Low Taxes Don't Cause Recessions: Part I

There are some things that are just not worth bothering to answer. But sometimes I get goaded into it, because of timing, or exasperation.

I, like you too, probably, have people on Facebook I’m connected to, but not because of politics, and yet we tolerate their posts for the sake of other reasons. There’s one of these in particular whose life I want to keep up with, but whose politics—especially the steady stream of everything put out by the Obama campaign website for minions to pass along—just causes a roll of the eyes.

Among the continual propaganda (alongside my care not to let politics be intrusive on my wall), this post came a few days ago:

It is apparently a characteristic of Obama minions that they have a moat and beam problem (and probably aren’t even familiar with the source of that imagery: Matthew 7:3-5).

The steady stream of posts has continued since that one a few days ago. This one came on Monday, with the comment, "Very sad. We need to fix this."

So, let’s see if I catch the message: low tax rates cause recessions and depressions. If only government would confiscate more money, then businesses would hire more workers and create more wealth. I’m not imagining that message, am I?

And the data verifies it, right? Well, not exactly. There is data shown here that implies a cause/effect relationship, but there are some really big gaps in the data as well as the surrounding history—which you have to be ignorant of in order to believe this implication. It is similar to noticing that 95% of obese people eat tomatoes either frequently or occasionally; ergo, eating tomatoes causes obesity. Well, not really. Even if the data is true, there’s a whole lot of data missing that would give a better picture of the causes of obesity. With the additional data we might find not only that eating tomatoes does not cause obesity, but we might find it’s a good food to help avoid obesity. So to give the limited data with the causal implication is pretty much—a lie.

One thing noticeable on the Obama-provided chart is a lack of data for the Great Depression. No problem; I can Google. I easily found the Historical Highest Marginal Income Tax Rates from 1913 (the first year they were imposed) through 2012.

Here’s a little history. When the income tax was proposed, it was pressed through as the 16^th Amendment over more than half a decade, based on the promise that the rate would never rise above 7% and would only be imposed on the very wealthy. That held for three years. Then in 1916 it more than doubled to 15%. But that wasn’t sufficient for Woodrow Wilson; he more than quadrupled it in a year to 67%, and the following year to 77%. Good for the economy? Not really. But there was a world war on, so maybe  there was a temporary need? But it was maintained at 73% for the next three post-war years.

Then in 1921 there was a stock market crash—every bit as severe as the 1929 crash. But government didn’t interfere, and the market corrected. According to the historical chart, one change from 1921 to 1922 was a decrease in the marginal tax rate. And those rates continued to be lowered down to a steady 25% for the rest of the decade. The Roaring 20s. A prosperous decade.

Yes, those rates were still low when the stock market crashed. Was that the cause? Most people look at overspeculation during the inflationary policies caused by the Federal Reserve failing to return to the gold standard following WWI. Related to the top marginal tax rate, there was a belief that rates would stay low, or even drop lower, up through 1929, when it had been dropped to 24%. But then, in 1929 the rise back up to 25% was passed. Those speculating because of reliably low rates would see that as a signal to get out of the market. After the legislation was passed to slightly raise the rate, but before the rise shows up on the historical chart, the 1929 crash happened. Was that change in rates the cause? Not enough data here, and this certainly isn’t the full picture. You have to include artificially low interest rates manipulated by the Fed. But we can be pretty sure it wasn’t the lower rate voted for in 1928 that caused the crash in October 1929.

Following the crash, the market began to recover, signaled by significant return growth in employment—until the government started interfering. That was Hoover, a Republican, but a "progressive," not a conservative. The interference halted the nascent recovery, and every interference caused further hindrance. Then, in 1932 the rate is drastically raised to 63%. Did this lead to an increase in employment? Of course not. It did lead to Hoover being voted out of office, and rightly so.

Unfortunately, the alternative was the even more “progressive” FDR. He held the rates at 63%, while interfering in various other government intrusions, though 1935. Then in 1936 he jumped the top tax rate to 79%. Coincidentally, 1936-1937 was a serious downturn in the economy. That’s when the word “recession” was invented, because it sounded less dire than “depression.”

But wait! There’s more! We’re only a third of the way through the timeline. So the rest of this will have to be continued in Part II in a couple of days.

