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Obama Doomed to Repeat History   February 21st, 2009
Amazing... Those that don't learn history are doomed to repeat it       

 
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For months Obama and the Democrats have been comparing our current situation to the Great Depression. They've pointed to the actions of FDR as something to model our response on, as though the Great Depression is something we want to repeat. The only thing that had been missing to repeat the Great Depression was raising taxes. It seems Obama's about to do that, too.

http://www.foxnews.com/politics/first100days/2009/02/21/official-obama-aims-cut-budget-deficit-half

President Obama wants to cut the federal deficit in half by the end of his first term. He would try to achieve that mostly by scaling back Iraq war spending, raising taxes on the wealthiest Americans and making government run more efficiently.


Recall that President Hoover, in 1932, raised taxes on the wealthy in his attempts to balance the federal budget. This tax hike coincides with the worst year of the Great Depression in terms of GDP (dropped 13.4%) and that and the following year were the highest unemployment (23.6% in 1932 and 24.9% in 1933).

Now, interestingly, the following quote is the liberal interpretation of the Great Depression:

As you can see, Roosevelt began relatively modest deficit spending that arrested the slide of the economy and resulted in some astonishing growth numbers. (Roosevelt's average growth of 5.2 percent during the Great Depression is even higher than Reagan's 3.7 percent growth during his so-called "Seven Fat Years!") When 1936 saw a phenomenal record of 14 percent growth, Roosevelt eased back on the deficit spending, overly worried about balancing the budget. But this only caused the economy to slip back into a recession, as the above chart shows.


So the typical liberal interpretation is that Hoover's attempts to balance the budget by instituting protectionism and increasing taxes in 1932 made the depression worse. Then, according to liberals, the economy was recovering until FDR started worrying about the deficits in 1937 and, in 1938, effectively balanced the budget... a secondary recession began in 1938 and unemployment rates went back up.

Now if you're a liberal and subscribe to this interpretation of the Great Depression, it seems the main problems were that Hoover raised taxes in 1932 and FDR, too, became concerned about the deficits in 1937. Apparently, being fiscally responsible causes recessions and depressions. I don't agree with this understanding of the Great Depression, but it's the general understanding to which Keynesians (liberals) subscribe.

So if the liberals are to believe their own interpretation of history which says that a tax hike and a concern for the budget deficit led to a recession and a depression, why then would Obama be proposing a policy that raises taxes and is concerned about the budget deficit? If those were the mistakes of the Great Depression, why is Obama proposing to repeat them?

The whole idea Keynesian stimulus spending is for the government to spend more money than it collects. Deficit spending is the very definition of what they believe they need to be doing. In response to Republican criticism of excessive spending in the stimulus package, Obama replied, "What do you think a stimulus is? It's spending -- that's the whole point! Seriously." So Obama himself has affirmed that the whole idea to get the economy on track is spending. If that's the case, why is he suddenly expressing concern over the deficit? As he said, the whole point of Keynesian stimulus spending is to have a deficit!

Obama seems intent on using the Great Depression as a template of what we should do. Liberals look at the Great Depression as a supposed example of when their deficit spending policies supposedly worked. But we should look at the Great Depression as a decade of misery... misery that continued unabated despite a decade of deficit spending until a massive World War consumed the interest of the nation.

We need to be looking at what we can do differently so we don't repeat the Great Depression rather than doing the exact same things in the hopes that we do.

Closing thought: I'm pretty sure the stock market won't like hearing about higher taxes and the prospect of repeating the Great Depression. No-one can predict the stock market but if I were a betting man, I'd bet on a decline in the stock market on Monday. We'll see.

Update 2/23/2009: Well I certainly won't claim any amazing abilities in terms of my prediction. It didn't take a financial wizard or an economist to predict it. But I was right. The stock market dropped 250 points (3.4%) to an 11-year low... levels not seen since October 1997 . The news seems to be reporting that this is on concerns about the banks, but I think the market already knows the banks and economy have problems. In the beginning I don't think it was reasonable to blame Obama for the market. Now I do. I think the market is unnerved by the lack of specificity of Obama's policies, and then voting harshly when Obama's policies turn out to be a repetition of the Great Depression. If Obama wants to turn things around he just needs to do two things: Cut income taxes and suspend capital gains taxes. Things would turn around in a hurry.

Stated well in the article:

'The biggest thing I see here is the incredible pessimism,' Springer said. 'The government is doing a lousy job of alleviating fears.'


To the contrary, they've continually talked down the economy and compared it to the Great Depression. And now they seem intent on repeating the errors of the Great Depression. Of course the market is pessimistic.

Update 3/4/2009: A little less than two weeks after I wrote the article above, an op-ed piece in the mainstream media reached the same conclusion about Obama's Hoover-like tax increases:

The composition of the tax hikes in the 2010 budget is frighteningly similar to the Revenue Act of 1932, the much-maligned Hoover tax hikes that put the 'Great' in Great Depression by putting an enormous tax burden on millions of Americans, largely through excise taxes...

If we continue down a path of repeating the policies of the 1930s we risk a repeat of the same results. Let's hope Congress has the good sense to say no to these Hoover-style tax hikes.


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