquial French he claims that “winds of change” are sweeping his native province. His message of higher corporate taxes, more social spending, green measures, and an early withdrawal of Canadian troops from Afghanistan goes down well in Quebec, a traditionally pacifist, big-government kind of place. Mr Layton seems to be successfully wooing disillusioned supporters of the separatist Bloc Québécois.

Once upon a time Canada was New France.  But the British changed French Canada to British Canada after winning the Seven Years’ War.  But the French never stopped being French in Quebec.  Even put ‘je me souviens‘ on their license plates.  So they would never forget their French past.  French tradition.  Or French culture.  The Bloc Québécois even wanted to get Quebec out of Canada.  It turned out that most Quebecers didn’t.  So the Bloc has been marginalized of late.  But if you ever traveled to the province of Quebec it is clear that they like their government big.  Which is why the NDP appeals to Quebecers.

The NDP is also profiting from the travails of Michael Ignatieff, the Liberal leader, who entered politics in 2006 after spending most of the three previous decades working as a journalist and academic in Britain and the United States. Although his campaign appearances have become more assured, he has failed to shake off the gibes of Conservative attack ads that he is an elitist from Harvard who is “just visiting” Canada in the hope of gaining power.

An elitist from Harvard?  Interesting.  For Ivy League elitists have ruled the US since George H. W. Bush.  The latest being perhaps the most elitist.  President Obama.  Who many criticize as being professorial.  And of talking down to the American people.  Which is what they teach you to do at Harvard.  And the other Ivy League schools.

The biggest problem for the Liberals, a centrist, big-tent party, is that Canadian politics has become less European and consensual and more American and ideological. Mr Harper has been the main cause and beneficiary of that process. After five years, he has earned Canadians’ respect if not their love. He is an astute political tactician: he is the longest-serving prime minister of a minority government in Canadian history. But he comes over as a cold control-freak. A headline on the website of the Globe and Mail, a Liberal-leaning paper, summed up popular sentiment when it described the prime minister as “nasty, brutish—and competent”.

Mr Harper’s campaign pitch is that he needs a parliamentary majority in order to sustain the country’s recovery from recession. His message of low taxes, small government and tougher treatment of criminals has won him support everywhere except Quebec…

Now this is very interesting indeed.  Becoming more American?  All the while the Americans, under the rule of those Ivy League elitists, are trying to become more European.  Where the big social democracies wield great power.  And budgets.  Meanwhile, America’s friends to the north are going low taxes and small government.  And however cruel and unfeeling that may be, the Canadian liberals even admit Harper’s government is competent.  Which is another way of saying responsible.  Or grown up.

Medicare Reform has had Bipartisan Support for Decades

The UK and Canada have little choice.  They have to be ‘grown up’ in light of their financial woes.  And it’s no different in the U.S.  Their financial woes just have taken a little longer to hit them.  Because they are the world’s largest economy.  But even size doesn’t matter in the long run.  And some have seen the writing on the wall since the early eighties (see GOP plan to change Medicare is rooted in bipartisan history by Amy Goldstein posted 5/1/2011 on The Washington Post).

There is a broad consensus that Medicare in its current form will be overwhelmed by the financial pressures of the aging baby-boom generation, longer life spans and sophisticated medical treatments. Various estimates say the fund that pays Medicare hospital bills will run short in a decade or two; the program’s trustees are to release new predictions in a few weeks.

The thinking about Medicare and market forces has long bipartisan roots. In the early 1980s, then-congressmen Richard A. Gephardt, a Missouri Democrat, and David Stockman, a Michigan Republican, proposed vouchers to help people on Medicare buy private health plans.

The term “premium support” was coined in 1995 by two respected health policy experts, neither a conservative: Henry Aaron, a Brookings economist, and Robert Reischauer, president of the Urban Institute. “The idea of vouchers was abroad in the land,” Aaron recalled. “We thought there was sort of a free-market-will-cure-all mentality.”

Their idea was to marry market competition in Medicare with regulation to ensure proper benefits and enough financial help. The Medicare commission’s work was an heir to their ideas. Proponents point out that the popular Medicare drug benefit created in 2003 relies on a such a model.

So America has had its grownups looking at the inevitable since the eighties.  Medicare will break unless it’s changed.  For three decades the grownups have been discussing this.  But the Ivy League elitists say ‘pish tosh’ and laugh with all knowing condescension.  For they don’t live in reality.  Their world is an insulated one where the privileged elite don’t work.  But spend their days pontificating.  Safe and snug in their universities.  Or in the federal government.  Where the consequences of their policies will never touch them.

Myopic Ivy League Pretentious Condescension

So we have unsustainable spending in the UK, Canada and the USA.  Concerned citizens in these countries voted in conservative governments.  Rising costs and greater life expectancy have made the state pensions and health plans in days of old no longer doable.  No, austerity is now the name of the game.  People are getting it.  Despite the lies of the politicians.  For the people live in the real world.  The world of paychecks.  And taxes.  Unlike the elite who like to pontificate from their lives of plenty and extreme comfort.  But that doesn’t stop the lying.  The myopic Ivy League worldview.  Or the pretentious condescension.  Case in point is the wonkish Paul Krugman. 

He posted a chart showing changes in revenue and spending from 2007 to 2010.   Spending is up.  And revenues are down.  Ergo, it’s not a spending problem.  We’re simply not taxing enough (see Origins of the Deficit by Paul Krugman posted 5/1/2011 on The New York Times).

Even on this crude calculation, it’s obvious that the slump is responsible for the great bulk of the rise in the deficit. Anyone who says otherwise is either remarkably ill-informed or trying to deceive you.

Budgets in cities and states across the country are facing their biggest deficits in history.  Why?  Recession.  Tax revenues plummet in times of recession.  Housing values tumble during times of recession (and with them property taxes).  People lose jobs during times of recession (the unemployed don’t pay income taxes or payroll taxes).  And it’s the same at the federal level.  Especially during the greatest recession since the Great Depression.  Sustained government spending during times of recession empties treasuries.  And creates deficits.

Federal spending has averaged approximately 20% of GDP since 1960.  It jumped to approximately 25% during the Obama administration.  That’s a huge spending increase.  No matter how you look at it.  And this is why the deficit is soaring into the trillion dollar territory for the first time.  Record spending during the worst recession since the Great Depression. 

“Anyone who says otherwise is either remarkably ill-informed or trying to deceive you.”

www.PITHOCRATES.com

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