Poster Household

A couple of days ago Greg Mankiw’s economics blog posted a chart showing the ratio of the population that is employed, from 2004 through the first quarter of 2012. You can see the plunge from early 2008 through the end of 2009. A normal recovery from a recession would, by definition, return to approximately the pre-plunge level (see my posts Parabolas and The Trampoline Effect). Clearly that has not happened.

EMRATIO chart found here

This is a better picture of the recession and unemployment rate than the doctored numbers the administration has been feeding to the sycophantic media. This picture is what we’re experiencing.

I know we can’t extrapolate accurately from one anecdote, but the Spherical Model household has been a good candidate for the poster family for the Obama economy (taking into account that the plunge began before Obama took over). My sense is that we’re not alone in our experiences (even though our numbers may be higher than most).

For part of 2011 we had nine people living in our household: eight adults and one toddler. Of the adults, three were employed: one well employed, one working two jobs but still seriously underemployed, and one part-time summer job. That left five unemployed job hunters—none of whom could get unemployment payments, nor appeared on government charts. That happens when you go from full-time student or full-time mom, or part-time worker who quit to move—all common situations.

But the government measures unemployment by how many are getting unemployment checks. If eligibility runs out, or they give up trying, or take time to try to develop an entrepreneurial business, these unemployed people stop being counted.

If they take a temporary low-paying job, because there are many good things that come from being a paid worker rather than an unemployed job seeker, they disappear from the statistics, but they don’t exactly exemplify recovery. We’re the poster household for this situation as well.

We went down to eight people (seven adults) at the end of summer when my daughter, Social Sphere, returned to college, where she had lined up another part-time job. By then three more family members started working part time at low pay, leaving only two technically unemployed (but not counted), but actually still six looking for better employment.

People who don’t expect government to solve their problems eventually improve their situation in just about any circumstances. My son Political Sphere will start law school in the fall, so, while the income situation will continue to be a problem not measured in the government statistics, we expect much better prospects for his family in about three years. And Mrs. Political Sphere, while underemployed, has been able to find some work recently, and the job should transfer after their move.

Economic Sphere entered the US Army and is halfway through bootcamp. He has a six-year commitment, or possibly a career, after which he has top secret clearance, another language, computer experience, and other experiences that should keep him employable.

So the household begins to empty out. Eventually we can call it recovery, although that will take years. Would we want four more years of this? No. I’d really prefer opportunities and prosperity for us and all our children. And I think I could also get used to quiet and a clean house—interrupted by frequent visits. Family continues to be the basic unit of society, and when family functions well, it is much better at leading to the positive ends we seek than government could ever be.

The Trampoline Effect

The other night I was reading something about the recovering economy—a recovery so tepid we can’t perceive it; instead we must take government’s word for it. Never comforting. And the reading led me to talk with my son Political Sphere about the concept that, the deeper the recession, the stronger the following recovery. I wrote about this principle with more detail in “Parabolas” on November 21^st.

photo from trampoline.com

So, we were discussing this concept, and Political Sphere unveiled what he calls the Trampoline Effect. On a trampoline, the harder you come down (from a higher or heavier fall), the higher and more powerful the bounce back up. But if a big brother (yes, he worded it that way, with plenty of extra meanings) steps in to “help,” it doesn’t help. It usually disturbs the bounce, taking the energy out of it, and you end up with buckled knees and a few small bounces fading into flatness.

Picture the difference between a parabola (the natural down and back up bounce) and what is euphemistically referred to as an L-shaped recovery, but is really just the dribble that happens from interference in the bounce.

Big Brother “helping” is the government stepping in, taking actions that interfere with the energy of the natural growing economy.

So, every time you hear someone say, “We had to do something,” or “Think how bad it would be if we hadn’t taken action,” translate that in your mind to the Trampoline Effect. Does the jumper need you to step in and “help” in order to bounce back up? No, that is going to happen unless you interfere.

A recovery, by definition, is coming back up to at least the starting point. If that hasn’t happened, we’re either still going down, or we’re stuck down flat because of the interference. What we need is for Big Brother to get out of the way so we can make a few small tentative bounces and put our energy into building up a good parabolic rise. But every time he steps in, he zaps the energy out of your bounce and leaves you flagging.