Recruiters for Tax Cuts: Federal Spending Programs Is Not the Answer!

All of us have a stake in government decisions made to address the current economic climate. Whatever we do, the business community and investors need to see actions on the economy that inspire confidence and optimism to get job growth back on track.

At present, there is an economic stimulus bill under review in the Congress, submitted by the new Administration, that may reach $1 trillion in new spending programs. Are you feeling optimistic yet?

Since the 1980s, the U.S. economy has demonstrated to the world how to stimulate growth and job creation: low taxes, free trade, and low government intervention. For decades, such policies have kept unemployment rates lower in the U.S. compared to almost all first-world, industrial nations.

What happens when governments intervene in economies? Consider two examples:

1. The 1930s: In the U.S., it was about money supply, taxes, and trade…
Historians generally agree that there were three federal government actions that contributed to the financial collapse of the 1930s. The well-known stock market crash of October 1929 was just the flashpoint for events that ultimately moved the economy from a difficult recession to a depression:

  • Federal Reserve Bank: According to Dr. Milton Friedman, in his book “Free to Choose,” from 1930 to 1933 the Federal Reserve Bank acted to reduce the money supply by 28%. Result? With a smaller money supply, massive bank failures (9,000+) occurred across the U.S. Banks closed due to under-funding for credit, lending, and daily operations.
  • Congress increased taxes to balance the federal budget.
  • Smoot-Hawley Tariff Act: In 1930, Congress passed the Smoot-Hawley Tariff Act, which raised the costs of goods imported to the U.S., which set off a trade conflict with other countries.

Results? The GDP of the U.S. was:

1930: -8.6%
1931: -6.4%
1932: -13.0%

In a recent article, Dr. Thomas Sowell, economist and author, commented on the Smoot-Hawley Act and federal actions of the 1930s:

  • Unemployment rate before government actions: June 1930: 6.3%
  • Unemployment rate after government actions: February, 1932 to January, 1935: 20%+

The rate of 24.9% in 1933 was the high point, with a rate range from 14% to 19% through 1938.

2. The 1990s: In Japan, it was about government spending, trade, taxes…
In the 1990’s, the biggest experiment in history for government spending to stimulate an economy was undertaken by Japan. According to a recent Washington Post article (9/22/08), from 1989 to the early 1990s, Japan experienced economic events that severely impacted investments, banks, and real estate:

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  • Financial markets in the 1980s were heavily engaged in speculative investing, with the Nikkei average peaking in 1989 before it collapsed to a value that is 30% of its value of that period.
  • Banks engaged in increasingly speculative lending practices, which created a loan portfolio bubble that, as loan assets dropped in value, threatened bank industry solvency.
  • Real estate investments were highly speculative, especially commercial properties. Prices collapsed, ending in huge losses to investors. Properties today are at 40% of property values of that period.

How did the Japanese government react to collapsing values of investments, bank loan portfolios, and real estate, as well as a long-term recession?

According to the article noted, in the early 1990s, the government of Japan launched massive spending programs, borrowing heavily to finance new public works construction as well as subsidizing hundreds of thousands of banks and businesses that would otherwise be insolvent. Government borrowing and spending exceeded $700 billion U.S. in the 1990s. In addition, according to the Institute of International Economics, Japan increased taxes and imposed new trade regulations to protect domestic markets.

Results?

Hello, World!

Annual Growth, 1980s-present National debt v GDP, 2007
Japan 2.9% from 1987-1995
1.3% Since 1995-2008
182% of GDP
U.S. 2.7% from 1987-1995;
2.9% from 1995-2008
36% of GDP

The U.S. economy has outperformed the economy of Japan since the mid-1990s and the onset of Japan’s economic problems. If government spending and intervention are the answers, why didn’t Japan achieve growth rates at least comparable to or better than the U.S. for the time period? Government spending and intervention were policy failures for Japan and we as a nation will hopefully not follow the path of failed policies.

Can we go back to basics? We already know how to create jobs: low taxes, free trade, and less government intervention. Let’s get to it!

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17 Comments on “Recruiters for Tax Cuts: Federal Spending Programs Is Not the Answer!

  1. An interesting article. “We already know how to create jobs: low taxes, less regulation, and less government intervention.” Is this February 6, 2001? Look around and see where that got us!

