Back to the Future?
by Thomas Sowell
by Thomas Sowell: Two
are impressed by words seem to think that President Barack Obama
made a great speech to Congress last week. But, when you look beyond
the rhetoric, what did he say that was fundamentally different from
what he has been saying and doing all along?
Are we to continue
doing the same kinds of things that have failed again and again,
just because Obama delivers clever words with style and energy?
Once we get
past the glowing rhetoric, what is the president proposing? More
spending! Only the words have changed – from "stimulus" to "jobs"
and from "shovel-ready projects" to "jobs for construction workers."
spending were the answer, we would by now have a booming economy
with plenty of jobs, after all the record trillions of dollars that
have been poured down a bottomless pit. Are we to keep on doing
the same things, just because those things have been repackaged
in different words?
Or just because
Obama now assures us that "everything in this bill will be paid
for"? This is the same man who told us that he could provide health
insurance to millions more people without increasing the cost.
When it comes
to specific proposals, President Obama repeats the same kinds of
things that have marked his past policies – more government spending
for the benefit of his political allies, the construction unions
and the teachers' unions, and "thousands of transportation projects."
fallacy in all of this is the notion that politicians can "grow
the economy" by taking money out of the private sector and spending
it wherever it is politically expedient to spend it – so long as
they call spending "investment."
Has Obama ever
grown even a potted plant, much less a business, a bank, a hospital
or any of the numerous other institutions whose decisions he wants
to control and override? But he can talk glibly about growing the
no substitute for experience. That is why the country is in the
mess it is in now.
he wants "federal housing agencies" to "help more people refinance
their mortgages." What does that amount to in practice, except having
the taxpayers be forced to bail out people who bought homes they
could not afford?
No doubt that
is good politics, but it is lousy economics. When people pay the
price of their own mistakes, that is when there is the greatest
pressure to correct those mistakes. But when taxpayers who had nothing
to do with those mistakes are forced to pay the costs, that is when
those and other mistakes can continue to flourish – and to mess
up the economy.
deficiencies in economics, Barack Obama is a master of politics
– including the great political game of "Heads I win and tails you
that shows any sign of achieving its goals will of course be trumpeted
across the land as a success. But, in the far more frequent cases
where the policy fails or turns out to be counterproductive, the
political response is: "Things would have been even worse without
I win and tails you lose.
unemployment went up after the massive spending that was supposed
to bring it down, we were told that unemployment would have been
far worse if it had not been for that spending.
Are we really
supposed to fall for ploys like this? The answer is clearly "yes,"
as far as Obama and his allies in the media are concerned.
was insulted even further in President Obama's speech to Congress,
when he set up this straw man as what his critics believe – that
"the only thing we can do to restore prosperity is just dismantle
government, refund everybody's money, and let everyone write their
own rules, and tell everyone they're on their own."
Have you heard
anybody in any part of the political spectrum advocate that? If
not, then why was the President of the United States saying such
things, unless he thought we were fools enough to buy it – and that
the media would never call him on it?
are hoping that President Obama's plan will get the economy out
of the doldrums and start providing jobs for the unemployed. Others
are hoping that the Republicans' plan will do the trick.
Those who are
truly optimistic hope that Democrats and Republicans will both put
aside their partisanship and do what is best for the country.
seems to be hoping that the government will leave the economy alone
to recover on its own. Indeed, almost nobody seems at all interested
in looking at the hard facts about what happens when the government
leaves the economy alone, compared to what happens when politicians
The grand myth
that has been taught to whole generations is that the government
is "forced" to intervene in the economy when there is a downturn
that leaves millions of people suffering. The classic example is
the Great Depression of the 1930s.
What most people
are unaware of is that there was no Great Depression until AFTER
politicians started intervening in the economy.
There was a
stock market crash in October 1929 and unemployment shot up to 9
percent – for one month. Then unemployment started drifting back
down until it was 6.3 percent in June 1930, when the first major
federal intervention took place.
That was the
Smoot-Hawley tariff bill, which more than a thousand economists
across the country pleaded with Congress and President Hoover not
to enact. But then, as now, politicians decided that they had to
Within 6 months,
unemployment hit double digits. Then, as now, when "doing something"
made things worse, many felt that the answer was to do something
Hoover and President Roosevelt did more – and more, and more. Unemployment
remained in double digits for the entire remainder of the decade.
Indeed, unemployment topped 20 percent and remained there for 35
months, stretching from the Hoover administration into the Roosevelt
That is how
the government was "forced" to intervene during the Great Depression.
Intervention in the economy is like eating potato chips: You can't
stop with just one.
the track record of doing nothing? For more than the first century
and a half of this nation, that was essentially what the federal
government did – nothing. None of the downturns in all that time
ever lasted as long as the Great Depression.
downturn in 1920-21 sent unemployment up to 12 percent. President
Warren Harding did nothing, except for cutting government spending.
