An argument I think destroys the Conservative approach to the Great Recession

Great Debates
1

The only ideas I hear from Mitt Romney and other Conservatives when it comes to getting out of the Great Recession are reduce taxes and reduce regulation.

OK, let’s go back to 1929, before the Great Depression began:

• The lowest income tax rate was 0.375%, which applied to $0-$4,000. Cite. That is up to about $54,000 in today’s money. Cite. The top marginal rate was 24%, which applied to incomes over $100,000. The rate on capital gains was 12.5%. Cite. $100,000 in 1929 was worth $1.3 million in today’s money.Cite. Sales taxes did not exist until 1930. Cite. So we had minimal taxes.

• We had minimal regulation of business, especially Wall Street. Wikipedia:

Before the Wall Street Crash of 1929, there was little regulation of securities in the United States at the Federal level. The crash spurred the Congress to hold hearings, known as the Pecora Commission, after Ferdinand Pecora.

The argument: Despite the fact that we had minimal taxes and regulation in 1929 and before, the Great Depression still happened, not to mention the innumerable panics and recessions before the Great Depression. If what Conservatives consider to be ideal policy could not prevent the Great Depression, how could it have a positive effect on the Great Recession?

Let’s put it another way. Take Mitt Romney back to early 1930 and ask him how to handle the worsening economic crisis. Would could he say? “Less taxes and regulation.” Oh wait, Mitt, we have minimal taxes and zero regulation right now. Any other ideas?

I think this argument is instantly fatal to the approach Conservatives would take to the Great Recession. Moreover, I think it is fatal to the line Conservatives take when the economy is not in the crapper, which is the same thing: lower taxes, decrease regulation.

One exceedingly lame objection that could be raised is that taxes and regulation are so bad now that, even if it we grant that minimizing them is not ideal, they nevertheless need to be reduced in order to spur innovation, job creation, blah blah. To this objection I have two counters:

• As is often noted (and indeed given as the main argument against the above-mentioned Conservative policy), we’ve had excellent economic growth even when marginal tax rates were higher, such as in the 1950s and 1960s.

• I’ve never heard a major Republican candidate say what s/he thinks the tax rates should be under our current system. Sure, they will throw out reduction plans that they consider to be within the realm of the possible, but I’ve never heard one say, “Here is the lowest rate, below which we should not go.” Rather, whatever the rates happens to be right now, the ideal rates should be lower. This isn’t policy; this is schtick.

Conservatives have no new ideas for how to get out of the Great Recession, or, for that matter, how to run the economy. Personally, I am tired of the same old rhetoric.

Thoughts?

2

Forget it, Aeschines, it’s Conservatown. This is reason 10,000 why the conservative line is bullshit. They weren’t listening to the first 9,999 reasons, and they won’t listen to this one either. People who didn’t arrive at their conclusions rationally can’t be persuaded to change their minds by rational argument.

3

The Republican base is more interested in schtick than policy.

4

Much as I think the general Republican approach to economics these days is criminally stupid, I don’t know if the world of 1929 and the world of today are similar enough to try to use the comparison to meaningfully prove anything.

5

Similar or not, history today begins with World War 2. Anything further back and you might as well be talking about ancient Egypt.

6

What would the Democrat/liberal response to the Great Depression would have been? Raise taxes on the rich, huge increases in government spending spent it on their favored constituencies, and massive regulation of economic activities. That is actually what happened. Top tax rates were raised to 75%, federal spending doubled, the alphabet soup of agencies were created to regulate parts of the economy, the NRA was created which regulated practically every part of the economy. The result of all this was the longest Depression in US history. The economy did not get back to trend until the end of WW2.
Contrast this with the Depression of 1920 when the response of the government was practically nothing. The economy returned to trend after that depression in less than two years.
The great Depression did not have much to do with federal income tax rates or regulations because they were so small a part of the economy. However, the Smoot Hawley tariff act raised taxes on imported goods and the resultant tariff war was very bad for American farmers. Banks were not regulated much by the federal government but they were regulated by states. The branch banking laws were one of the primary reasons so many banks in the US went bust. Canada which did not have branch banking laws saw almost no bank failures during the great depression.
The economic conditions surronding the great depression were much different than conditions today. The US was on the gold standard. France was hoarding gold which led to massive deflation in all the industrialized countries. This deflation was the cause of the Great Depression and fixing it through tax break and deregulation would have made no sense. The deflation and Hoover’s high wage policies caused massive unemployment. What the US economy needed was to go off the gold standard as soon as possible.