    My liberal Nobel Prize winner and commentator disagree with your conservative Nobel prizewinner and commentator (see below). However, I’m no economist, though perhaps a commentator. Why not try BOTH approaches: a liberal stimulus package combined with a conservative tax cut that could garner bi-partisan support? I am in favor of whatever can get large numbers of Americans back to work with decent incomes and benefits (including hopefully universal health coverage).

    Keith “Mr. Pragmatism” Halperin

    ………………………………………………………………………………………………

    http://www.nytimes.com/2009/01/12/opinion/12krugman.html?_r=1

    Ideas for Obama

    By PAUL KRUGMAN
    Published: January 11, 2009

    First, Mr. Obama should scrap his proposal for $150 billion in business tax cuts, which would do little to help the economy. Ideally he’d scrap the proposed $150 billion payroll tax cut as well, though I’m aware that it was a campaign promise.
    Money not squandered on ineffective tax cuts could be used to provide further relief to Americans in distress — enhanced unemployment benefits, expanded Medicaid and more. And why not get an early start on the insurance subsidies — probably running at $100 billion or more per year — that will be essential if we’re going to achieve universal health care?
    Mainly, though, Mr. Obama needs to make his plan bigger. To see why, consider a new report from his own economic team……

    …………………………………………………

    http://www.newamerica.net/blog/us-budget-watch/2009/tax-cut-stimulus-stiglitz-no-gop-lots-9543

    Tax Cut Stimulus? Stiglitz: No, GOP: Lots
    January 16, 2009 – 4:28pm — USBudgetWatch.org
    January 16 – In the Financial Times, economist
    Joseph Stiglitz urges Congress to ignore tax cuts and maximize stimulus spending when forming the package.He claims that each dollar of stimulus spending not only increases GDP more efficiently than each dollar of tax cuts because direct spending, unlike a tax break, does not allow businesses or individuals to bolster savings or pay down debt with money that was intended to stimulate the economy.Stiglitz writes:
    “Tax breaks for business may prove to be a sinkhole as bad as the troubled assets relief programme. Particularly worrisome are rumours that companies will be allowed to set off their losses against profits made in the past five years to get tax rebates – a big gift to those who mismanaged risk, including banks such as Citibank.”…….

    ………………………………………………

    http://www.cbpp.org/11-27-01tax.htm (from 2001)

    TAX CUTS ARE NOT AUTOMATICALLY THE BEST STIMULUS:
    A Response to Glenn Hubbard
    by Peter Orszag and Joseph Stiglitz(1) (
    The Basic Flaw in the Hubbard Article
    The principal reason that Mr. Hubbard’s arguments are misguided — and the main reason the Administration’s package would be relatively ineffective as a stimulus measure — is that they largely ignore the central feature of a recession: lack of demand. In a recession, the primary problem is that the nation’s firms face a reduction in demand for their products — not that they lack available workers, equipment, or anything else needed to produce goods and services. Indiscriminately injecting cash into such firms through tax breaks, without linking the tax breaks to new business activity, would do little if anything to address the underlying difficulty.
    Firms that are faced with reduced demand for their products lay off workers, regardless of how much cash they have. The managers of firms have a fiduciary responsibility to maximize their profits, and in the face of reduced demand for their product, firms therefore typically reduce costs by cutting back on production, which triggers layoffs. As the number of unemployed workers increases, a downward economic spiral can occur. Households with unemployed workers, facing a sharp decline in their incomes, cut back on spending and further reduce the demand for products. That, in turn, leads to additional layoffs. This harmful cycle, by which an economic slowdown can build into a more serious recession, can be arrested or broken by boosting demand for the goods and services that American companies produce. Only when a company faces renewed demand for its products will it end the process of shedding workers and begin to create new jobs. As a result, the primary objective of a stimulus package should be to spur spending on these products.
    An effective stimulus package consequently should expand the aggregate demand for goods and services in a timely way. Mr. Hubbard notwithstanding, there is little question that increases in government expenditures can be quite effective in boosting aggregate demand and thereby stimulating the economy in the short run.
    Temporary expansions in unemployment insurance, for example, would spur increased consumer spending. Households in which a worker is laid off experience a significant decline in income. They thus are likely to spend a high percentage of any additional income they receive while out of work. The extra spending on unemployment benefits that a temporary expansion of unemployment benefits provides thus has a direct economic benefit — it keeps more workers employed at firms that produce the products the unemployed workers purchase with their additional cash. Temporary expansions in unemployment insurance consequently are a “win-win” proposition: They are quite effective in helping more people keep their jobs during an economic downturn, and they also assist those who are unfortunate enough to have lost their jobs……

  2. I am in favor of a stimulus plan, but not this one. And I am thrilled to see the initial edits to the bill that were published last night. Below is a list of items cut…..

