Monday, February 14, 2011

Prescribing a Dose of Herbert Hoover for the US Economy

It seems that Obama is determined to recreate some of the worst aspects of the Great Depression. With his latest budget he seems determined to create the mini-depression within the Great Depression, the 1937 Recession:
Unemployment jumped from 14.3% in 1937 to 19.0% in 1938, rising from 5 million to more than 12 million in early 1938. Manufacturing output fell by 37% from the 1937 peak and was back to 1934 levels. Producers reduced their expenditures on durable goods, and inventories declined, but personal income was only 15% lower than it had been at the peak in 1937.
What caused the 1937 Recession? It was FDR trying to satisfy his right wing critics about "big deficits" so he tightened the budget before the economy got its legs under it from the Great Depression, so the economy promptly nose-dived. This is what the Republicans want. If they can get it, then winning the elections in 2012 should be easy because people will be up in arms over the state of the economy. So why is Obama playing by the Republican script?

Here's a bit from a post by Robert Reich that looks at this crazy situation:
President Obama has chosen to fight fire with gasoline.

Republicans want America to believe the economy is still lousy because government is too big, and the way to revive the economy is to cut federal spending. Today (Sunday) Republican Speaker John Boehner even refused to rule out a government shut-down if Republicans don’t get the spending cuts they want.

Tomorrow (Monday) Obama pours gas on the Republican flame by proposing a 2012 federal budget that cuts the federal deficit by $1.1 trillion over 10 years. About $400 billion of this will come from a five-year freeze on non-security discretionary spending – including all sorts of programs for poor and working-class Americans, such as heating assistance to low-income people. Most of the rest from additional spending cuts.

That means the Great Debate that starts this week will be set by Republicans: Does Obama cut enough spending? How much more will he have cut in order to appease Republicans? If they don’t get the spending cuts they want, will Tea-Party Republicans demand a shut-down?

Framed this way, the debate invites deficit hawks on both sides of the aisle to criticize Democrats and Republicans alike for failing to take on Social Security and Medicare entitlements. Expect Erskine Bowles and Alan Simpson, co-chairs of Obama’s deficit commission, to say the President needs to do more. Expect Alice Rivlin and Paul Ryan, respectively former Clinton hawk and current Republican budget hawk, to tout their plan for chopping Medicare.

It’s the wrong debate about the wrong thing at the wrong time.


The Republican bromide – cut federal spending – is precisely the wrong response to this ongoing crisis, which is more analogous to the Great Depression than to any recent recession. Herbert Hoover responded the same way between 1929 and 1932. Insufficient spending only deepened the Great Depression.

The best way to revive the economy is not to cut the federal deficit right now. It’s to put more money into the pockets of average working families. Not until they start spending again big time will companies begin to hire again big time.

Don’t cut the government services they rely on – help with college loans for their kids, help affording home heating oil, and the rest. State and local budget cuts are already causing enough pain.

The most direct way to get more money into their pockets is to expand the Earned Income Tax Credit (a wage subsidy) all the way up through people earning $50,000, and reduce their income taxes to zero. Taxes on incomes between $50,000 and $90,000 should be cut to 10 percent; between $90,000 and $150,000 to 20 percent; between $150,000 and $250,000 to 30 percent.

And exempt the first $20,000 of income from payroll taxes.

Make up the revenues by increasing taxes on incomes between $250,000 to $500,000 to 40 percent; between $500,000 and $5 million, to 50 percent; between $5 million and $15 million, to 60 percent; and anything over $15 million, to 70 percent.

And raise the ceiling on the portion of income subject to payroll taxes to $500,000.

The lion’s share of America’s income and wealth is at the top. Taxing the very rich won’t hurt the economy. They spend a much smaller portion of their incomes than everyone else.
But since Obama is a cryto-centre-right politician, he won't be taking on the left-of-centre agenda of cutting taxes for the poor and raising taxes for the rich. No. He just agreed to cut taxes for billionaires under Republican pressure. Yes, the Republicans who now scream that doom is upon imminent because of billion dollar deficits are the very ones who demanded, and got, big tax cuts for billionaires. The Republicans aren't serious. Out of one side of their mouth they scream about deficits, but out the other they demand big deficits to enable tax cuts for billionaires. Obama is a fool to try to "negotiate" with a political party that has no serious agenda other than destroying the economy so they can win the next election.

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