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.

How to Talk about the Economy

Virtually every economic debate falls into a discussion about parties and politics. This is why most economic discussions do not amount to much. You start discussing parties and politicians and the debate simply goes down hill from there. That is why I love the Ten Pillars of Economic Wisdom. They speak of pure economic truths -- no agendas, just common sense.

In the 1990s, I was a Senior Fellow at the American Economic Foundation, which was the group that developed the Ten Pillars during the Great Depression. The organization wanted to remind Americans that freedom works. It was my job with the Foundation to teach the same lesson in seminars in the former Soviet Union and how these principles could be a light to a region that suffered from decades of totalitarianism. Today, the US is slipping into a command economy of its own where the government will seek to be in charge of all things. Today, with the Obama Administration, this country needs to be reminded of these principles now more than ever.

1. "Nothing in our material world can come from nowhere or go nowhere, nor can it be free: everything in our economic life has a source, a destination, and a cost that must be paid."

As Milton Friedman use to say, "there is no such thing as a free lunch." Everything has a cost, regardless of promises from politicians. The next time a person says "the government should to that," simply ask them how? At what cost? Why?

2. "Government is never a source of goods. Everything produced is produced by the people, and everything that government gives to the people, it must first take from the people."

Following the two massive bailouts over the last 16 months, 25 percent of Americans who were asked in a Fox survey how the government pays for its programs said it was because the US "has its own money." Those people need to be familiar with this Pillar. The bailouts we have seen cost plenty and will have a profound impact on our economy. They are being paid for through a massive printing of fiat money (essentially counterfeit dollars) and new taxes that will effect every economic group.

3. "The only valuable money that government has to spend is that money taxed or borrowed out of the people's earnings. When government decides to spend more than it has thus received, that extra unearned money is created out of thin air, through the banks, and, when spent, takes on value only by reducing the value of all money, savings, and insurance."

Much of the new spending we have seen by politicians is being financed by fiat money and will result in rampant inflation. Inflation means "too much money chasing too few goods." Government is paying for its programs with "funny money," but the consequences are anything but humorous.

4. "In our modern exchange economy, all payroll and employment come from customers, and the only worthwhile job security is customer security; if there are no customers, there can be no payroll and no jobs."

Labor unions have long tried to create an economic world that is detached from reality. If labor wants job security, they must do what successful employers must do -- make the customer the priority. There is no other way to assure stability.

5. "Customer security can be achieved by the worker only when he cooperates with management in doing the things that win and hold customers. Job security, therefore, is a partnership problem that can be solved only in a spirit of understanding and cooperation."

This simply means that labor often seeks an adversarial relationship with business, but job security can only come if the two are partners. For years Japan's company unions served as a model of labor and employer cooperation. With this model employees and management would work together on strategies to increase customers, foster efficiency, and to build a better business.

6. "Because wages are the principal cost of everything, widespread wage increases, without corresponding increase in production, simply increase the cost of everybody's living."

An example of this is the minimum wage. When it goes up, so do prices, and if the job isn't worth the wage, it will be lost. This solves the mystery as to why minimum wage increases are both rare and devastating. Unemployment had remained extremely low for several years until the summer of 2008 when there was a huge jump, followed by unemployment surpassing the 7 percent level. Another increase in the summer of 2009 has led to double digit unemployment. This is due to cause and effect, not coincidence.

7. "The greatest good for the greatest number means, in its material sense, the greatest goods for the greatest number which, in turn, means the greatest productivity per worker."

Production is the best way to keep an economy strong, and those who participate in it growing financially. The best way to encourage productivity is for a government to keep the costs of production as low as possible. This is done through a stable money supply, low taxes (especially on wealth creation), and few regulations.

8. "All productivity is based on three factors: 1) natural resources (NR), whose form, place and condition are changed by the expenditure of 2) human energy (HE) (both muscular and mental), with the aid of 3) tools (T)."This is straight forward enough. These three factors make up the totality of the economy. As a formula, this is seen as NR + HE x T = Man's Material Welfare."

