How to shrink the economy – Lessons from immoral policies during the Great Depression

Hunger sculpture at FRR Memorial in Washington DC. How much earlier could hunger have ended with different policies? Photo courtesy of DollarPhotoClub.com.

Hunger sculpture at FDR Memorial in Washington DC. How much longer did wide-spread hunger last due to unintended consequences of federal policies? Photo courtesy of DollarPhotoClub.com.

Do we want to hurt poor people or help them?

It is always worth explaining yet again that specific federal policies played a massive role in helping cause the Great Depression, deepening the collapse, and extending the pain.

For a brief explanation, check out Arthur Laffer at Investors Business Daily on July 17:  Tax And Tariffs Hikes Crushed 1930s America

Trade restrictions

Article points out the Smoot-Hawley tariff passed in 1929 and signed in May 1930 created the largest tax increase on trade ever. The intention was to get Americans to “buy American” and thus stimulate the American economy. The severe act prompted severe retaliation.

The unintended consequence? Just what everyone should have expected:

U.S. tax revenues and U.S. employment went into free-fall. I guess American consumers, now penalized for buying high-quality low-cost foreign products, chose to work less over buying American, and American workers supplying goods to foreigners had their markets slammed shut.

The impact can be seen from the graph accompanying the article. Total trade in goods fell from about $10B in 1929 to around $2.5B in 1931. That’s something in the range of a 70% or 75% drop in two years. Lost of people lost their job. A rather severe unintended consequence.

Trade slowly recovered to around $6B in 1937 before FDR’s recession-within-depression dropped trade again.

Tax increases

In 1931 the top income tax rate went from 25% to 63%. Many other taxes were increased.

At the start of 1936 the maximum income tax rate was increased to 79%. It was increased to 83% by the start of WWII.

Wealth confiscation

In 1937 a 27% annual tax was imposed on undistributed corporate profits. That will destroy business economic activity really fast.

Tax the profits as earned and then confiscate a quarter of the profits every year until every business has nothing left. I cannot imagine how officials could possible think that is a good idea.

Here’s a few more details I didn’t realize: After FDR confiscated all gold in March 1933 at a price of $20.67, he devalued the dollar 60% at the end of 2013, adjusting the price of up to $35.

Here is how Mr. Laffer describes that theft:
If done by anyone else, these actions would be a Madoff-esque crime. But when done by Roosevelt, it was a massive wealth tax a la French economist Thomas Piketty.

The net effect of all the destructive federal policies was to extend the Great Depression until around 1947, shortly after World War II was over.

Conclusions

All the federal actions to stimulate the economy worked so poorly that unemployment averaged 25% in 1933. The utter failure of those policies ought to be obvious to everyone today, but is not.

Mr. Laffer’s conclusion.

If this wasn’t proof-positive you can’t tax an economy into prosperity, then I don’t know what is. And yet time and again political economists continue to recommend higher taxes, stimulus spending, currency devaluation, protectionist trade policies and more regulations that simply don’t work.

My conclusion:

If your goal is to hurt people, especially poor people, then increasing taxes to punitive levels and increasing regulations is the way to go.

If you want to help people, especially poor people, then reducing taxes and reducing regulations is the way to stimulate the economy and make life better for the poor and everyday working stiffs.

P.S. Could someone explain to me how the policies carried out in the 1930s can possibly be classified as moral?

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