7

Which is another thing Republicans want to bring back. It used to be that the Republican platform was to go back to the golden age of the 50’s, now it’s to go back to the guilded age of the 1890’s complete with robber barons, union busters and sweat shops.

8

This argument fails for two reasons.

First, Hoover was president until March 1933. So you had more than your “two years” in which taxes and regulation were still quite low and the economy could presumably have righted itself.

Second, the Great Depression was worldwide, and not all countries had the same policies, yet the vast majority of countries remained in the doldrums until, as you noted, after WWII. Fascist Germany could be cited as a counter example, yet Germany was engaging in debt spending, i.e., what Keynes would recommend anyway. Per Wikipedia:

Furthermore, the spending rate of Hitler was far greater than the growth of the economy. In 1934 Hjalmar Schacht, the Reich Minister of Economics, introduced the Mefo bills, allowing Hitler to spend money on rearming without giving the big businesses money, therefore gradually getting Germany into more and more debt. Between 1933 and 1939, the total revenue was 62 billion marks whereas expenditure (at times made up to 60% by rearmament costs) exceeded 101 billion, thus creating a huge deficit and national debt (reaching 38 billion mark in 1939) coinciding with the Kristallnacht and intensified persecutions of Jews and the break-out of the war.

BTW, I am not saying that Liberals, then or now, have a solid program to prevent or cure recessions or depressions. I don’t think they do. I think we have fundamental problems with the legacy economic system (aka “capitalism,” a misnomer in my view, for various reasons) that we have yet to solve. I think the New Deal was ultimately not successful in “curing” the Depression but it did establish the regulation needed to curb the worst abuses of Wall Street and the social safety net needed to ameliorate the suffering encountered in a depression/recession and help maintain a minimal amount of consumption and thus raise the bottom the economy could sink to. Thus, the New Deal was definitely a good thing, but not enough.

We agree that the gold standard was a bad thing. I am not saying that low taxes caused the Great Depression. I do think that minimal regulation of Wall Street played a big role in the nature and timing of the Crash and thus the Depression. I have heard about the causes you cite (well, the tariff and the gold standard), and they played a role, no doubt. It is entirely possible that adequate regulation of Wall Street could not have prevented the depression/recession of 1929 and 2008. I think the fundamentals of our economic system make panics, depressions, and recessions inevitable.

All that said, my argument here is that Conservatives don’t have the answer. I am not at the same time arguing that Liberals have the answer. The difference between the two is that Conservatives act as though they have the answer, whereas Liberals do not exhibit such confidence, and the Liberal approach is many steps further toward what is needed, albeit still grossly inadequate.

9

[QUOTE=Aeschines]
All that said, my argument here is that Conservatives don’t have the answer. I am not at the same time arguing that Liberals have the answer. The difference between the two is that Conservatives act as though they have the answer, whereas Liberals do not exhibit such confidence, and the Liberal approach is many steps further toward what is needed, albeit still grossly inadequate.
[/QUOTE]

Both sides definitely think they have the answer. If you think Liberals don’t ‘exhibit such confidence’ then I’m unsure where you are drawing that conclusion from, since they seem quite vehement about how raising taxes on The Rich, and raising spending to spend our way out of the recession plus more regulation and emphasis on green energy initiatives (and of course their assertion that the stimulus was too small and that’s why we are still in a recession…if only we’d spent double all our troubles would be over, etc etc). That’s the thing with political rhetoric…it’s, you know, rhetoric. It sounds good on the surface, but if you want to look at comparisons between what is happening now and what happened during the Great Depression then it’s fairly easy to point out, as puddleglum did earlier, how that works both ways, and some of the things that Liberals were calling for were actually tried in the GD…with pretty tepid results. Personally I don’t think that there are a lot of comparisons you can make between the GD and what’s happening today, including what did or didn’t work in the GD (even assuming you could get a consensus on what actually did or didn’t work), so it’s futile to even try. It was a totally different political and economic environment, the problems were totally different, and the solutions that were tried and succeeded or failed would be impossible to implement today, and would be under much heavier scrutiny…as well as much more voracious partisan wrangling.

