Leave the New Deal in the History Books
Cut corporate taxes to zero and create real jobs.
MARK LEVEY
When Barack Obama takes office on Tuesday, his first order of business will be a stimulus package estimated to be close to $1 trillion, including $300 million in tax cuts and the largest new government spending program for infrastructure since Franklin Delano Roosevelt. Sages nod that replicating aspects of FDR's New Deal will help pull the country out of a recession. But the experience under FDR largely provides a cautionary tale.
Mr. Obama's policy plans are driven by the conventional economic wisdom that the New Deal economic programs ended the Great Depression. Not so. In fact, thanks to New Deal policies and programs, the U.S. economy faltered for years longer than it might otherwise have done.
President Roosevelt came to office much as Barack Obama will, shouldering an economic crisis that began under his predecessor. In 1933, Roosevelt's first year, unemployment hit nearly 25%, as people lost jobs and homes in towns across the country. Believing that government played a key role in restarting growth, FDR, within his first 100 days as president, created an alphabet soup of new agencies that mandated actions or controlled public spending and impacted private capital flow within the U.S. economy.
At first, it seemed to be working. After four years of FDR's policies, joblessness declined to 14.3% -- still very high but heading in the right direction. Then things turned for worse again: By the fall of 1937, the U.S. entered a secondary depression and unemployment began to rise, reaching 19% in 1938.
By 1939 Roosevelt's own Treasury secretary, Henry Morgenthau, had realized that the New Deal economic policies had failed. "We have tried spending money," Morgenthau wrote in his diary. "We are spending more than we have ever spent before and it does not work. . . . After eight years of this Administration we have just as much unemployment as when we started. . . . And an enormous debt to boot!"
The problem was that neither Roosevelt nor President Herbert Hoover before him grasped the essential nature of the crisis, which was not the stock-market crash, but global deflation. At the end of the roaring '20s, an overhang of intergovernmental war debt from World War I, coupled with falling commodity prices and a currency crisis, had started the decline. Weak credit structures and European banks hurt by wartime inflation worsened it. When the Austrian Creditanstalt Bank failed, it ignited a global banking crisis that slashed across the international financial system cutting down everything in its path. Deflation went into full howl.
The same perils are now confronting President-elect Barack Obama, as the risk of deflation casts a long shadow over the economy. Federal Reserve Chairman Ben Bernanke and Treasury Secretary Henry Paulson have been correctly focused on shoring up financial institutions to prevent a collapse of the financial system, and stave off a severe decline in the general price level. If that were to occur, the unspoken fear has been that the U.S. and global economy could go into a deflationary death spiral that would cause the collapse of the international financial system.
As a short-term matter, the moves of the Fed and other central banks have been correct, but in the long term a return to growth will depend on dynamic job creation by American business -- not the U.S. government. Under a two-year plan designed to create three million to four million jobs, Mr. Obama's plan would have the federal government begin distributing funds for public-works projects carried out by the states. With government already spending 20% of GDP, federal government, not private enterprise, will become the growth industry.
The effect of these policies, like FDR's, will be to lengthen the pain.
Early on, Roosevelt's economic thinking was that laissez-faire competition drove prices and wages down, resulting in unemployment, which in turn collapsed demand for goods and services. To remedy this, his administration passed laws such as the National Industrial Recovery Act (NIRA) that encouraged business to collude and raise prices without fear of antitrust prosecution. The hope was that this would allow business to raise wages.
By the time NIRA was found unconstitutional a few years later, the damage had already been done. For example, the Department of the Interior complained that over two years it had received 260 bids from different steel companies that were identical to the penny and 50% higher than foreign bids. The policy had put chains on every normal free-market instinct and price feedback mechanism needed to restore economic growth. Roosevelt himself rued the decision in the late 1930s as a secondary depression was gripping the economy. "The disappearance of price competition," he said, "is one of the primary causes of the difficulties."
In addition to New Deal spending programs, a series of new taxes were introduced that crushed the innovation, risk taking, and growth plans of entrepreneurs, corporations and investors. From 1930 to 1940, the top marginal income-tax rate rose to 79% from 25% while the corporate income-tax rate doubled to 24% from 12%. In addition, Roosevelt tacked on an excess profits tax and undistributed profits tax. He imposed an excise tax on dividends. Even the new Social Security payroll tax added 2%.
