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Monday, April 21, 2008

The Democrats' Great Depression in Redux

Any astute student of history knows full well that the tipping point of the Great Depression was the stock market crash of 1929. What many people don't is that the Great Depression never needed to be a depression. It could have and should have been a recession, and in fact, it could have been relatively mild. What turned the Great Depression into a depression was two critical government responses that had the effect of perpetuating an economic downturn into a crisis.

The first was the Smoot Hawley Tariff Act.

was signed into law on June 17, 1930, and raised U.S. tariffs on over 20,000 imported goods to record levels, and, in the opinion of some economists, was responsible for the severity of the Great Depression,[2] Although this can be debated, a widely accepted statement is that the tariff certainly did not help the economic situation in America.[3] In the United States 1,028 economists signed petition against this legislation but it was passed in June 1930. According to The Economist, the Smoot-Hawley tariff act turned a stock market collapse into a long Depression. [4] Many countries retaliated with their own increased tariffs on U.S. goods, and American exports and imports plunged by more than half.

By imposing tariffs, and thus exacting retaliation from others, the act also choked off international markets to our companies and thus choked off markets at the exact time that our economy needed every market it could find.

The second was the ill timed tax increase imposed by Hoover.

Finally, there was Hoover's tax policy. Today every fool, right or left, knows that imposing a tax increase in an economic downturn is like kicking a wounded man in the stomach.

Yet in the dark days of 1932, with unemployment at 20 percent, Hoover perversely signed an increase that reversed the multiple cuts by his predecessor, Calvin Coolidge.

Hoover more than doubled rates at the bottom of the tax schedule. He also increased the top marginal tax rate to 63 percent from 25 percent. The effect was predictable. That tax error has haunted economists ever since.

At time time, there were actually some schools of thought that believed that tax increases were expansionary. Today, that thought has been eliminated and those tax increases are exhibit A into the faultly logic of that thinking.

At this point this quote should be brought

those that don't study history are deemed to repeat it

It seems the Democrats don't care much for economic history because they are determined to make the exact same mistakes of the early 1930's. They are all falling over themselves to be more protectionist. They are against NAFTA, CAFTA, and the free trade agreements with Colombia, Korea, and Panama. Even though our weakening economy needs all the markets it can find right now, they are determined to cut off the international markets it desperately needs.

The Democrats have only small differences with the Republicans of the early '30's on taxes. While those Republicans were determined to raise every single tax bracket they could, the Democrats are simply determined to raise most of them. It should be nothing less than uncanny and disturbing that these Democrats are determined to reverse tax cuts the same way that those Republicans were. While these Democrats promise income tax cuts for the so called middle class, they are also calling for capital gains tax increases and a reinstitution of the so called death tax.

This populist message has absolutely no roots in any economic theory. In fact, Barack Obama recently stated that the reason he wants to raise capital gains taxes is simply in the interest of "fairness". On that end he will be right. He will certainly go a long way toward making the economy equally miserable for everyone if raises taxes on capital at the exact time the economy needs investment most. Hillary Clinton has equally nebulous reasoning. She says she wants to raise capital gains taxes because that is what Warren Buffet says for her to do.

The bottom line is that the Democrats simply ignore basic economic principles. When an economy is softening, the government must do everything to stimulate it. Fiscally, that means tax cuts not tax increases. On trade, it means opening up new markets not closing already established ones. The Democrats are running a populist scam whose roots are set in politics not policy. They want to appear as the party of the little guy against the big guy, and they are determined to prove their credentials no matter the economic impact. If their policies are implemented the recession we may very well be headed towards may then turn into a recession. The last time the government did this, they could be excused for ignorance. No such excuses can be made now. It is no longer economic theory but economic fact that free trade expands economies and the same can be said for tax cuts. Ignoring such basic economic theory for political convenience can win elections, but it will lead to economic disaster.

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