Two Big Spending Presidents Led the Way
President Hoover took office in early 1929, and later that year, in October, came the stock market crash. The 30’s began much like the 20’s with a severe downturn in the economy (See Facts No Spin #134: US History; The Roaring 20's). However, that was the only similarity between the two decades.
International trade was a big factor in the growth of world economies. Early in his presidency, Hoover decided to protect American industry through trade protectionism. Against the advice of many economists, he passed the now infamous Smoot-Hawley Tariff Act. This dramatically increased tariffs on thousands of imported products. In retaliation, other countries responded in a similar manner by taxing goods imported from the U S. International trade plunged dramatically and all countries suffered as a result.
Presidents Hoover and Roosevelt had a different approach to taxes and spending than the two frugal Presidents, Harding and Coolidge, that preceded them. Hoover increased the tax rate from 25% to 63% and in 4 years government spending increased by almost 50%. And this increase was during a period of deflation, so effectively the spending increase was even worse in real terms. These policies - increasing taxes, increasing spending, and restricting international trade - led to a declining economy and deflation as government took an ever-larger slice of the economic pie, while the US lost access to foreign markets in which to sell its goods. Hoover was punished for his economic performance and lost in a landslide in 1932 to FDR, Franklin Delano Roosevelt.
President Roosevelt had similar policies on taxing and spending. Under Roosevelt top tax rates were increased to 77% and then to 79%. Over the next 8 years until WWII started, government spending doubled. The economic depression continued.
By the end of the decade, Roosevelt’s Treasury Secretary, Henry Morgenthau, said in April 1939, “Now, gentlemen, we have tried spending money. We are spending more than we have ever spent before and it does not work . . . I say after eight years of this administration, we have just as much unemployment as when we started . . . and an enormous debt, to boot.”
Government trade, spending, and tax policies were not the only factors causing the Great Depression, but it is fair to conclude that these policies were a major factor causing the depression years.
An interesting fact on how income tax rates affect tax revenue. Looking through IRS data, it was found that upper-income taxpayers reported more than $6 billion of annual income to the IRS in the late 1920s. In the 1930s, after Hoover and Roosevelt raised tax rates, the amount of taxable income reported by that same group of taxpayers never rose above $2 billion. People are smart and react to policies and the incentives created, positive or negative. Incentives are one of the most powerful forces in the world - incentives matter, a lot.
BOTTOM LINE
Some people look at the 30’s as successful for some of the programs initiated during this period, a bizarre misinterpretation of the facts. Perhaps they were not around to see the breadlines and misery of those woeful years.
The contrast between the 20’s and the 30’s is dramatic. Lower taxes and spending worked well, protectionism, high taxes and spending did not.
As we have discussed in earlier Facts, No Spin emails, the reason is clear. When more resources are left in the private sector, the productive sector (i. e. smaller government), there is more investment and growth in output of goods and services. That is how the economy grows and increases the standard of living for everyone.
Here is my formula for success:
LIMITED GOVERNMENT + REASONABLE TAXES + BALANCED BUDGET
=
INCREASED PRIVATE INVESTMENT + ECONOMIC GROWTH
And we will leave it right there.
LEARN ECONOMICS, THEN VOTE SMART
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