As a result, the New Deal forced the allocation of money away from the private sector. As economist Henry Hazlitt wrote back in 1946, New Deal programs prevented the creation of the types of jobs which have the multiplier effect of successful businesses. Creating "work" prevented innovation and new jobs that would create other jobs.
The quickest way to strengthen the credit system and begin the end of this crisis is to get money into the economy for true job creation, and not into government work programs. The way to do this is to slash taxes. The U.S. corporate tax rate, currently the highest in the world, should be cut to 0% (corporate income would still be taxed, of course, when distributed to shareholders as dividends). The capital-gains tax should be cut further.
The positive impact on corporate-credit markets, the stock market, the attractiveness of the U.S. to foreign investors, and the willingness to take business risk and create new jobs would be immediate. Capital-gains tax collections would rise. Capital flows would be in the hands of those who are driven to build businesses and permanent jobs efficiently instead of pushing that capital through a government pipeline with endless amounts of friction. If the U.S. is to lead the international economic community out of this crisis, this is the place to start.
Mr. Obama will come to office next week with plenty of political capital and the faith of a majority of Americans that he can help pull the country out of its economic woes. As he takes over the reins, his success will be judged not on rhetoric but on the numbers his policies can generate. The best thing he can do is leave the New Deal in the history books.
Mr. Levey is senior managing director at Lotsoff Capital Management in Chicago.
FairTax would stimulate growth
FairTax would stimulate growth in economy
STEVE KINGThe federal government is bloated, inefficient and spends too much of your hard-earned money. Not coincidentally, the federal government is also the largest employer in America. Now President-elect Barack Obama and House Speaker Nancy Pelosi want more taxpayer dollars to pay for additional, unneeded government workers.
Over the past few weeks, Obama unveiled details of his much-discussed “stimulus package.#” Initially, his plan would have created 600,000 new government jobs, potentially increasing the number of federal employees by as much as 33 percent. News of this increase in government workers reached skeptical taxpayers, and Obama has since backtracked and said the number will be lower. Obama also pledges to create millions of new private sector jobs, but how many will be taxpayer funded?
The American economy needs a shot in the arm, but the answer is not a legion of new government workers. New government jobs will only add to the waste, fraud and abuse coming out of Washington, D.C., and fail to provide a true economic stimulus.
Just as with the recent bailouts of the automotive and financial services industries, Obama is looking for a quick and highly visible fiscal fix. The Obama team would be well-served to examine a recent example of a similar economic philosophy that failed.
In the 1990s, Japan faced problems similar to those currently ailing the American economy. A struggling stock market. Bank failures. Credit problems. Public cries for government handouts and bailouts. A ballooning national debt.
Japanese policymakers believed they could rescue their economy by creating new government jobs and large infrastructure spending. Years and years of increased government spending, high taxes, slashed interest rates and bailouts only intensified Japan’s economic recession.
Economic plans like Japan#’s from the 1990s and the original New Deal in the 1930s produce a sugar high that eventually wears off. The lesson learned from these economic calamities is that an increase in government jobs and federal spending does not lead to economic recovery.
Rather than follow this failed blueprint, the president-elect should look to cut taxes and reduce government spending to encourage business growth and positive, long-term economic performance. A national sales tax, like the FairTax, would grow the private sector and create new, good-paying jobs which would stimulate long-term growth in the American economy.
The FairTax offers American businesses and taxpayers a complete departure from the way we've been taxed in the past. Rather than taxing production, the FairTax taxes consumption.
Implementing the FairTax would immediately eliminate tax barriers that presently hurt American companies and favor production abroad over production here in America. Right now, when American companies export their products overseas, they must pay payroll taxes, embedded taxes and compliance costs to the IRS, and then compete directly with foreign manufacturers who do not pay these taxes. Our current income tax system puts American products at a disadvantage on the world market and makes American products more expensive than their competitors in foreign markets With the FairTax, American producers will no longer be forced to pass on embedded costs to foreign customers.
The FairTax will give American producers an edge here at home as well. A tax structure that rewards foreign products over those made in America is one of the main reasons why the Big Three struggles to compete with foreign importers.
