When I was young my Dad would often speak disdainfully about "hammer mechanics". A hammer mechanic was someone who had a whole toolbox full of tools, but instead of using the right tool would just pick up a hammer and start beating on whatever was the problem.
Historically Republican have prescribed the same remedy for every economic problem. Economy doing well? Cut taxes, government and regulations. Economy stalled? Cut taxes, government and regulations. Republicans seem to me to be the political equivalent of the hammer mechanic. With a tool-box full of tools for fine tuning an economy Republicans always reach for the same tool. In the last decade as Republicans were leading the charge into the two wars half a world away that are a major cause of our exploding debt, they were cutting taxes. Now Republican Presidential candidates are arguing against increasing the debt ceiling while the Congressional negotiators refuse to consider tax increases to pay for the debt.
It makes me wonder if any of them ever used a history book for anything other than a paperweight.
Republicans have been in complete charge of government and been able to indulge their ideology on only two occasions in the last 100 years, from 1921 to 1933 and from 2001 to 2007. (There was one other brief period where Ike was President and Republicans controlled the House and Senate from 1953 to 1955 which I overlooked when this was first written. Given the short period I don't believe that impacts the thesis of this argument. Particularly since Republicans in 1953 to 1955 were not cutting taxes, they enacted the 1954 Tax Code with some of the highest income tax rates our nation has ever seen). Lets review what happened during those two periods.
Republicans controlled both houses of Congress and the Presidency from 1921 to 1933. They cut taxes, cut government and eliminated regulations. In 1929, after 8 years of Republican control, the stock market crashed and we began a decade long Depression. WW II and the government spending that went with the war effort finally pulled us out the Great Depression a decade and a half later.
For the next couple decades the generation that lived through the crash and depression remembered what had happened, and were largely immune to Republican economic ideology. The top income tax bracket went up to around 90% for a period in the early 1950’s. But as that generation passed from the scene we changed course. In the mid 1980's we bought into Ronald Reagan's fantasy justification for cutting taxes on the wealthy that "a rising tide lifts all boats". Taxes went down and the National debt went up. In the 1990's Republican took control of the agenda and pushed Capital Gains tax cuts, re-structured the nature of the Capital gains tax, and repealed the laws controlling bank speculation. Despite that fact a stock bubble developed and burst almost immediately after the 1996 Capital Gains tax cuts, in 2000 we still handed both houses of Congress and the Presidency to Republicans promising more tax cuts and less regulation. For the first time since 1933 Republicans controlled both Houses of Congress and the presidency from 2001 to 2007. We basically turned back the clock to relive the 1920's. Republicans cut taxes and regulations, eveyone thought they were getting rich. We went through a boom, bubbles in housing, commodities and almost anything else that someone could invest in, then a housing collapse followed by a full on worldwide financial crises.
There is one big difference between the great depression and the current great recession. For the first three years after the 1929 crash, from 1930 to 1933, Republicans continued to control both houses of Congress and the Presidency, they continued to follow their ideology believing the private sector was the path out of the depression. The philosophy was to encourage wealthy people to put their money to work and pull us out of the depression. It didn't work. By the time Democrats took over in 1933 somewhere around 5000 banks had failed, unemployment was at 25%, property values had plummeted and millions of homes were in foreclosure. The country survived on Government borrowing and spending for the next 20 years, running up a huge debt through WW II and the Korean War.
In 2007 as the crash was happening George Bush was getting ready to leave the White House. Luckily his advisors knew enough about the great depression to immediately start developing huge government stimulus packages which the incoming Obama administration carried forward. It slowed the downward spiral enough that now, instead of a great Depression, we are “only” in a great Recession. But now Republicans treat increasing taxes to pay our huge debt as the ultimate sin. They continue arguing we need to cut government, cut regulations, no new taxes. Clearly they are oblivious to history, but they also seem clueless about basic human nature, common sense and the findings of science about investing.
