Thursday, July 29, 2010
A History Lesson, Ignored!
Those that fail to learn from history, are doomed to repeat it. - Winston Churchill
From the American Spectator, by Peter Ferrara, The Timeless Principles of American Prosperity
Several times in the last 100 years, whenever the nation’s economic policies adhered to the timeless principles of economic growth and prosperity, our economy has boomed. When it has departed from those policies, it has fallen into stagnation, or worse.
America today once again desperately needs to return to the timeless principles of economic growth, to restore our traditional, world leading prosperity, and the American Dream. This should be the central argument and theme for this fall’s elections.
Supply-Side Economics, Ignored by Franklin Roosevelt, Ignored by Barack Obama
Last year, the Intercollegiate Studies Institute produced a brilliant, overlooked book that recounted the history of supply-side economics—Econoclasts: The Rebels Who Sparked the Supply-Side Revolution and Restored American Prosperity, by Brian Domitrovic. As explained in that book, the roots of supply-side economics go back to 1913, when the national income tax and the Fed were first adopted. “For restraining the institutions created that year—the income tax and the Federal Reserve—is the essence of supply-side thinking,” Domitrovic writes.
It didn’t take long for trouble to brew. The top tax rate of 7% soared to 77% by 1918. Moreover, the income tax, sold as a tax on the rich, began to apply at just $1,000 in income (equivalent to about $20,000 today). In addition, during World War I, the Fed essentially doubled the money supply relative to the economy. Inflation consequently soared by 84% over the 4 years from 1916 to 1919. The Fed then slammed on the brakes, draining 60% of the excess money, and throwing the economy into steep recession as a result. Unemployment soared to 12%, 50% higher than in any previous recession.
Warren Harding, newly elected President in 1920, appointed the enormously successful Pittsburgh banker Andrew Mellon Secretary of the Treasury, with the duty of fixing the economy. Mellon adopted what became the supply-side economic formula. He slashed the top income tax rate to 25%, and the bottom rate from 8% to 1%, increasing the income level to which it first applied by 50%. Moreover, Mellon led the Fed to stop the money supply drain, return interest rates to standard levels, and devote itself to stable prices. The Fed would look to market price levels, particularly commodities, including gold, for its guide.
The result was the Roaring ‘20s, the greatest boom in American history to that point, essentially beginning the modern American economy. Real output galloped, stock prices tripled, real wages advanced with productivity increases, and prices were stable. “It was in the twenties that Americans bought their first car, their first radio, made their first long distance telephone call, took their first vacation,” as Domitrovic quotes Richard Vedder and Lowell Galloway.
Supply Side Economics replaced by Keynesian Economics lead to the Great Depression
The Depression arose and worsened as America departed from these pro-growth policies. Instead of maintaining stable prices, the Fed allowed the money supply to decline precipitously, even while dollar demand was soaring as the world sought a stable store of value. This created ruinous deflation. Mellon’s tax rate policies were also ruinously reversed, with the top income tax rate raised first to 63%, and then to 79%, with the lower tax rates raised even more in percentage terms. The Smoot-Hawley tariff added another tax burden that killed international trade. President Roosevelt tried to restore prosperity with soaring Keynesian government spending and deficits, which failed miserably as the Depression dragged on for over 10 years. By 1933, unemployment was at 25%, and GDP was down 57% nominally, 22% in real terms.
Read the full article for the complete history of Supply Side Economics.
John Kennedy, Ronald Reagan, GW Bush all applied Supply Side Economics with great success yet the current occupant of the White House is doing the exact opposite and reaping disastrous results. Keynesian Economics practiced by the Democrats, exclusively, have never lead to prosperity and it won’t now.
If the Obama Administration would learn from our history America’s prosperity could be restored. Unfortunately when the Bush tax cuts expire we will face an economic downturn that will rival the Great Depression or worse.
Just remember as I pointed out previously, President Warren Harding faced a worse depression than the Great Depression and recovered the economy in one year using Supply Side Economics. It worked then, it can work now.
Wake up, America! It’s time to clean house! Democrats are unteachable and they have to go.
PS, It wouldn’t hurt to include some RINOS in that house cleaning as well
