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Yet another difference between the Great Depression and today: the Revenue Act of 1932

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January 16, 2009 – Comments (14)

 

A lot can be learned by studying history and not repeating mistakes that were made in the past.  Earlier this week I wrote about how the Federal Reserve exacerbated the economic slowdown that caused the Great Depression by shrinking instead of growing the money supply (see post: One huge difference between the Great Depression and today).

Here's another major mistake that was made during the great depression, the government raised taxes instead of lowering them, or at least leaving them alone.  In June of 1932 with the national unemployment rate hovering around 17%, then President Herbert Hoover became convinced that unless the United States had a balanced budget (huh, what's that?) foreign countries and banks would lose confidence in the U.S. dollar and its value would fall significantly.

In an effort to prevent this from happening, Hoover successfully lobbied Congress to raise taxes and the Revenue Act of 1932 was passed.  While this act did not impact everyone's taxes, the concept of a national income tax was still new at the time and it was levied only on wealthy individuals, it hit the rich particularly hard.  It raised the top income tax rate from the mid-20% range to an astonishing 63%!  The maximum top rate when the concept of income tax was introduced twenty years earlier was only 7%!

This astonishingly ill-timed act didn't just target individual income tax.  It also raised corporate taxes by almost 15% and doubled the estate tax.

So at a time when the economy needed every single dollar possible put to work, the government took dollars away from its citizens.  Similarly, this new tax made removed much of the incentive for individuals to start new businesses or to expand existing ones by hiring new employees at a time when the unemployment was unbearably high.

Whether you like President-elect Obama or not, one thing that he seems to be willing to do is listen to others and compromise.  While he talked about raising taxes early in his campaign, he has backed off of that now that everyone realizes the terrible state that the economy is in.  He seems to realize that raising taxes is one of the worst possible things that the government could do during a massive recession.  He has similarly backed off of his NATO / Trade bashing rhetoric would be disastrously Smoot-Hawley-like.

No where is this change of heart more evident than in the new stimulus plan that the Democrats are now pushing: Obama's $825B stimulus plan includes spending, tax cuts.  The bill as it currently stands includes $275 billion in tax cuts, including a payroll tax credit of $500 per person, a $2,500 college tax credit, and a $7,500 first-time home buyer's credit (hmmmm, I would have liked that one when I bought my first place, grumble, grumble, grumble).

One thing's for darn sure, the government certainly is not focused on balancing the budget.  This could cause its own, different set of problems at some point down the road but we seem determined not to repeat the mistakes that created the Great Depression.

I'm not saying that things are all peaches and cream right now.  The economy is in rough shape and it could be that way for a long time, but as I said at the end of my last piece on this subject anyone who thinks that the unemployment rate is headed north of 20% like it was During the Great Depression is dead wrong.  The alarmists who are talking about figures like 30% and 50% unemployment and saying that such an event would be a healthy purging of the system are complete nuts.  If the unemployment rate rose to that level society as we know it would completely break down and we'd all be running around hunting wild boars with spears and living in caves.

Deej

Note some of the data in this post was obtained from the book The Forgotten Man by Amity Shlaes

14 Comments – Post Your Own

#1) On January 16, 2009 at 2:15 PM, Tastylunch (29.20) wrote:

Deej great post as usual, but be careful quoting/trusting Amity Shlaes, she is considered by many economists to be a discredited Hack who plays fast and loose with the facts/figures.

Barry Ritholtz of the big picture  and Paul Krugman skewered her work pretty badly.I'll see if I can find their writeups..

ah here is some of them

http://www.ritholtz.com/blog/2008/11/krugman-vs-shlaes-not-a-fair-fight/

http://www.ritholtz.com/blog/2008/12/amity-shlaes-clueless-as-ever/

http://www.ritholtz.com/blog/2008/12/no-one-agrees-with-amity-shlaes/

To be fair Krugman is a Keynesian, but Ritholtz certainly isn't.

if nothing else she's pretty controversial., her call on the "Pyschological Recesion"was pretty epicly moronic.

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#2) On January 16, 2009 at 2:41 PM, djemonk (< 20) wrote:

If the unemployment rate rose to that level society as we know it would completely break down and we'd all be running around hunting wild boars with spears and living in caves.

The thought of big, fat suburban people running(!) around in loincloths with makeshift spears and headbands made out of  cornflower blue ties is probably the funniest image I'm going to have today.