    I wish someone could explain how these would have stimulated the economy.

    ITEMS CUT

    $5 billion for energy-efficient federal buildings (original bill $7 billion)

    $75 million for Smithsonian (original bill $150 million)

    $200 million for Superfund (original bill $800 million)

    $100 million for National Oceanic and Atmospheric Administration (original bill $427 million)

    $100 million for Law enforcement wireless (original bill $200 million)

    $300 million for federal fleet of hybrid vehicles (original bill $600 million)

    $100 million for FBI construction (original bill $400 million)
    Items eliminated
    $55 million for historic preservation

    $122 million for new Coast Guard polar icebreaker/cutters

  3. This is a joke right? The minute this site starts getting political, I’m outta here. You have a lot of nerve telling such a diverse group of professionals, of all income levels, what’s right and wrong for the economy.

    Go start a political blog somewhere else.

  4. Stack: It’s often a stretch to defend pork, but one man’s pork is another man’s livelihood. I assume the $5B for fed buildings would create jobs and put a down payment on efficiency, which should lower costs over the long haul. Does it have to be part of this bill? probably not. Superfund? Let’s talk Superfund. I live in a area where the well water was contaminated by an old dump site, where several companies, including WR Grace were dumping toxic waste (in the 1970s). Anywho, it was discovered in our wells, so we needed something done about it. Because most of the companies were long out of business, it was the Superfund that covered the expense of getting us clean water from another resource. So, I feel for the Superfund, but any funds it needs are certainly the result of corporations gone wild, only to disappear and avoid responsibility for their actions. Law enforcement wireless? I can’t say anything bad about law enforcement – give them everything they need. Installing and managing this system is not the job of the Police, so there are jobs associated with it and long term job stability in managing it. Hybrid vehicles is a good one, getting the gov to buy thousands of vehicles sure would help Detroit, plus would put the foundation in place to start saving money on energy (less gas, etc.). FBI Construction? Any kind of construction is good, since these folks’ jobs have been hit hardest. Coast Guard Ice breakers – yes, might be much, but they cut lanes in the ice for shipping.

  5. Ha! Bill you stepped in it for real with this post.

    This article from last week touched on it:

    https://staging.ere.net/2009/02/05/why-is-unemployment-so-high-and-how-to-emerge-a-winner/

    I’ll just reprint my root comment since it applies here:

    People don’t like talking politics on this site. Back (way back) what we call politics were referred to as “Political Economy”, and the notion of talking about one without the other would have been impossible.

    Read Mish’s Global Economic Trend Analyis blog or The Oil Drum, and after a few hours, you will have an answer to the question of why things are the way they are today.

    In one paragraph, here you go: We have global overcapacity in everything but healthcare and the energy complex. We have built our economy around cheap oil, which is going away for good (plus while there may be plenty to burn, there is only one atmosphere to burn it in).

    The fed dreamed it could manipulate the supply and demand for money (otherwise known as interest rates) without distorting the economy: FAIL. Then those distortions were massivly multipled by the Vegas mentality and tools of the trade like MBS, CDS, and now coming soon, CMBS.

    In our efforts to avoid the results of these facts, we have bankrupted the country on every level, and that has caused a global deflationary spiral to begin. Firms are laying off because the raw numbers are awful- look at shipping rates, rail rates, auto and housing production, energy use, confidence, and debt-to-equity and you will see that this is not a typical recession.

    But it’s not all gloom and doom- while we are bankrupt at the moment, we have vast untapped sources of wealth and answering the health and energy issues will create a far better, more sustainable world. It will be a rough ride for awhile and it will never be the same as it was, but there is plenty to look forward to on the other side.