The economy quickly rebounded on its own.
In 1987, when
the stock market declined more in one day than it had in any day
in 1929, Ronald Reagan did nothing. There were outcries and outrage
in the media. But Reagan still did nothing.
not only rebounded, it was followed by 20 years of economic growth,
marked by low inflation and low unemployment.
The Obama administration's
policies are very much like the policies of the Roosevelt administration
during the 1930s. FDR not only smothered business with an unending
stream of new regulations, he spent unprecedented sums of money,
running up record deficits, despite raising taxes on high income
earners to levels that confiscated well over half their earnings.
today, FDR blamed the country's economic problems on his predecessor,
making Hoover a pariah. Yet, 6 years after Hoover was gone, and
nearly a decade after the stock market crash, unemployment hit 20
percent again in the spring of 1939.
may have a better track record in the economy but government intervention
has a better political record in getting presidents re-elected.
say that Barack Obama cannot be re-elected with unemployment at
its current level should take note that Franklin D. Roosevelt was
elected a record four times, despite two consecutive terms in which
unemployment was never as low as it is today.
is one thing. But political impressions are something very different
– and all too often it is the political impressions which determine
the fate of an administration and the fate of a nation.
ago – in 1921 – federal income tax policies reached an absurdity
that many people today seem to want to repeat. Those who believe
in high taxes on "the rich" got their way. The tax rate on people
in the top income bracket was 73 percent in 1921. On the other hand,
the rich also got their way: They didn't actually pay those taxes.
of people with taxable incomes of $300,000 a year and up – equivalent
to far more than a million dollars in today's money – declined from
more than a thousand people in 1916 to less than three hundred in
1921. Were the rich all going broke?
It might look
that way. More than four-fifths of the total taxable income earned
by people making $300,000 a year and up vanished into thin air.
So did the tax revenues that the government hoped to collect with
high tax rates on the top incomes.
was no mystery to Secretary of the Treasury Andrew Mellon. He pointed
out that vast amounts of money that might have been invested in
the economy were instead being invested in tax-exempt securities,
such as municipal bonds.
estimated that the amount of money invested in tax-exempt securities
had nearly tripled in a decade. The amount of this money that the
tax collector couldn't touch was larger than the federal government's
annual budget and nearly half as large as the national debt. Big
bucks went into hiding.
out the absurdity of this situation: "It is incredible that a system
of taxation which permits a man with an income of $1,000,000 a year
to pay not one cent to the support of his Government should remain
One of Mellon's
first acts as Secretary of the Treasury was to ask Congress to end
tax exemptions for municipal bonds and other securities. But Congress
was not about to set off a political firestorm by doing that.
B was to cut the top income tax rate, in order to lure money out
of tax-exempt securities and back into the economy, where increased
economic activity would generate more tax revenue for the government.
Congress also resisted this, using arguments that are virtually
unchanged to this day, that these would just be "tax cuts for the
all this history so relevant today is that the same economic assumptions
and political arguments which produced the absurdities of 1921 are
still going strong in 2011.
"the rich" have far more options for putting their money beyond
the reach of the tax collectors today than they had back in 1921.
In addition to being able to put their money into tax-exempt securities,
the rich today can easily send millions – or billions – of dollars
to foreign countries, with the ease of electronic transfers in a
In other words,
the genuinely rich are likely to be the least harmed by high tax
rates in the top brackets. People who are looking for jobs are likely
to be the most harmed, because they cannot equally easily transfer
themselves overseas to take the jobs that are being created there
by American investments that are fleeing from high tax rates at
– hardware stores, gas stations or restaurants for example – are
likewise unable to transfer themselves overseas. So they are far
more likely to be unable to escape the higher tax rates that are
supposedly being imposed on "millionaires and billionaires," as
President Obama puts it. Moreover, small businesses are what create
most of the new jobs.
then are so many politicians, journalists and others so gung-ho
to raise tax rates in the upper brackets?
sheer ignorance of history and economics, class warfare politics
pays off in votes for politicians who can depict their opponents
as defenders of the rich and themselves as looking out for working
people. It is a great political game that has paid off repeatedly
in state, local and federal elections.
As for the
1920s, Mellon eventually got his way, getting Congress to bring
the top tax rate down from 73 percent to 24 percent. Vast sums of
money that had seemingly vanished into thin air suddenly reappeared
in the economy, creating far more jobs and far more tax revenue
for the government.
eventually prevails. But not always.
Sowell is a senior fellow at the Hoover Institution at Stanford
University. His Web site is www.tsowell.com.
To find out more about Thomas Sowell and read features by other
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