You are right that part of the problem we faced in the US during the GD was due to the fact that everyone was having fiscal problems then (same can be said today of course, with all the uncertainty over the EU and China markedly slowing down economically, etc etc). One of the huge issues was the US turn towards isolationism, protectionism of jobs and a turn inward of trade…a mistake we will hopefully not make again, though both Liberals AND Conservatives can be idiots on this score, as all the folks crying about outsourcing and offshoring and making calls to increase tariffs and trade protection show.

Personally, it doesn’t matter if Conservatives have all the answers or if Liberals do, because in our system, the way it actually works is you have to compromise with the other side. Neither Liberals OR Conservatives have a great enough majority to push through their economic plans, so what you get is pretty much half baked plans that the other side tries it’s best to water down, compromise or obstruct. Which means that the reality is that we don’t know if the Conservative approach would or wouldn’t work…or the Liberal approach for that matter. Because what we end up with is a mishmash, at the BEST of times. In THESE times though, with the level of political rhetoric and animosity we get a whole lot of nothing, as both sides do their damnest to block or obstruct everything the other side tries, and no one wants to compromise.

10

Obama disagrees with you:
Obama Administration Moves Plan To Ax Hundreds Of Regulations
Obama outlines tax breaks to help small companies

11

Cool. The idea that Liberals love taxes and regulations for their own sake is a canard. Minimizing taxes on the poor and middle class is ideal. I think we need higher taxes on the rich not so much for revenue purposes but to prevent the accumulation of capital in too few hands and the building of dynasties (i.e., the rich gaming the system for themselves). Any regulations we can eliminate without harm, we should.

That said, these two things aren’t going to get us out of the recession or prevent future recessions.

12

I see Liberals as advancing such things as good policy, but they aren’t necessarily saying that that’s enough to get us out of the recession. But your point is taken. Both sides will hint, if not say explicitly, hey, here’s a probably really big step in the right direction!

I think the basic problem is the same, and it lies with a fault in our legacy economic system. Marx pointed out that the system eventually needs to destroy capital, since excess capital breaks the system. Why is this? (And this is my thought and not necessarily Marx’s.) Because the system only works when it produces a certain return on investment, and those returns are fundamentally easier to achieve when the system is starting from zero. A good example is post-War Japan. Bombed to kingdom come with very little in the way of capital but lots of hard workers. But this was perfect, since lots of capital was required to rebuild the system, and you could get excellent returns on investment. Come the 1989 when the whole system is built back up again and–whoops!–the bubble bursts, and economic malaise sets in–malaise from which the mature Japanese economy has never recovered. An economy should be doing better once production and lifestyle capital are in place, but uh uh.

1929 and 2008 are very similar in my view. Overleveraged economies with unreasonable, in fact impossible, expectations of returns. In our legacy system, once the returns fail to come in, it sends a shockwave through the system as everyone duns everyone, with no one able to pay. We get asset deflation, a liquidity crisis, and an “agreement not to produce”–that’s my term for everyone sitting on their ass instead of producing and mutually trading goods and services.

In theory, the government can bring the system back to life through stimulus spending, but by the time that happens, a lot of damage has been done. A lot of productive people have already been fired from their jobs, a lot of businesses have been shut down, a lot of homes have been foreclosed on. All of this displacement is extremely destructive to the economy and very difficult to reverse. It’s the difference between going to the hospital after a car wreck and not getting in a wreck in the first place.

It’s great when mature economies trade with each other, which more or less would have been the case at the time of the GD. It’s not so great when we have a race to the bottom based on cheap Chinese labor. China should have grown its economy through building up internal production and consumption. There was simply no reason to hollow out our manufacturing base and send it all to China.

You are certainly correct about this. The thing is, history isn’t going to cut us any slack because we are the US of A. Empires fall because of the kind of inertia we are currently exemplifying. We are headed for the dustbin if we can’t get our act together.

13

BTW, I think Marx was great at pointing out problems in the legacy economy. I don’t think he came up with viable solutions. I’m not a Marxist.