    The really hard part will be the politics- so why not start talking about what business needs to do to foster the kind of politics needed to answer the challenge ?

    The kind of funny/sad part ? Your politics Bill, and that of the rump party once known as the GOP. Your post already sounds like it’s from another era.

    You are going to get all kinds of pushback from quarters unexpected, and unlike in years past, with some venom.

    People are angry, and they know who to blame and which ideas (Tax cuts are always wonderful for one, social spending is always wasteful for two) are rotten to the core.

    Have fun !

  6. I’m just glad it’s getting talked about on ERE. I’d hate to go through the weekend with such a massively important (important whether you think the bill is good or bad) bill being discussed and for people who do so much hiring to not be debating it. The article was originally planned for Tuesday but I moved it up late Friday night because I think the bill matters to ERE readers and I think ERE readers’ opinions matter, pro or con.

  7. Thanks for the post Todd and Bill! I really enjoyed Stein’s attack 🙂

    STEIN: For a guy that DIDNT want to get political it sure is interesting to see your politics. I won’t take your rant personally and will chalk it up to your love for Alec Baldwin – he said he would leave the country if Bush won, back in the day. He never left… and actually won a Golden Globe! You said you would leave rather than talk politics…. but you are still here! Maybe an Oscar in your future?
    ____

    We need a stimulus plan. No debate there. But if we want larger government spending and programs, let’s just say so, and not cloak larger government inside a stimulus bill that claims to be creating jobs or reinvigorating lending. Wireless devices for the FBI? outstanding. Give them what they need. But dont layer it in a stimulus plan. $100M+ for STD prevention/ education for the military? I would rather see 1000 random small businesses get $100,000 credit lines at no interest.

    Perhaps this smoke and mirrors is why the approval for the stimulus dropped to 51%.

  8. “We need a stimulus plan. No debate there. But if we want larger government spending and programs, let’s just say so”

    We did say so, on Nov 4, 2008.

    Stimulus is a synonym of spending; they are one and the same. The debate is when, where, and how much.

  9. Thanks for the interesting comments and good to see a spirited debate.

    While the article seems to be interpreted by some as political, the topic was economics. I cited two examples of governments attempting to tax and spend to better times and the failures of those policies. In the 1990’s the economy of Japan was half the size of the US,and the second largest economy on the planet. It ranks third today and is drifting to fourth place behind India. The economy of Japan is permanently mired in debt and debt servicing, incapable of resuming the levels of growth and prosperity it once enjoyed. Japan illustrates that there are consequences to massive government spending. The key point of the article is: Do we want to apply failed policies a third time?

    With regard to the content of all the spending plans in the bill before congress, let’s agree that the needs are infinite and resources (our tax dollars) are finite, or used to be. The merits of specific spending plans are not at issue.

    The central issue we face as a nation is the decision to undertake the assumption of debt ($800 billion+) and attempt to spend our way back to better times. That decision has short and long-term consequences for all of us. Bill Broderick

  10. Bill, politics and economy (especially now) are tied up so tightly that its pointless to talk about one without the other.

    As for Japan, many economists believe that they did not apply enough stumulus, fast enough, to stop the deflation. My take on Japan is that the underlying problem was a combo of an oil-based economy, low social mobility, and central bank meddling with interest rates.

    Japan was a harbinger of what happened here, and the same result will likely happen.

    I dont happen to think we need much of any stimulus to get out of this, becsause I dont belive in stimulus spending per se, but in the absence of doing what needs to be done, it’s better than nothing. Here is what I posted on Facebook about the economy:

    The root root cause of the crisis is interest rate manipulation by central banks in general, and the fed in particular. If any calculations other than market forces set interest rates, the risk/reward ratio will not reflect the real world, and distortions will occur. Money has a supply and demand just like anything else, and you manipulate those at your peril.

    In our case, the latest and worst distortion was the runaway housing prices. The reason that particular distortion was so deadly was because risk was allowed to be spread throughout the whole system via (appropriately named) toxic assets like MBS, CDS, and derivatives. However, other underlying problems in the economy were there before this multiplied distortion pushed us into a deflationary spiral.