Under the FairTax, cars made in America will enjoy a 28 percent marketing advantage. A Ford that currently costs $30,000 would sell to American consumers for $30,390, a slightly higher price, but Americans would be pocketing their entire paycheck under the FairTax. The new price of the Ford would be set through competition after producers subtract 22 percent of the current price - the cost of complying with the current tax code - and then add in the FairTax’s 23 percent embedded sales tax.
The price of a $30,000 import, with none of that price accounting for compliance with our tax code, would rise to $38,961 under the FairTax. As this example shows, the Big Three and other American manufacturers would not have to operate under a tax code inhibiting American production.
The American economy is hurting for real economic reform that produces long-term results. The fiscal path chosen by President-elect Obama will determine whether the current recession is brief or elongated. Rather than turning to gimmicks like more government workers, the president-elect should pursue a simple but effective economic solution: the FairTax.
Republican Steve King represents Iowa's 5th District in the U.S. House of Representatives.
McWilliams: Irlanda debe abandonar el euro si no recibe ayuda de la UE
ESPAÑA, GRECIA Y PORTUGAL PODRÍAN SUSPENDER PAGOS
McWilliams: Irlanda debe abandonar el euro si no recibe ayuda de la UE
Un destacado economista irlandés, ex funcionario del Banco Central de Irlanda, ha instado al Gobierno de Dublín a amenazar a Europa con sacar a Irlanda de la zona del euro si no recibe ayuda de sus socios. Irlanda podría suspender pagos, al igual que "España, Grecia e Italia".
"Es la guerra: los países tienen que defenderse", dijo David McWilliams, ex funcionario del banco central irlandés, citado este lunes por el diario británico The Daily Telegraph. "Es esencial que vayamos a Europa y expliquemos que tenemos un problema grave. Y que digamos: o nos declaramos en suspensión de pagos o nos salimos de Europa", afirmó McWilliams en declaraciones a la emisora RTE."Si Irlanda sigue por este camino, que está muy cerca de la suspensión de pagos, toda Europa se verá afectada muy negativamente. Podría ocurrirles lo mismo a España, a Italia o a Grecia", pronosticó.
McWilliams, ex miembro de la directiva del banco suizo UBS y ahora un destacado comentarista radiofónico, ha violado un tabú al amenazar con una crisis de la Unión Monetaria Europea, que podría desencadenar una reacción en cadena por los países del Mediterráneo, comenta el periódico británico, informa Efe.
Sus declaraciones, dice el Daily Telegraph, reflejan la creciente irritación de Dublín por la manera en que se ha tratado al país después de que sus ciudadanos votasen contra el Tratado de Lisboa. "La existencia de una moneda única implica obligaciones y responsabilidades de una parte y otra. La idea de que Alemania y Francia pueden dejarnos en la estacada, como se ha venido diciendo en los últimos días, no debería aceptarse sin más", agregó.
Sin embargo, los irlandeses no están a favor de la salida del país del euro como demuestra un sondeo publicado este domingo por el Irish Independent, según el cual un 97% de los ciudadanos es contrario a esa posibilidad.
Tres de cada cuatro entrevistados se muestran a favor de un gobierno de unidad nacional para intentar sacar a Irlanda de la crisis, idea propuesta, entre otros, por el ex consejero delegado del grupo Unilever Niall Fitzgerald. Según McWilliams, el euro está obstaculizando la economía irlandesa: "La única forma que tenemos de ganar esta guerra es convirtiéndonos de nuevo en un país exportador".
"Podemos seguir haciendo como hasta ahora: es decir, reducir salarios, aumentar el paro y sufrir una larga contracción económica", dijo McWilliams. "El otro modelo, agregó, es imitar a los británicos, que están dejando caer la libra esterlina, es decir que echan a otros el problema. Pero nosotros no podemos porque somos miembros del euro", agregó el experto. "Estamos pagando doble por el euro: primero, con el tipo de cambio y segundo, con los intereses", se quejó McWilliams, según el cual con la actual política.
Stimulating Consumption Won’t Help Economy
by Sheldon Richman
Many politicians, economists, and pundits — under the influence of Keynesian “economics” — worry that Barack Obama’s stimulus package won’t be stimulative enough because too much of the money might go to people who won’t spend it.