Economies grew when the labor (human energy) is available in the most efficient way possible, when national resources (oil, wood, etc.) are as accessible and affordable as possible, and through the development of tools (which is technology)

9. "Tools are the only one of these three factors that man can increase without limit, and tools come into being in a free society only when there is a reward for the temporary self-denial that people must practice in order to channel part of their earnings away from purchases that produce immediate comfort and pleasure, and into new tools of production. Proper payment for the use of tools is essential to their creation."

Tools are the only one of these that can increase without limit. An example of this is agriculture, which was the dominant industry in the late 1700s and early 1800s, with the majority of our population working in that area. Today, the number who work in it are in the single digits, yet the abundance of food could not be greater. Technology made this completely possible.

10. "The productivity of the tools--that is, the efficiency of the human energy applied in connection with their use--has always been highest in a competitive society in which the economic decisions are made by millions of progress-seeking individuals, rather than in a state-planned society in which those decisions are made by a handful of all-powerful people, regardless of how well-meaning, unselfish, sincere and intelligent those people may be."

The genius of the many individuals operating on their own when it comes to economic prosperity is always greater than the few or even the majority that would impose its view of "fairness" on them. This is the "invisible hand" that Adam Smith spoke of so eloquently in his, The Wealth of Nations. Government cannot effectively manage economic growth and its efforts to do so only leads to government waste, economic recession (or depression), and devalued currency.

I love the Ten Pillars because they are simple, factual, logical, and without a agendas. They provide excellent benchmarks on what works in the economic system. Pass this tool on to others who are trying to figure out the headlines and share with them the message of economic liberty.

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

The Truth About Trade Deficits.

The dreaded "trade deficit" is shrinking...let's celebrate! Wait a minute, this is happening in the context of the worst unemployment in a quarter of a century, a jump in inflation, and a period of protracted economic decline.

The balance of trade -- the amount of goods imported versus goods exported -- has been a tool used by those who are shallow in their economic knowledge and deep in their fear of competition. We are told by many politicians that trade deficits (importing more than we export) is a "terrible" thing and demonstrates an economy in decline. As a result of decades of trade deficits, the US is a "debtor" nation, we are told.

So the recent news stories should be good news: "Trade Gap Continues to Narrow." This narrowing is because the amount of goods we are importing each year is actually shrinking. There are few, if any, who would argue that this economy is anything but weak and has been in a downward spiral. This reality should not be a surprise to any student of history. When the economy is weak, we can't afford to buy. Our trade deficit shrinks with our spending power.

In 1928 Republican Herbert Hoover was running for President of the United States against Democrat Al Smith of New York. Hoover, the Secretary of Commerce under one of the most successful Presidents in US history, was running against a very popular governor. It was easy for Hoover to defend the record of the President he served, Calvin Coolidge, as virtually every indicator pointed to an administration noted for its prosperity. "A chicken in every pot and a car in every garage" was a message that rang true to most voters.

During the 20s, Coolidge and his allies took a tax rate that was as high as 70 percent under their predecessor and lowered the top rate to a low of 5 percent. Coolidge opened economic trade with countries and unleashed a level of prosperity we had not seen in generations. The number of people who made six digits (a very high income in the 1920s) increased four fold. Inflation was less than 2 percent and unemployment was at a comparable amount. They called it the "Roaring Twenties" for a reason.

In spite all the glitter, there were signs of "rust" for those who cannot look beyond the surface. That was the trade deficit that grew rapidly during his administration. This area fell under the Secretary of Commerce and Hoover was taunted by his opponent through out the race as the man who over saw this area of "decline." Finally Hoover got on the protectionist bandwagon and told voters that if Smith or he were elected, there would be quotas and tariffs placed on trade. Hoover won and by the Fall of 1929, he was sticking to his guns and pursuing protectionism in the form of the Smoot-Hawley Tariff Act.

That law did exactly what it intended to do -- slash the import of goods. Within a few years, the US had its first trade surplus in decades and also one of the highest unemployment rates in history. The Stock Market crash that proceeded the Depression was fueled by this trade protectionism. Wall Street knew that, if we penalized imports, foreign countries would retaliate. That led to the Market crash because investors knew that the value of goods would decline as the trade markets would shrink.

