Tuesday, December 28, 2010

Tax cuts work better than public stimulus

Outstanding article in The Australian which also addresses the fallacy of the New Deal and how it actually did nothing but prolong the Depression (which I have argued for years) much as Obama's Stimulus as continued and deepened the Recession. (which I have also pointed out since day one)
Anne Henderson 
From: The Australian  
December 29, 2010 12:00

BARACK Obama recently forced through congress an extension of the Bush tax cuts for another two years, in spite of heated opposition from many Democrats.

The tax cuts repudiate the President's economic policy and signal a shift from government stimulus to tax relief as a means of pushing US economic recovery. Significant sections of the Democratic Party are far from happy, seeing the move as a betrayal.

US unemployment is now 9.8 per cent. With numbers of long-term unemployed multiplying, journalists such as Catherine Rampell of The New York Times report that economists still believe public works projects and direct employment programs are the fastest way of getting the long-term unemployed back into jobs. Many are calling for a new New Deal.

But is this really the answer? Or might tax relief in fact do better? There are many who argue that uncertainty for business around taxation and regulation with the Obama administration has forced investment to wait and see. In these times of government stimulus, as political strategist Joe Trippi puts it, there's still uncertainty that prices have not bottomed, leaving investors waiting.
Bloomberg columnist and widely read analyst Amity Shlaes published The Forgotten Man: A New History of the Great Depression in 2007. Risking derision for taking on America's economic sacred cow, Shlaes has argued the New Deal was a tragic mistake in social engineering.

She argues that presidents Herbert Hoover and Franklin D. Roosevelt should have allowed the market to recover rather than spend billions on government schemes. FDR's New Deal was the prime offender. Throughout the 1930s, the US stayed deep in economic depression. By 1937 it had developed a depression within a depression.

The New Deal is foreign territory to most Australians. Its experimentation, largesse of government spending, indifference to global partners or agreements and the, at times, autocratic stance by the president in decisions about finance is unimaginable in any successful Australian leader.

For Roosevelt, there seemed few limits. Such was the power and financial might of the US, allies such as France and Britain bent before him
But prices continued to stagnate. Shlaes writes that what FDR was doing was like "pouring glasses of water into the ocean in the hope of raising the sea level". Buyers also determine prices. Even as the US government was offering low interest loans to farmers at the rate of $US1m a day, it was also paying farmers not to farm. As gold hit a new high, Roosevelt put the US back on the gold standard. The depression remained, with unemployment at 23 per cent.

Roosevelt began massive projects under the Tennessee Valley Authority, constructing dams for hydro-electricity. Power to the people, literally, in a nation where private companies owned the utilities. Farmers and locals were resettled at great cost and much protest, and private utilities companies pursued until they could be bought up by the federal government.

The New Deal in the US during the 30s was America's flirtation with a command economy. It failed, and was saved only by the industrial expansion of war in the early 40s.
What became known as Keynesian economics is seen as the theory behind the New Deal. However, as the US unemployment figures remained stuck in the teens by 1937, Keynes wrote to Roosevelt saying he should abandon his war against private utilities companies: "It is a mistake to think businessmen are more immoral than politicians."
The New Deal forced income taxes on high earners to 79 per cent, introduced death duties and lowered tax-rate thresholds. It even delivered an undistributed profit tax as capital retreated in the face of unfair competition from government monopolies and over-regulated markets.

By 1937, taxing the "middleman" had become an FDR sport while new laws to tighten rules around monetary policy forced banks to keep more cash and cut back on loans. Business became expensive. Wages were forced up - in the first six months of 1936 by 11 per cent. August 1937 witnessed the greatest drop in industrial production ever recorded.

In stark contrast, Australia and Britain took a very different path. The British government continued debt reduction. Keynes's biographer Robert Skidelsky, in Interests and Obsessions, writes: "What is striking in retrospect is the shallowness of the British depression and the need for recovery from it in the absence of any deliberate fiscal stimulus. British unemployment, 2.9 million at its peak in 1932, was half Germany's and a sixth of America's at the same date."

In Australia, more damaged by heavy debt by the mid-20s, the story was also far better than in the US. By the time the Scullin government fell in 1931, opposition leader Joe Lyons had mounted a rallying cry that only he and the United Australia Party could be trusted to deliver "sound money". In government from 1932, Lyons fought the depression with modest relief works and government economies to bring budgets back into the black.
From 1934, figures showed that Australia had turned the depression around.