Typical is this recent editorial paragraph from the New York Times about the tax-cut component of Obama’s plan:
“The proposed tax break — up to $500 for individuals and $1,000 for families — makes good sense for low- and middle-income Americans, because the money is likely to be spent quickly, thus boosting demand in a contracting economy. But higher up the income ladder — a couple making $200,000 a year is in the top 9 percent of households — tax cuts are likelier to be saved than spent, providing relatively little stimulus.”
The Times here, like so many others, attributes our economic problems to insufficient demand. We aren’t consuming enough, either because we don’t have the money to spend or because we just don’t want to spend it. Since we are stuck in this stubborn situation, so goes the Keynesian argument, the government must increase aggregate demand either by spending money itself or by putting money in private hands. But the problem, as the Times sees it, is that some of those private hands will grasp the money and won’t let go. They will — O Horror! — save it. Or, if you can imagine such a thing, they might pay down debt.
Anyone with common sense and innocent of Keynes’s crackpot views will wonder what the fuss is. Saving and paying off debt are generally seen as wise for individuals, so it makes no sense that they are bad for society as a whole. Yet that is what we our “leaders” expect us to believe.
Ask yourself: can you consume your way to prosperity? Of course not. So how can a society do so? Greater consumption is the effect not the cause of economic growth, yet this is so contrary to conventional wisdom that you can read newspapers and watch news programs for months without seeing this truth expressed.
To say the recession was caused by diminished demand is to say that the recession was caused by the recession. The fact is, people are holding on to their cash because the economy is in recession and they are uncertain about the future. As we’ll see, it is exactly under these circumstances that people should be saving.
The idea that consumption needs to be stimulated is ridiculous on its face. Consumption is fun. It’s saving that takes effort. Not long ago the American people were scolded for consuming too much and saving too little. Now it’s the opposite. Will the scolds please make up their minds!
As noted, falling consumption is not the cause but rather the effect of recessions. So government-boosted demand, made possible by deficit spending and expansion of money and credit, can’t be the solution. Recessions follow ill-advised government policies that channel investment into unsustainable projects, that is, projects that conflict with economic reality, such as the government-created housing boom, which misdirected billions of dollars into finance and construction. The recession is the process of correcting the errors that government policy encouraged. This correction involves the liquidation of inappropriate projects and therefore unemployment. Resources have to be redirected to projects consistent with economic reality. But resources are not malleable Play-Doh. They are specific machines, tools, and materials in particular places whose adaptation to new projects (when possible) is not costless. Workers may need to be trained for new jobs.
This process takes time and money, that is, investment. Investment requires saving. And saving requires deferred consumption. So this is a good time for people to save.
Saving is a form of spending. When a person abstains from consuming, he makes his money available to entrepreneurs who will buy capital goods and materials and hire workers. Saving is not inimical to a thriving economy. Quite the opposite.
So why doesn’t the recession end quickly? The process takes time, but government also slows it down by creating uncertainty about what new meddling it will engage in. That’s what is happening now. The best thing the politicians can do is lighten the burden of government. Now!
Sheldon Richman is senior fellow at The Future of Freedom Foundation, author of Tethered Citizens: Time to Repeal the Welfare State, and editor of The Freeman magazine.Preparing For The Rebound
Preparing For The Rebound
Ed SperlingCompanies need to start figuring out now where they want to be when the recession ends.
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| Ed Sperling |
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The hot topic in Silicon Valley these days isn't about the next big thing. It isn't even who's going to run Apple or how much money companies can save by going green. It's about where the bottom is for the current economic downturn.
There's good reason for this kind of speculation, too. The word across the tech industry is that once we reach bottom and begin climbing back, there's going to be a scramble for acquisitions because of the amazingly affordable prices the drop in stock will have provided. The market cap of some companies has dipped lower over the past month than the total cash reserves on hand, meaning some companies have been trading on a negative cash basis. The cash they have stockpiled is worth more than the total company, so an acquisition in that case actually could be profitable to the company that buys them.
There are all sorts of caveats, of course. A company has to be willing to be acquired, and there are costs associated with acquisitions, such as legal fees. But it's bargain-hunting time across the tech industry, and a lot of companies with cash--tech companies, venture capitalists and private equity investors--are now figuring out what they want to acquire and when. Some of this capital may come from non-U.S. investors or companies looking to extend their reach into more established markets.