The high unemployment rate was associated with the trade surplus for a very simple reason. We imported more goods than we exported because our buying power had declined dramatically. Through out our nation's history over the last century, our periods of highest prosperity were accompanied by eras of trade deficits. Meanwhile, trade surpluses accompanied economic decline. In our prosperity we were buying more, from everywhere.

Today, the trade deficit is shrinking because the economy is weak. Our national buying power is in decline. Trade deficits continue to do what they have done for centuries -- indicate strength and not weakness.

Kevin Price is Host of the Price of Business, the longest running show on AM 650 (M-F at 11 am) in Houston, Texas and on AOL Radio. His articles often appear in Chicago Sun Times, Reuters, USA Today, and other national media. Steve Moore of the Wall Street Journal calls Price the “best business talk show host in the country.” Find out why and visit his blog at www.BizPlusBlog.com and his show site at www.PriceofBusiness.com. You can also find Price on Strategy Room at FoxNews.com.

Lessons Obama Should learn from FDR

We are familiar with the various quotes about the lessons of history. Bottom line, if we do not learn them, we will find ourselves reliving them. Since the election of Barack Obama to the President of the United States, we have seen this Administration try an approach to government that we have seen before and we have plenty of evidence as to how effective it is.

During the Great Depression, Franklin Roosevelt moved to have the government take over huge amounts of the economy after the nation experienced a meltdown.. The man he hired to over see that project was Secretary of Treasury Henry Morgenthou, Jr. Morgenthou was both a trusted adviser to Roosevelt and one of his very close friends.

Morgenthou was called on to take an ambitious approach to the nation's economic problems with a primary objective of relieving the pain of unemployment caused by the protracted decline in the economy. That approach was centered on massive increases in government spending and intervention in a manner never seen in our nation's year. After eight years of this expansion, the Secretary had the following to say to Congressional leaders: "We have tried spending money. We are spending more than we have ever spent before and it does not work. And I have just one interest, and if I am wrong ... somebody else can have my job. I want to see this country prosperous. I want to see people get a job. I want to see people get enough to eat. We have never made good on our promises ... I say after eight years of this Administration we have just as much unemployment as when we started ... And an enormous debt to boot!"

During the Great Depression, the government assumed a larger role in "helping" people with their poverty through politically driven programs that rewarded battle ground states that money could influence into the Democrat column. Furthermore, by taking away the personal accountability that came from state run agencies and private organizations, the government's approach led to chronic unemployment and the crushing of the spirit of people who simply wanted a job. Most disheartingly in the end, it didn't work. After a decade of throwing money at the problem, nothing had fundamentally changed.

Albert Einstein is credited with saying that the definition of insanity is doing the same thing over and over again and expecting different results. People are the same now as they were back in the 1930s. Human nature hasn't changed. Free markets and individual responsibility works and government does not. Let's hope we learn that lesson sooner than Henry Morgenthau.

For additional lessons from the Great Depression, consider New Deal or Raw Deal? by economic historian Burt Folsom.

Kevin Price is Host of the Price of Business, the longest running show on AM 650 (M-F at 11 am) in Houston, Texas and on AOL Radio. His articles often appear in Chicago Sun Times, Reuters, USA Today, and other national media. Steve Moore of the Wall Street Journal calls Price the “best business talk show host in the country.” Find out why and visit his blog at www.BizPlusBlog.com and his show site at www.PriceofBusiness.com. You can also find Price on Strategy Room at FoxNews.com.

Where Keynes Went Wrong

I recently received an advanced review copy of a compelling and important book entitled "Where Keynes Went Wrong," scheduled to be published on October 1, 2009 by Axios Press. One of the perks of hosting a show is the large number of free books I receive every month. Better still is getting books weeks before they are released. This particular book, by Hunter Lewis, is fantastic and is must reading for those who are concerned about the future of our country. It provides one of the most thorough critiques of John Maynard Keynes and, more importantly, it restores the economic way of thinking that use to be a central part of Western thought and was the mighty force that made nations prosper. If nations applied the principles in Hunter's book, those nations would grow economically.

