Monday, February 22, 2010

The Problem with Tax Cuts

OK, There isn't a problem with tax cuts, especially broad-based marginal rate cuts. But there is something to keep in mind.

Here's what I mean. As Glenn Beck told us at CPAC on Saturday, the US was in a big depression in 1920. Unemployment was nearly 12 percent. Deflation was on big time. Production was off by 20 percent and more.

Then the Harding-Coolidge Administration cut income tax rates from 77 percent top rate to 25 percent. And it cut federal spending in half.

The result was a barn-burner of a boom, the extension of prosperity to the broad middle class. But it ended in tears in 1929. Why? Because debt got out of control. The same thing happened in the 1960s when Kennedy cut tax rates. The go-go years ended in huge bear market and a decade of inflation and recession. And in the 1990s when Congress cut capital gains taxes, the resulting boom ended in the NASDAQ meltdown of 2000-2001.

The only exception was the Reagan boom of the 1980s. But the Reagan era balanced the 30 percent Reagan-Kemp-Roth tax cuts and some moderate spending cuts with a tight monetary policy. Those were the Volker years.

There's a lesson here. When you cut tax rates and government spending you set off a prairie fire of economic growth. If you aren't careful, you'll get a debt explosion as well, and debt explosions end in tears. So it is absolutely essential to keep monetary policy (and broad credit policy, e.g. Fannie and Freddie) in check. We know why, because we've just lived through it. When you leverage debt too high then people can't service their debt when the economy turns south.

To you chaps at the White House: this advice is free. You won't listen of course. But you'll wish you had when inflation starts nipping at your heels, and President Obama becomes the most unpopular president in modern memory.

Why, things could get so bad that Republicans may end up running against Obama for the next 50 years, just as Democrats ran for decades against Herbert Hoover.

2 comments:

  1. LOL! The lesson here is that you don't know your facts! Federal debts ballooned under Reagan. What a bunch of pure unadulterated bullshit!

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  2. Hey Chris, just found all of your information. Beck has inspired me to research all this stuff for myself. Just want you to know I'll be doing alot of research off your sites, which I will add, are footnoted very well; citing sources such as the New York times...obviously a paper that doesnt deliver the facts that anonymous is looking for. I've just been researching the Lockheed Martin Corp. Interesting stuff. Thought it was great as well that I could look all the way back to the beginning of the Federal spening.
    Thanks - Brian

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