    Those problems are:

    Overcapacity in just about every area except the energy and health complexes. The Internet has been and will be poison to retail buildings and office space, and all of the supporting infrastructure around them. People can work and shop from home in many cases, and they will. Problem #2, Oil.

    Lending is not happening at the desired rate because there is no reason to borrow. Nobody wants to buy a house with the market as uncertain as it is. Nobody wants to invest in retail or commercial real-estate for good reason- there is no real need for any right now. Investments in energy and healthcare may be attractive, but are currently in a political limbo until the new president and congress settle down. Lending is not being unreasonably withheld by banks and investors because they need and want returns on their money.

    Why the debate about the stimulus is debased:

    *Demand is what it is- attempts to “stimulate” demand can only take it from the future or provide things to people who otherwise could not afford them. Neither is truly helpful.

    *The Debt to Equity ratio of the country (personal and public) is far from historic norms. We have been binging, and we need to clear it up before we get back to drinking again.

    *There is real truth to the ‘animal spirits’ being the prime mover for many economic decisions. If investors and employers had reason to believe that the economy were being placed on a sound footing, they would lend and hire without current demand (e.g. without need for “stimulus”). GHW Bush’s tax increase (which was political suicide) set the stage for the Clinton boom for just that reason: all could see that we were serious about getting our fiscal house in order. Macroeconomic theory only says demand must increase, but now the how and why of it.

    To summarize: If President Obama were to take a number of steps to restore confidence, zero stimulus would be needed to ‘save’ the current economy.

    1) announce that he intended to let the market determine interest rates from now on (Fed defanged)
    2) align tax policy to favor any and every step that reduces the use of oil (Wind/Solar , electirc cars, utitlity grants)
    3) switch the tax deduction from mortgage interest paid to mortgage principal paid
    4) treat saving and checking interest as capital gains rather than ordinary income
    5) achieve universal health insurance on two tiers: basic public health services and catastrophic coverage, and the current private system
    6) means test Medicare to middle class standards taking #5 above into account
    7) raise slightly the full retirement age of social security
    8) raise slightly the income limit for social security tax
    9) raise the upper marginal income tax rates
    10) clearly project that he intends to maintain world peace thru the UN and not at our sole expense as world policeman, expecting (but not making just yet) major cuts in our defense spending
    11) make all college and training costs tax deductible
    12) He is already doing this: robust re-regulation of finance to ensure that crazy leverage and risk taking is not permitted without disclosure and/or containment.
    13) Lucky 13- let all insolvent banks fail but protect the depositers and bondholders thru the normal bank failure laws.

    If on the other hand they just throw printed money at the banks and states and keep on keepin on, nothing good will come of it, and it wont be change we can believe in….

  11. WELL SAID! I love this country and love it enough to say I’m so disappointed and very frighted of where we have and are heading as a nation! This country was built from blood, sweat and tears and today’s motto sounds more like a spoiled child…I’m entitled to health care needs! I”m entitled to a job! I’m entitled to any and all benefits! Our country is beginning to sound like a bunch of whiners and I personally don’t want any part of it.

    Just as Robert pointed out, we need to get back to the basics and quit complaining! Quit being so “PC” and having to bend over backward for anyone and anything that isn’t seen as fair! Work hard, keep government OUT and working FOR us not AS us and get back to the basics this country was built on…a country for the people by the people and guess what else…put God BACK IN or we’ll never make it.

  12. Clarification: Read Robert’s posts and don’t misrepresent/stretch Robert’s opinion, please. Robert did not mention God. Robert likes God, but it’s a personal and not the business of others or government. Robert also thinks government has a role to play to help those who need help.

  13. Aaron – Todd Raphael is the editor of this site (I think anyway and his note on this thread is supportive….

    Is it possible that a firewall between politics and professionalism is NOT a good thing, or at least maybe not a good thing at this time ?

    I’m fine either way- lots of places on the web to spout off about my political views and learn about other folk’s….but maybe it would be better for businesspeople to be more engaged in these somewhat important subjects….

  14. @Martin – Todd is indeed ERE’s Editor-In-Chief, and when we posted Bill’s article, we were aware that it would spark a debate.

    @Robert – Bill’s opinions are his own, but I think that we at ERE would not be doing our jobs very well if we did not foster a discussion over how the goings-on in Washington will be affecting all of our professional lives in the future.

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