The timing for the book could not better. One year ago the US economy (and many economies around the world) began a terrible meltdown and responded with an approach very similar to what economist John Maynard Keynes promoted during the Great Depression. Lewis' compelling and powerful book eloquently argues that Keynes approach made that Depression far worse than it should have been and will have a similar impact on our economic situation today.

In the press release for the book we see that "When the world financial system began to fall in 2008, the US government reacted decisively with a stimulus package, bailouts, and printing, borrowing, and spending trillions of dollars. All of these interventions were taken from a playbook devised by the last century's most influential economist, John Maynard Keynes. But is Keynes right? The implications of this question are large and timely. If Keynes is wrong, then so are the economic policies of Barack Obama, George W. Bush, and virtually all governments today."

He tackles Keynes with extraordinary vigor and raises the questions that are desperate to the issues of the day. Did Keynes have proof for his theories? Lewis argues that the answer is absolutely not. In fact, the author noted in an interview that "Overall, the most surprising thing is the lack of evidence, much less proof for anything he says. It is just a series of brilliant hunches. But there is really nothing to back up the hunches. In the whole of the General Theory, Keynes most important book, there are only two pages devoted to actual evidence." Imagine building an economy on such flimsy evidence and even those two pages were lacking.

The two pages -- and the rest of the book -- are full of paradoxes that tend to only confuse and not bolster his arguments. The following are a few examples from Lewis of the type of approach Keynes would take to problems based on the General Theory:

• "If too much bad debt is the problem, for example during the Crash of 2008, the solution is to add more debt."


• "An economy depends on the confidence of the players. If confidence has been shaken by too much bad debt, restore confidence by adding more."


• "If low interest rates held down long have caused trouble, lower them further and hold them down longer."


• "If the public seems to be opposing the idea of borrowing and spending more, their elected representatives in government can do it for them."

These types of paradoxes (and many more) not only confuse the debate, but when they are applied in the form of public policy the consequences for the Great Depression was an economic downturn that lasted almost two decades. The jury is out on what kind of impact Obama's policies will have today, but human nature and the way a person responds to polices is unchanged. Lewis does an excellent job of providing a window of our own possible future based on the policy pursuits of Obama. What we can expect is long term pain.

This book is extremely readable and might be a force to impact the opinions of the general public. Unfortunately, I don't think most people will read a book about John Maynard Keynes except for those in the academic world who have already made conclusions about the economist. Many are familiar with the popular book, Free to Choose by Milton Friedman, but virtually no one (outside of academia) know about Capitalism and Freedom (also by Friedman) which has almost the exact same message. Titles matter. One that focused on our problems, rather than the philosopher behind them, would likely be a more popular work. This book is great, however, and with the times we are in it could create a huge following. With it coming out just before the holiday season, I believe this could be the idea gift for the person looking for answers to today's biggest problems.

Kevin Price is Host of the Price of Business, the longest running show on AM 650 (M-F at 11 am) in Houston, Texas and on AOL Radio. His articles often appear in Chicago Sun Times, Reuters, USA Today, and other national media. Steve Moore of the Wall Street Journal calls Price the “best business talk show host in the country.” Find out why and visit his blog at www.BizPlusBlog.com and his show site at www.PriceofBusiness.com. You can also find Price on Strategy Room at FoxNews.com.

Sizing Up the Vote Against the Wall Street Bailout

I was trying to have a business lunch while watching the US House of Representatives vote regarding the Wall Street bailout on TV. It wasn't easy. On the one hand, I wanted it to pass. I grew up with two parents who were raised during the Great Depression and the life they lived has had an impression on how I look at things. Generally speaking, I have denounced the philosophy of fear and scarcity that I grew up with, but when they spoke about the problems with banks and the fears of the Stock Market, I had to take notice. On the other hand, passage of this bill would be the abandonment of moral hazard on Wall Street and further promote a financial system growing out of control.

