Friday, August 27, 2010

The New FDR Is Obama

Are you wondering why the economy is stumbling so badly?

In addition to the mad money supply management of  Fed Chairman Bernanke, there is the suffocating regulatory environment that the Obama Administration is creating. It is reminiscent of the regulatory environment that FDR created. And that ain't good.

Thomas Cooley and Lee O'Hanian write in today's WSJ:

In 1937, after several years of partial recovery from the Great Depression, the U.S. economy fell into a sharp recession...The economy did not tank in 1937 because government spending declined. Increases in tax rates, particularly capital income tax rates, and the expansion of unions, were most likely responsible. Unfortunately, these same factors pose a similar threat today... 1936, the Roosevelt administration pushed through a tax on corporate profits that were not distributed to shareholders. The sliding scale tax began at 7% if a company retained 1% of its net income, and went to 27% if a company retained 70% of net income. This tax significantly raised the cost of investment, as most investment is financed with a corporation's own retained earnings.

The tax rate on dividends also rose to 15.98% in 1932 from 10.14% in 1929, and then doubled again by 1936. Research conducted last year by Ellen McGratten of the Federal Reserve Bank of Minneapolis suggests that these increases in capital income taxation can account for much of the 26% decline in business fixed investment that occurred in 1937-1938.

Meanwhile, after the 1935 National Labor Relations Act, union membership rose to about 25% in 1938 from about 12% in 1934. The increase in unionization was fostered by the sit-down strike...

There are important parallels between the tax and labor policies of FDR and those of President Obama. As in the 1930s, tax rates on capital income will be rising sharply with the expiration of the 2001 and 2003 tax cuts. Beginning in 2011, dividends will be taxed as ordinary income with rates increasing up to 39.6% for many taxpayers, more than double the current 15% rate. The capital gains tax rate will rise to 20% from 15%.

And like FDR, Mr. Obama has advanced unionization through his recess appointments to the NLRB and his support for "card check," a provision in the controversial Employee Free Choice Act that would allow unions to organize without holding a secret ballot vote...

There are lessons to be learned from the history of 1937-1938 but they are not the ones being taught. The Obama administration should consider these: Raising business costs by increasing capital income taxes and promoting higher unionization is a mistake that will hurt most those who they should want to help—workers who have lost jobs during this recession
The remarkable thing is that Cooley and O'Hanian are likely optimistic in their view. In addition to FDR style higher taxes on capital income and stronger government promotion of unions, you also have ObamaCare which is going to cause all kinds of unkown swings in the healthcare sector, plus you have the potential of major suffocation of the consumer financial sector, given the new regulatory power that will be assumed by whoever is put in control of the Consumer Finance Protection Board, especially if it is the interventionist pit bull Elizabeth Warren.

Further, you have the tremendous debt overhang, which is now being absorbed by foreigners and panicked Americans. No one knows how long these buyers will continue to do so.

 In other words, this is not your father's Great Depression. Obama is FDR on steroids. And that isn't good for anyone except a few insider elite.

1 comment:

  1. Wenzel,

    I assume this post was to serve as an update to a theme I touched upon in The Macro-Managed Economic Recovery ;)