Thursday, September 16, 2010

A Republican victory could spell economic disaster

One of the dumbest things Americans can do in this economy is to put Republicans back in charge, or in a position to stall things in Congress.

That's not just a partisan opinion. Had the Republicans had a major change of heart, admitting the error of their ways, and offering a new policy, then things might be different. But what we are hearing from GOP leaders is the same old song and dance, i.e. they want to cut taxes.

George W. Bush cut taxes to the lowest level since the Great Depression, but that only led to the present economic mess. There simply is no historical reason to think that cutting taxes in a deep recession is going to stimulate the economy.

Let's look at what happened during the Great Depression. Three back-to-back presidents, all Republican, helped set the stage for that monumental plunge in America's economic fortunes:

Warren Gamaliel Harding, 1921-1923
Calvin Coolidge, 1923-1929
Herbert Clark Hoover, 1929-1933

Harding and Coolidge combined their efforts to reduce the top income tax rate from 73% to 24%.

Many people mistakenly think that Hoover, upon taking office, immediately starting raising taxes to help bring on the Great Depression.  In fact, Hoover's first tax legislation was the Revenue Act of 1929, passed in December after the October crash, which continued the Republican policy of lowering taxes.  Taxes were cut for both corporations and individuals.

When the economy kept sliding, Hoover and Treasury Secretary Andrew W. Mellon continued to fight for further tax cuts.

Now, eventually Hoover faced with high deficits was forced to raise taxes in 1932, but this was already after most of the major damage, on the stock market at least, had been done.  In fact, the stock market hardly bleeped after the tax hike in June 1932 as the charts below show.

The second chart shows that the Dow reached its lowest level just about a month after the 1932 tax hike was passed.  From that point, the Dow made a very slow climb up from that low point.

However, it can be seen from both charts that things were already sliding very badly before the new tax legislation, and that the hike hardly had any impact on the stock market's woes.

What we see instead is that most of the slide happened when taxes were at historical lows, and that the 1929 tax cut did nothing to improve the economic situation.

At least Barack Obama and the Democrats know that we have to find new ways to fund spending.  Cutting taxes for rich people might only lead to more money stashed in derivatives and hedge funds that create no new jobs.

Obama's actions, including his recent plan to rebuild the nation's infrastructure, show that he is keenly aware of what it will take to keep things moving in the economy.

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