Tuesday, March 02, 2010

Obama's Mentors included Hoover, as well as FDR

Calvin Coolidge oversaw one of the greatest expansions in the history of the US economy. When Coolidge took office, he believed tax rates were too high. With top rates at over 70% following World War I and facing a protracted recession, Coolidge believed it was time to take serious actions. The combined top marginal normal and surtax rate fell from 73 percent to 58 percent in 1922, and then to 50 percent in 1923 (for incomes over $200,000). In 1924, the top tax rate fell to 46 percent (for incomes over $500,000). The top rate was just 25 percent (for incomes over $100,000) from 1925 to 1928, and then fell to 24 percent in 1929.

The reduction in tax rates fueled the productivity engine of the US during these years, leading to inflation rates below 2 percent, unemployment below four percent, and the number of people who made over $100,000 a year actually quadrupling over his years in office. In addition to leading to economic expansion, these policies led to a dramatic increase in tax revenue. I call it the "Wal-Mart Principle" of taxation. Charge as little as possible per item (or activity) and you will make more than any of your competitors in your profits. Low tax rates lead to much greater economic activity and a huge increase in revenue.

Many historians perceived Coolidge's successor, Herbert Hoover, as one who continued his predecessors limited government policies. Coolidge was actually quite critical of Hoover, stating "That man has given me nothing but advice, and all of it bad." Hoover actually pursued several policies that remind one of Barack Obama, not Calvin Coolidge.

In fact, Hoover turned the depression into a "Great" one through several, government interventionist, policies:

  • Supporting artificially high wages. When unemployment reaches approximately 25 percent, your objective should be eliminating the barriers between people and jobs. Wages are a huge barrier to employment The Hoover Administration pressured businesses to keep wages high and prices low. The Secretary of Labor at the time, James Davis said "There never has been a crisis such as we have had as the stock market crash that threw...millions out of employment that there wasn't a wholesale reduction in wages...If Hoover accomplishes nothing more in all of his service to the government, that one outstanding thing of his administration -- no reduction in wages -- will be a credit that will be forever remembered not by the working classes alone but by business men as well, because without money in the pay envelope business is the first to suffer" (The Politically Incorrect Guide to the Great Depression and the New Deal, by Robert P. Murphy, Ph.D.). What a legacy, backing a policy that forced widespread unemployment.

  • Undermining international trade. The Smoot-Hawley Tariff Act of 1930 unleashed a chain of events that was seen first in the stock market crash of that year and crippled any efforts towards recovery for years to come. The tariff act put a huge cost on all goods coming into the United States. Investors on Wall Street knew that this would lead to retaliation and would greatly devalue the companies and the stock that represents them. This led to massive sock selling and lit the fuse to the depression. It took until the 1940s before the barriers finally began to fall and economy recover.
In addition, Hoover raised taxes to levels not seen since Coolidge took office (when the country was in an other recession) and he implemented domestic programs that were precursors of the New Deal (including subsidies and loans similar to what we see today).

In the end, Hoover was a big government proponent who sounded similar to Barack Obama today. At the Republican National Convention of 1932, Herbert Hoover stated, when receiving his party's nomination that "We might have done nothing. That would have been utter ruin. Instead we met the situation with proposals to private business and to Congress of the most gigantic program of economic defense and counterattack ever evolved in the history of the Republic. We put it into action." I'm sure advocates of free markets at the time find themselves asking, "how's that change working for you?" The differences between FDR and Hoover were simply in the scope of their activities, not in their nature. They both believed in massive government and they both failed miserably, placing this country into a decade and a half of despair. Obama is taking the US on a similar course and on a fast track that would be the envy of Hoover or FDR. We need to go back to what works -- less government and not more. We need to create a predictable economic environment that can only be created through less taxes and regulations. It is obvious that we need freedom and not government expansion.

Kevin Price is a syndicated columnist whose articles frequently appear at ChicagoSunTimes.com, Reuters.com, USAToday.com, and other national media. Kevin Price is also host of the Price of Business (M-F at 11 AM on CNN 650). Hear the show live and online at PriceofBusiness.com. Visit the archive of past shows here.

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