I was a little surprised that the bill didn't make it. I actually expected it to do more than squeak by, let alone crash and burn. It demonstrated how deep the angst of the American voters is and how great the fear is among members of Congress towards those voters. We have an election that is less than six weeks and the more vulnerable a member of Congress, the less likely he or she was going to vote for it. Clearly, many members rightly feel like they are in the cross hair of angry voters.

Most Republicans were making more than a "protest vote." Some felt that $700 billion being voted on in such a short time frame didn't make sense. What could be hidden in a bill that virtually no one had enough time to thoroughly understand it? Most feared there could be plenty and it gave Secretary of the Treasury Henry Paulson carte blanche authority for bailing out other financial institutions (including some outside of this country). Most Republicans wanted a proposal that didn't have taxpayers bearing the lion's share of the proposal. They wanted a system more like the Federal Deposit Insurance Corporation, where the banks have to pay a premium to protect their accounts. They offered a list of other reforms that would have dramatically reduce the final costs of the multibillion dollar bailout by hundreds of billions of dollars.

The Republican proposals didn't even receive serious consideration because they didn't offer quick or simple solutions, would require more pain on Wall Street (and also Main Street) in order to achieve long term reform, and simply didn't have the "panacea effect" that investors are looking for. The bottom line is that Wall Street and Washington wants average Americans to do the hard work that our politicians and financial institutions should be responsible for.

In the end, I'm glad that the House Republicans put the breaks on this proposal. Certainly, we need some type of bill to get us out of this situation, but it should be done with deliberation and not at the expense of future generations.

Kevin Price articles frequently appear at ChicagoSunTimes.com, Reuters.com, USAToday.com, and other national media.

Kevin Price is Host of the Price of Business (M-F at 11 AM on CNN 650) and Publisher of the Houston Business Review. Hear the show live and online at HoustonBusinessShow.com. Visit the archive of past shows here.

US-China Trade War?

I'm a very strong advocate of free trade between nations and absolutely despise protectionism. Free trade encourages competition and forces companies to produce the best products at the best prices. Protectionism is anti-consumer, causing higher prices for consumers and is a form of corporate welfare and indirect taxation. Protectionism usually destroys more jobs than it creates, because so many domestic jobs depends on imports. With 4.4 percent unemployment, what are we protecting the US from? The typical argument for protectionism is the lost of jobs due to unfair trade practices, this certainly isn't the case now.

Furthermore, the reasons for protectionism never make sense. Historically, our economy is doing best when we have high trade deficits. Why? Because we are able to afford more goods -- including foreign -- when our economy is doing well. The period of our strongest trade surpluses was during the Great Depression, because the US couldn't afford to buy foreign goods. Trade deficits and prosperity or trade surpluses and depression? Tough choice. Instead of being seen as a negative, I actually see trade deficits as an economic positive, because of the other indicators associated with such.

I do, on the other had, have problems with China. China uses slave labor to create its goods (e.g., political prisoners) and it is a consistent violator of intellectual property rights. But it isn't in these areas that the US wants to punish China. Rather, it wants to put tariffs on goods that we know are subsidized by the Chinese governments. Let's see, China wants to help us get stuff cheaper? Isn't that the same as foreign aid? The US, meanwhile, wants to penalize our consumers who will suffer from the higher prices that the tariffs will carry. Furthermore, our struggling airplane builders that need cheap steel in order to compete internationally will probably have to layoff employees when the price of steel goes up after the tariffs go into effect. Trade wars don't happen in a vacuum, they happen in the real world with real consequences.

Furthermore, trade wars typically go both directions, with countries retaliating against each other, further negating any economic benefit to protectionism.

But protectionism also creates conflict. Frederic Bastiat (photo), the great economist, pointed out that "when goods do not cross borders, soldiers will." Many believe that the tariffs of the 1930s fueled the fires that lead to World War II.

Any question on what I feel about free trade? If the US is going to punish China for behaving badly, penalties need to relate to the specific areas of violation and not be some excuse to apply protectionist measures. The best ways to protect the US economy is to keep costs for consumers down, create a tax and regulatory environment in which our businesses can perform, and to make sure US businesses must compete in order to make the best products for the price These objectives are best pursued in an environment of free trade and not protectionism.