Unemployment had gone from 29 per cent in 1931 to 16 per cent by 1935.
Australians' belief in labour market flexibility and sound money should never be ignored and their distrust of utopias and social engineering has a lot going for it.

Anne Henderson is deputy director of The Sydney Institute


Anonymous said...

G'day Yank,

You got that right mate

Ticker said...

Ah heck Fred, sum daze I jist gudder dan uderans.

Chuck said...

I am not an economist (and I am happy for that) but I have wondered if we should have had any of these bailouts.

I wonder if in the long run we would have been better off taking our lumps and letting some of these companies fail. It would have been thinning the herd more than anything. The strong companies would have survived and been stronger, the weak ones that were poorly managed would have gone under.

General Motors would no longer be but Ford would have picked up a lot of their business. The rest would have been taken by foreign automakers. This seems bad but quite frankly Toyota is close to hiring more American workers than GM is. Most of GM's work is done overseas.

Living in Michigan I have followed GM for over 30 years now. They have been failing slowly for that long. They are a company that has made incompetent management an art form. Maybe they should be allowed to go down?

What the stimulus did in this case and a lot of others is rewarded incompetence and re-enforced the behavior.

Now we have companies and industries looking to the government for a bailout when they blow it.

GM Roper said...

The Keynesians still think they are right despite all of the evidence to the contrary.

Hard choices ahead and I fear that the Republicans, in their desire to be "liked" and being afraid of being tagged with such approbations as The Party of No, and Uncaring, Rich, Selfish, etc. aren't going to be up to the task.

Ticker said...

Chuck , yes we would have . If you look at the Recession of 1920, the government stayed out of it and the recovery was rapid. Here is what occurred:
he economic situation in 1920 was grim. By that year unemployment had jumped from 4 percent to nearly 12 percent, and GNP declined 17 percent. No wonder, then, that Secretary of Commerce Herbert Hoover—falsely characterized as a supporter of laissez-faire economics—urged President Harding to consider an array of interventions to turn the economy around. Hoover was ignored.

Instead of “fiscal stimulus,” Harding cut the government’s budget nearly in half between 1920 and 1922. The rest of Harding’s approach was equally laissez-faire. Tax rates were slashed for all income groups.
The national debt was reduced by one-third.
The Federal Reserve’s activity, moreover, was hardly noticeable. As one economic historian puts it, “Despite the severity of the contraction, the Fed did not move to use its powers to turn the money supply around and fight the contraction.”
By the late summer of 1921, signs of recovery were already visible. The following year, unemployment was back down to 6.7 percent and was only 2.4 percent by 1923.
I think you can see the difference between FDR's spend and spend and Obama's spend and spend and wanting to tax and spend more.

Debbie said...

I was against the bailouts from the beginning. Seems everything Obama has done has made things worse.

Then he comes out last week and says something like "it's time now to turn to the economy and jobs..." Really? Now? I shudder to think what his solutions might be now.

Right Truth

Ticker said...

Debbie, the same as all the rest of his solutions, throw money at it and if it survives tax it to death.

Gary01 said...

The problem with tax cuts,although we want to keep as much money as possible,after all we worked for it. Right.That alone will do nothing unless giant spending cuts are made.Our Government is and has been out of Control.To many unfunded mandates.fourteen trillion dollars in the hole and climbing daily.We cannot continue to kick the can down the road any longer.Drastic spending cuts in defense spending,presently at $800 billion per year.Social Security will have to be adjusted.Raise the ceiling on the max Deductions and also raise the Retirement age.Reagan did it once.This is a small one, but cut the Congressional Pensions,They should feel the pain just like everyone else.Re examine our trade policy.Seems to me we get the short hand every time.Its going to be a tough time ahead.Are we up to the task.If we share the sacrifice I think anything is possible.

Ticker said...

Welcome aboard Gary. I agree with you and that was the premise of my post today. Spending has to be cut and there are so many places that it can be cut. I have a list of government funded agencies and projects from A-Z and the number of them is astounding, each taking a slice of the pie.
I agree on defense spending and can suggest many areas in which it can be cut. I also would cut EPA, DOE Health care and that is just to start since all are Unconstitutional.
As I posted in reply to Chuck, the 20's recession which was worse than this one was ended quickly by cutting spending and taxes. That is the way to get it done.

Always On Watch said...

Along the same lines, see THIS.

Ticker said...

Great link AOW, as usual from you.
It again proves that throwing money at a perceived problem does not solve it. Let the market take it course and corrections will occur in due time and those that make it will be stronger for it.