Studies established decades ago that successful investors are conservative, tending toward risk averse. In short most people with wealth want to protect it. They are managers, they don't need more wealth (although they often are perfectly happy to have more if there is a safe way to do it) so they don't take risks that might put their wealth at risk. Sure this is a generalization, people are different, but psychological studies have also shown people value what they already have more than what they might acquire, even if in actuallity what they have is not as valuable. This confirms the common sense observation that most people are cautious with what they own. In general people with wealth go to great lengths not to risk losing it.
Most risk takers are risk takers because they have little to lose and a lot to gain.
History has demonstrated how these two simple truths interact. When the economy is stable with few risks on the horizon, wealthy people become more willing to invest with risk takers. As the economy starts to boom the wealthy become more and more willing to invest with the risk takers and the risk takers become more and more bold. Next thing you know you have some kind of bubble.
When the bubble bursts, wealthy people pull their money back like a snail retreating into its shell. They lost some of their wealth and will be a little more cautious before they take risks again, so probably won't loosen their purse strings until they see a long enough period of stability to make them overcome their fear of risk.
This simple observation explains why in the 1930’s the Republican efforts to use the private sector to pull us out of the great Depression didn’t work. Nobody in their right mind sitting on a pile of money during the Depression was going to take a risk in that economic environment.
Lets look at the current situation. Corporations are sitting on huge piles of cash. Put yourself in their shoes to ask why aren't they expanding their business or starting new ventures. Of course Corporate CEO's say that the reason they aren't investing is because of Obama. If I was in their shoes I would want to point the finger elsewhere so all the employees I have laid off to protect my Corporate (and personal) wealth, and all the folks who have been unemployed don't think badly of my Corporate brand. Selfish protectionism is understandable, we would probably all do the same in their situation, but it is a PR nightmare. So blame someone else.
The real reason Corporations are sitting on cash is they don't want to risk losing it. Sitting on cash right now is a perfectly rational decision.
We still have millions of homeowners underwater on their mortgages, and millions more already in foreclosure. House prices continue to fall. We can pander to the wealthy people in every possible way and they are still not going to cure these huge problems in our housing market. There is no money to be made curing the housing mess. Corporations are making the perfectly rational decision to sit on their wealth and wait for someone else to do it.
Unemployment is stuck around 9% and huge swathes of consumers are tightening their belts. If I'm an investor in small business, or a Corporate CEO, I have to ask, if I spend a lot of my cash stash to expand, to whom am I going to sell products ? Why should I take a risk on entering any market already saturated with products when I can keep my money (or keep shareholders happy) by sitting comfortably on our big pile of money, deflecting criticism by pointing the finger elsewhere and wait until someone else solves the problem.
Simple rule of wise investing - when you have wealth and a risky investment environment, you sit on your wealth and be patient. You may dabble in stocks or other liquid investments, since you can bail out quickly, but you are not going to commit to the long term investment of building or expanding a business.
Cutting regulations and decimating government are not the way out of this recession. They will not make the investing environment less risky, they will take us further down the path of economic instability - the worst scenario for risk taking investment.
The National Debt is hardly a stabilizing factor. But cutting government programs is just an impersonal way of saying we are throwing more people on unemployment, reducing the pool of potential consumers, aggravating the slowdown. The time to trim government is when the economy is buoyant, not when it is stagnant.
The huge debt problem incurred after the Great Depression and WW II was dealt with by really high taxes on wealth. In the early 1950’s the wealthiest earners were paying up to 90% of some of their income. No longer could the wealthy just sit on their wealth. They had to invest and use their wealth or gradually lose it to taxes. The highest tax rate continued at not less than 70% for a couple decades, during which we experienced strong growth and became the worlds dominant economy.
I have no problem with people having wealth. There are lots of people out there who have made making money a higher priority than I have, have worked harder and sacrificed more to make money. I do not begrudge them their wealth. But at the same time, we are all in this economy together, and I have a big problem with short sighted policies that history has demonstrated undermine the health of the economy that directly impacts us all. Our economy has the same counterintuitive dynamics as a peloton in a bicycle race - we all go faster when we all go together.
Private wealth is the way out this recession, and tax policies followed in the aftermath of WW II showed the pathway.