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#3) On January 16, 2009 at 2:52 PM, FleaBagger (29.21) wrote:

 Ritholtz certainly is a Keynesian. Check out Gary North's explanation of Keynes:

http://www.lewrockwell.com/north/north672.html

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#4) On January 16, 2009 at 3:27 PM, Tastylunch (29.20) wrote:

FleaBagger

I know what a Keynesian is, I've taken two years of econ classes back in the day.

I haven't got the impression Ritholtz was in favor of the bailouts etc if I recall correctly. He might be somewhat in favor of Obama's infrastructure play which would be most certianly Keynesian , I don't know haven't read his opinion on that.

He may not be as anti-regulation anti-government as Shedlock or Gary North he certainly isn't a Chicagoan or an Austrian (which is what most CAPS players seem to be) but I don't think he is a Keynesian either. I don't know what he is to be honest. Probably some sort of hybrid.

But Ritholtz wasn't my point, my point was Shlaes has shaky credibility.

Shlaes isn't even well embraced by people of her own school of thought from what I can tell. She is an old Bush booster which is an affront to any small government fan out there I would hope. She's on record as saying Bush did a good job handling Katrina and that the recession was ourely pyschological. You never see orth or Shedlock talk about her and for good reason. Every group has their undesirables.

Whether you happen to agree with Ritholtz's world view or not I think his criticisms are valid and worth noting in this case.

 

 

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#5) On January 16, 2009 at 3:31 PM, TMFDeej (99.43) wrote:

Thanks for reading everyone. 

You're right, I definitely do not agree with everything that Amity Shlaes says in her book or in real life.  In fact, the book is actually pretty darn dry in parts. 

However, the pieces of information that I lifted from the it in my two recent posts on the Great Depression, the contraction of the money supply and the hike in taxes, should be historical fact.  Of course their impact upon the economy is open to interpretation.

As as Shales is to the right, her defense of Bush and Gramm is absolutely absurd, Krugman may be even further to the left.  I don't think that I have ever read anything from someone who is as liberal as he is.

Deej

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#6) On January 16, 2009 at 3:32 PM, Tastylunch (29.20) wrote:

Deej

just wanted to say I agree with this part  you wrote 100%.

The alarmists who are talking about figures like 30% and 50% unemployment and saying that such an event would be a healthy purging of the system are complete nuts.  If the unemployment rate rose to that level society as we know it would completely break down and we'd all be running around hunting wild boars with spears and living in caves.

I really dont think advocates of that level of unemployment have had any idea of how the geopolitical realities would play out before that.  No way Washington would let that happen without basically self destructing. They may not be successful in preventing it if it gets that bad, but you better believe they will pull out all the stops before it does.

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#7) On January 16, 2009 at 3:42 PM, TMFDeej (99.43) wrote:

By the way, I have mentioned this in the past, but it is absolutely amazing to me how something that should be black and white like history can get bent by people who write about it.  There aren't really very many truly objective people out there.  Most authors slant things to the left or the right, depending upon their personal beliefs. 

I try to stay as close to the middle as possible when looking at things and blogging, but I am sure that my somewhat Libertarian beliefs show through very frequently.  By Libertarian, I don't mean regulationless anarchy-like free markets or the joke that is Bob Barr, I mean less government is more, pave the roads, enforce the laws...including things like securities fraud, shoot anyone who tries to invade the country, and otherwise leave me alone because I can take care of myself and my family on my own.

Deej

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#8) On January 16, 2009 at 3:46 PM, lquadland10 (< 20) wrote:

Very good post. However you left out a few things. The IMF an Arm of the World Bank was not in every country like it is now. On CNBC they were just talking about letting the government (IMF) take over.The country is bankrupt and back then we had manufacturing jobs. We have lost 40 million jobs all ready on top of what they are reporting. Add another 330,000 jobs lost with circuit city alone announced today. 2 Wars. Military Post's around the world. Still giving out foreign aid around the world hand over fist. Members of congress and the president and future president and cabinet all CFR members. Nafta Cafta were not added in. Don't forget the 10 million undocumented workers here also. The total USA debt government and Citizens is now at 53 trillion and counting not to mention the intress on that.What happens if we loose the credit rating? Back then we also did not have social security and medicare payments. It will get to 40% or more and we will see society as we know it will completely break down. It is going to be real bad 2 years from now. That is my conservative outlook.

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#9) On January 16, 2009 at 3:47 PM, kdakota630 (29.46) wrote:

...less government is more, pave the roads, enforce the laws...including things like securities fraud, shoot anyone who tries to invade the country, and otherwise leave me alone because I can take care of myself and my family on my own.