All of this has tech executives talking about what needs to be done and how the landscape will change. One of the more thought-provoking comments I've heard recently came from Rajeev Madhavan, CEO of Magma Design Automation
When companies come out of the downturn, they may have to do more to differentiate themselves than when they went into it. As Jim Hogan, longtime Silicon Valley venture capitalist, put it, "We have to think differently." Companies with cash already have begun looking at ways to redefine themselves so they stand out from the pack.
For CIOs, this is a chance to rethink what their organizations will look like after the downturn ends, even if they don't have the budget to fund all the changes up front. Will they centralize data or distribute it? Will they ditch PCs and have their employees use smartphones for computing? And probably even more importantly, do they have a strategy going forward that is flexible enough to incorporate changes they may not expect?
Each CIO needs a clear vision of where his company is going and how to best implement its needs, while simultaneously cleaning up the clutter and mess that decades of outdated technology have left behind. Those are tough challenges to meet, but the companies that will be most competitive coming out of the downturn will be those that are developing a plan in the midst of it.
Given all of that, it's good to know where the bottom is in this financial mess, because it dictates just how much time you have left in your planning cycle.
Russia Troublemaker
Russia Will Be a Troublemaker in 2009
By Ian BremmerThe world enters 2009 with Russia in play in a way it hasn't seen in decades. The relevant comparison isn't 1998, when the Russians engaged in default and devaluation but remained within the bounds of their existing political and economic system (as Lenin said, two steps forward, one step back). The history to consider is 1989--as key aspects of the Russian system could change for the worse.
Russian Prime Minister Vladimir Putin certainly isn't a risk taker. The carefully managed "transition" to President Dmitry Medvedev and the extension of presidential terms to six years underscore that Putin prefers to leave as little as possible to chance. That's more ominously obvious in the recent tightening of laws on treason.
With oil prices well below what the Russians can afford, but Putin's (& Medvedev's) popularity still high, the initial moves have been to consolidate power. Yet despite no organized political opposition to speak of, we're still starting to see social unrest. For the first time in years, there have been widespread demonstrations in Russia--in 30 cities, following the imposition of import duties on used cars. We're likely to see much more turbulence in 2009, as factories providing employment for entire cities are shuttered. That's a sort of suffering that Russians are certainly used to, but only in the context of a very different kind of political system.
Where could this go? There will be near-zero state tolerance for dissent. And the strongest level of anti-Americanism (and, in many quarters, of broader xenophobia) of any significant emerging market in the world, creates the potential to make security a serious concern--and possibly lead to unrest that disrupts supply chains. The Obama administration is unlikely to quietly tolerate a crackdown, and will put plenty of focus on human rights and democracy. So American and some European nations' relations with Russia will continue to deteriorate over the course of 2009 (with the Germans, who are more dependent on the Russians economically and, to some extent, politically, playing the role of wild card).
Support within the Kremlin for better relations with the west will also diminish. The real question is how far that actually goes. So does Deputy Prime Minister Alexei Kudrin remain strong, get scapegoated, or actually get fired? Are western-leaning oligarchs brought under tighter scrutiny and economic control...or forced out completely? And, most fundamentally, to what degree are the Russians prepared to go back to soviet-style authoritarianism? At worst, it's conceivable that western organizations of all sorts (media, NGOs, and corporates) will be, to varying degrees, seen as increasingly unwelcome within the country.
I don't expect such serious risks on the foreign-policy side. Russia has achieved its principal objectives in Georgia, at least for now, and we'll see less direct conflict over NATO enlargement and missile defense as the west takes a breath and reassesses both issues. Nor will we see Russian tanks in Ukraine. The Russians are too connected into the Ukrainian economy and have too much to lose (though Russian minorities in Ukraine--a majority in Crimea--could see some violence and make headlines. More on that later.) Nevertheless, Russia will be a troublemaker in international relations--if a more unpredictable and opportunistic one than in 2008. As the latest gas cutoff to Ukraine shows, the Kremlin puts realpolitik and national interests first. "market discipline" in the aftermath of Georgia did not prevent Moscow from again turning off the tap to Ukraine, and more instances of bare-knuckles foreign policy are likely in 2009.
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