14

First of all, depressions are the natural result of the popping of bubbles. What this means is this:
-whenever you have a prolonged economic expansion (i.e.a “bubble”), the economy adjusts in a way as to anticipate the bubble continuing. This is why people thought their houses would continue to appreciate forever
-when the bubble pops, banks and people react by cutting spending and lending
-the unemployment rate jumps, and people spend less…this results in depression
-in depression, firms go bankrupt, and debts become uncollectable
The “recovery” comes when enough debt is written off, such that firms can again begin to hire, and demand recovers.
In the case of the 1929-1941 depression, the low point was reached in 1932-33. However, Roosevelt started monkeying around, and started his “New Deal”-this led to a second depression (1937-38). Obama is following the same path-instead of allowing bankruptcy to allow GM and Chrysler to break union contracts, his “rescue” froze the same inefficiencies and bad business practices to stay in place-that is why GM is floundering again, despite receiving over $55 billion in taxpayer funds. Moreover, the massive size of the Federal Government (over 122,000 employees added in the past 4 years) acts as a massive drag upon the economy. Meanwhile, his monetary policies (effectively zero interest to the big banks) has led to reckless investment schemes on Wall Street, and record losses. Zero interest rates have also caused a massive inflow of capital into China-which is getting set for a massive RE bust (think “Ghost Cities”).
Effectively, Obama has combined the worst features of the “New Deal” with his own brand of crony capitalism (think Solyndra); which will guarantee another 4 years of economic stagnation and double digit unemployment. And when the Chinese RE bubble pops, all bets are ff.

15

You are laboring under three misconceptions. The first is that Hoover did not raise taxes or increase regulations. Hoover twice raised taxes first in 1930 with the Smoot Hawley tariff increase and then in 1932 with an income tax hike. Furthermore federal spending increased by 50% during Hoover’s term and increased the deficits. Deficits lead to tax hikes so everyone knew they were coming. Hoover also had a high wage policy, he met with many industrialists and convinced them he could keep unions off their backs if they agreed to keep wages high. He thought keeping wages high would lead to more consumer spending by workers and a restoration of the economy that way.
Secondly the stock market crash did not cause the Great Depression it was a symptom. Massive deflation caused by France’s gold hoarding weakened the economy. This weakened economy could not support a high valued stock market and the market crashed. It was one of the first signs of the Great Depression but it was not a cause, it was a symptom. When I get a cold the first sign is usually a sore throat but my sore throats do not cause colds, the same way the stock market crash did not cause the Great Depression. It could not have sunk the whole economy because there just was not enough money invested and as you point out every nation was affected and there was no way for the German economy to be sunk by the american stock market crashing.
The last point is that just because low taxes and low regulations did not prevent the Great Depression does not mean they are not good for the economy. If the value of the currency falls by a third in a very short period of time, there is almost nothing tax policy or regulatory policy can do to prevent an economic disaster. Given the circumstances there were not regulations that could have prevented the Great Depression nor was there anything tax policy could have done. What needed to be done was ending the gold standard. After that good regulatory and tax policies could have helped out at the margin. Just because a policy is a good policy does not mean it is a cure all.
I agree with you that there is alot of similarity between the current recession and the Great Depression in that monetary policy has been much too tight. However, at the margin tax and regulatory reform could still have salutatory effect.

16

The argument has never been that low taxes and regulations are the miracle from God that will prevent all ills and that if we have these low taxes, cats and dogs will live in harmony and nothing bad will ever happen to the economy.

The argument IS that lower taxes and regulations HELP stimulate the economy, create jobs, etc. One could easily turn your argument on its head and say that the last 4 years of Obama stimuli and demand side economics proves that government help doesn’t pull us out of economic troubles.

17

I agree with this, but this would seem to strengthen the OP’s argument, not negate it.

Obama hasn’t raised taxes.

18

It couldn’t have worked. Unions then just didn’t represent enough workers - mostly skilled craftsmen, who weren’t a big enough percentage of the population to make up for the fall in spending. Besides, a lot of those skilled workers very shortly lost their jobs, too.

In general, I feel Hoover’s failure was that he was not the man to give a voice to the voiceless. He feared radicalism, probably too much. He would only work with groups that were already respected and recognized by government - bankers, not depositors; skilled craft labor, not unskilled or farm labor - and in 1932, such groups just did not represent enough of the American people to be of any help to the economy. In contrast, when one aggrieved group - unemployed veterans - organized and moved on Washington to demonstrate in 1932, Hoover caved in to Douglas MacArthur’s warnings of communism and unrest and gave the Army free rein to run them out of town.

19

Unless you smoke, chew tobacco, don’t provide health care to your employees, or don’t have health care personally. Other than those tax increases, he hasn’t increased taxes.

20

…so Obama’s raising taxes on Republicans?