Based on that last sentence... Deej for president!

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#10) On January 16, 2009 at 4:25 PM, Tastylunch (29.20) wrote:

TMFDeej

Very true, being objective no matter your beliefs is very tough to do, especially in a very subjective science like Economics. I struggle with it myself all the time,I know you care about being objective which is why I brought Shlaes up in the first place but I probably adopted too tough of a tone.

I apologize if I offended you, Deej. FWIW you have my utmostrespect. Imo you are on the very best bloggers/commenatorson CAPS.

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#11) On January 16, 2009 at 9:14 PM, TMFDeej (99.43) wrote:

No worries, Tasty.  I wasn't offended at all.  I appreciate that you take the time to read and comment.  I just put the kids to bed and I'm off to have a beer.  Have a good weekend.

Deej

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#12) On January 17, 2009 at 12:31 AM, Option1307 (29.65) wrote:

...less government is more, pave the roads, enforce the laws...including things like securities fraud, shoot anyone who tries to invade the country, and otherwise leave me alone because I can take care of myself and my family on my own.

I second kdakota630's opinion, this is a great statement. If only we had more people who shared similar views.

TMFDeej

While I don't believe we will see unemployment at 30%, no I don't think we will. I still have to ask you this,

Don't you think in 1929, everyone was saying "we will never see 20% unemplotmet, the market will never crash a million trillion percent..."?

I guess my point is, while it is highly unlikely we will see something as severe as the unemployment rate in the Great Depression, I think it is ignorant to think it could never happen again. Again, it's not likely, but I think it is good for everyone to have an understanding of what occured and realize that we are not immune from another tragic event. We experience more pain when we are surprised.

Believing something can never happen is the worst thing one can do. Realizing it is not likely, but understanding that it is possible and thus taking steps to prevent/survive it is more constructive.

This is not meant to be critical of you. And I realize this is a "hot topic" with you and many others here on Caps because of previous blogging situations, but I think it is a valid point to be made and considered. Just because something is highly unlikely doesn't mean it should be completely brushed off and swept under the rug.

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#13) On January 17, 2009 at 4:16 AM, DaretothREdux (39.93) wrote:

Good post Deej and I love the Libertarian slant personally...if only the government would leave us alone.

Oh, and... I know that alarmist comment was for Alstry... but I don't think he actually reads anyone's posts but his own. ;)

Keep blogging! By my calculations you are actually the 12th most recommended blogger on CAPS (as of two fridays ago---need to retabulate) and higher than dwot, GMX, and alstry. I will have a post explaining that coming up very soon.

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#14) On February 10, 2009 at 8:05 PM, DMZuniga (< 20) wrote:

I was once a technical editor back in the day.  I've studied the Internal Revenue Code for 11 years, and it appears to me, at least, that Amity Shlaes is a tax industry hack. 

On my American Glasnost site, I recently did an expose article on her book The Greedy Hand: How taxes drive Americans crazy and what you can do about it viz:

http://americanglasnost.blogspot.com/2005/09/irs-contractor-walt-disney.html

For an accurate, copiously documented book on precisely how Congress pulled its IRS scam on Taxpayers, read former Rep. Phil Hart's book Constitutional Income: Do You Have Any?

Any critical reader could spot that Shlaes "big story" was a fake, from the paucity of real news in the book.  For instance, there are an estimated 67 million non-filers today; how did that fact not make it into the book?  Or how could an author of a book on the income tax scam fail to interview any of the very vocal former IRS employees working for the Tax Honesty cause today?

Former U.S. Treasury CID agent Joe Banister, agents Clifton Beale and John Turner, former IRS Fraud Examiner Sherry Jackson, former IRS attorney Paul Chappell, and former IRS auditor Matthew McErlean are all working for Tax Honesty and would have made interesting interviews for her book, I should think.

Or, were she not a disiinformation agent for the tax industry, Shlaes could have included excerpts of the sworn testimony of Shelley L. Davis before the Senate Finance Committee oversight hearing about the IRS in September 1997.  Google that testimony, and see the first, last, and only Historian of the IRS describe the agency as totally corrupt, lawless.

Perhaps I've got it all wrong, and Shlaes is not a tax industry disinformation specialist at all.  Just a very poor investigative journalist.  

D.M. Zuniga

Host, American Glasnost

www.americanglasnost.blogspot.com

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