Thought of the Day

Sydney M. Williams

Thought of the Day

February 3, 2010

As the President presented his $3.8 trillion budget on Monday, the lesson of FDR, as taught by Amity Schlaes, should be the “canary in the coal mine” for Mr. Obama. Shakespeare has Juliet say, “A rose by any other name would smell as sweet”; the same could be said, with differing conclusions, for a pile of manure.

There were a number of factors that caused the stock market crash of 1929 to morph into a ten-year Great Depression, but among the most obvious were increased tariffs, tight money and higher taxes - based on the concept that retribution was necessary for recovery. (Amity Schlaes’ op-ed piece, on this subject, in Tuesday’s Wall Street Journal is worth reading at least twice.) It is important to understand that Roosevelt was hardly alone in misunderstanding the way out of the Depression; Hoover started the damage with his signing of the Smoot-Hawley Act and an unfortunate desire to balance the budget by raising taxes.

Extraordinary times demand extraordinary reactions. Most of us would agree that the events during the fall of 2008 were extraordinary and the responses taken were unique. As we climb toward recovery, it is critical to keep economic growth foremost in mind; anything that hinders that growth will be regretted. Increases in taxes on business, while popular in a populist sense, are almost always regressive, in that the affect of the taxes fall unduly on the neediest. A good example is the plan to increase taxes on oil and gas companies. Does anyone truly believe that any such tax increases will not be passed on to the consumer? A decision to increase corporate taxes on international earnings impedes, not encourages, exports. Permitting the Bush tax cuts to expire is a tax increase on all taxpayers and raising the tax on capital gains hinders investment at a time when investors are wanted. The President has claimed that he cut taxes for 95% of all working families, but since 40% of working families pay no taxes (other than payroll and state taxes) that really means an increase in transfer payments – not tax cuts.

There are tax increases, which the President has proposed, that seem fair, such as taxing carried interest for hedge fund managers as ordinary income, rather than treating it as a return on capital. As Warren Buffett once asked, “If it isn’t income, what is it.?” Proposing a tax on banks that provides a reserve against future bailouts seems important, certainly as long as banks are allowed to remain as large and untethered as they are today.

As the Wall Street Journal pointed out on Tuesday, there were bits of good news within the budget. The temporary fix to the AMT (Alternative Minimum Tax) would be made permanent and indexed for inflation. Taxes on estates would be re-imposed following the current year – a good year for the rich to die! – but at more realistic levels than in the past.

However, the quickest and least painful way out of the fix in which we find ourselves is to grow revenues, and the way to grow revenues is to encourage the private sector. Government can spend, but they cannot generate tax revenues; only the private sector can do that. Government can cut budgets, but we all know from experience that both parties are better at talking than acting when it comes to cutting favorite programs, and there is no such thing as an orphaned government program.

There are two recently written books that should be required reading for every member of Congress, especially at this time of enormous deficits: one is Amity Schlaes, The Forgotten Man , a new and fresh look at the Great Depression, and the second is George Melloan’s, The Great Money Binge, a clear-eyed look at why supply-side economics led us out of the 1970’s and into almost two decades of growth.

From my week-long perch in Florida, despite a rainy Monday and deficits that look to stretch to the far horizon, the world doesn’t look all that bad, and I was very much encouraged by reading David Brook’s in Tuesday’s New York Times, in which he concludes, “The elderly. They are our future.” It may not be true, but I like the sentiment.