July 9, 2010

HEY, HERE'S AN IDEA...:

Obama threatens to follow in FDR's economic missteps (Amity Shlaes, July 9, 2010, Washington Post)

Taxation is an obvious area the Obama administration ought to reconsider. Income taxes, the dividend tax and capital gains taxes are all set to rise as the Bush tax cuts expire. The Obama administration portrays these increases as necessary for budgetary and social reasons. A society in which the wealthy pay their share, the message goes, has a stronger economy. The administration and congressional Democrats are also striving to ensure that businesses pony up. The carried-interest provision in the tax extender bill seeks to raise rates on gains by private equity and hedge funds. If that were not enough, a so-called enterprise value tax would be levied on partnerships that sought to elude the new high taxes by selling their companies.

Roosevelt, too, pursued the dual purposes of revenue and social good. In 1935 he signed legislation known as the "soak the rich" law. FDR, more radical than Obama in his class hostility, spoke explicitly of the need for "very high taxes." Roosevelt's tax trap was the undistributed-profits tax, which hit businesses that chose not to disgorge their cash as dividends or wages. The idea was to goad companies into action.

The outcome was not what the New Dealers envisioned. Horrified by what they perceived as an existential threat, businesses stopped buying equipment and postponed expansion. They hired lawyers to find ways around the undistributed-profits tax. In May 1938, after months of unemployment rates in the high teens, the Democratic Congress cut back the detested tax. That bill became law without the president's signature.

Then there is labor policy. Obama announced this year that the federal government would award contracts to firms with more generous pay and benefit packages. With its support of private- and public-sector unions -- recall its treatment of the automakers' unions in the 2009 bailout -- the administration generally wants wages or compensation to be high.

Roosevelt's flamboyant pursuit of a similar goal cost the economy dearly. The National Industrial Recovery Act and, later, the Wagner Act gave workers the power to demand higher wages. They got them. But employers struck back, choosing not to hire or rehiring many fewer workers than they otherwise might have. In the later 1930s, the divide deepened between those with jobs and the unemployed. Economists Harold Cole and Lee Ohanian wrote in the Journal of Political Economy that the politically driven wage increases were the most important factor in the double-digit unemployment of the later 1930s. A popular Gershwin song of the period, "Nice Work If You Can Get It," captured the bitterness.


...let's make hiring and earning less attractive!


Posted by Orrin Judd at July 9, 2010 6:03 AM
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