The Worst Economy Since the Great Depression

Every time I hear some administration whiz kid parrot that phrase, incorrect as it is, I want to run for my copy of Thomas Sowell's Economic Facts and Fallacies. The administration is big on comparing the current recession with the Depression. We've blogged about this before. President Obama, like most liberals of his generation with an inflated sense of self, wants to make history before he understands history.

As the philosopher Santayana wrote, those who cannot learn from history are doomed to repeat it.

The Federal Reserve, under the chairmanship of Ben Bernanke, has continued a long policy of cheap money--keeping interest rates low on the theory that it will encourage economic expansion and avoid the peril of deflation. The connection between high unemployment and sagging consumer prices in the 1930s has led the Fed to conclude that it can lead the nation out of the current recession by money supply management.

That's all well and good. Monetary policy is one of the Fed's principle roles. But Art Laffer makes the case that taxes were the real demon that doomed the U.S. during the Depression and will destroy what remains of our economy if we allow it.

Most high school history students know how the 1930 Smoot-Hawley tariff turned a recession into a rout. By enacting the largest peacetime trade tax in the history of the Republic, it forced foreign governments to retaliate and enact their own tariffs against U.S. products.

As the economy further spiraled downward, government tried to make up the shortfall by raising other taxes, accelerating the decline. One thing about Congress in the good old days: As Mr. Laffer pointed out in a recent Wall Street Journal piece, when Congress raised taxes it didn't try to hide it:

• In 1932 the lowest personal income tax rate went from less than half of 1% to 4%
• The top marginal tax rate went from 25% to 63%
• The death tax more than doubled from 20% to 45%
• The gift tax went from 0 to 33.5% with the stroke of a pen

And the economy went from decline to free fall.

Enter FDR, who gets a total pass for his mismanagement of the economy during the Depression. His solution was to administer more of the same toxins that were killing the economy:

• That death tax went from 45% to 60% in 1933
• Not satisfied with that, Roosevelt saw the 60% and raised it 10 more points a year later to 70%
• The gift tax rose to 45 and then to over 52% in losing battle to pay for the New Deal
• By 1936 the highest marginal income tax rate hit 79%--a stunning 216% increase in 4 years!
• Finally, with nothing left to raise, FDR and Congress created a 1% employer and 1% employee tax on all wages up to $3,000

The result: a second economic collapse in 1937.

But wait! There's more! Don't forget about state and local taxes. From 1929 through 1932 they rose from 7% of GDP to 12%--on top of all of the federal tax increases, as documented by Mr. Laffer.

The result was a penury that lasted for another 20 years until 1953 when the Dow Jones Industrial Average and the unemployment rate (factor out the effects of World War II) finally returned to pre-1930 levels. This is documented in Amity Shlaes study of the Depression, The Forgotten Man.

It is worth noting all this because the current administration has a boundless faith in its own ability to centrally plan, direct and manage the economy. This was the fatal flaw that both a Republican, Herbert Hoover, and a Democrat, Franklin D. Roosevelt, made. Both were experienced technocrats who thought they could do the thinking for an organic economy that could largely manage itself if left alone.

President Obama and his apparatchiks seem to be making the same mistake. From stimulus packages, to nationalization of key industries to the healthcare takeover he is building a debt that can lead to only one place: higher taxes. In doing so his legacy may be not in restoring the economy through management wizardry, but in making the U.S. a permanent debtor nation.

Just thought you might like to know.