Recruiters for Tax Cuts: Federal Spending Programs Is Not the Answer!

Feb 6, 2009
This article is part of a series called Opinion.

All of us have a stake in government decisions made to address the current economic climate. Whatever we do, the business community and investors need to see actions on the economy that inspire confidence and optimism to get job growth back on track.

At present, there is an economic stimulus bill under review in the Congress, submitted by the new Administration, that may reach $1 trillion in new spending programs. Are you feeling optimistic yet?

Since the 1980s, the U.S. economy has demonstrated to the world how to stimulate growth and job creation: low taxes, free trade, and low government intervention. For decades, such policies have kept unemployment rates lower in the U.S. compared to almost all first-world, industrial nations.

What happens when governments intervene in economies? Consider two examples:

1. The 1930s: In the U.S., it was about money supply, taxes, and trade…
Historians generally agree that there were three federal government actions that contributed to the financial collapse of the 1930s. The well-known stock market crash of October 1929 was just the flashpoint for events that ultimately moved the economy from a difficult recession to a depression:

  • Federal Reserve Bank: According to Dr. Milton Friedman, in his book “Free to Choose,” from 1930 to 1933 the Federal Reserve Bank acted to reduce the money supply by 28%. Result? With a smaller money supply, massive bank failures (9,000+) occurred across the U.S. Banks closed due to under-funding for credit, lending, and daily operations.
  • Congress increased taxes to balance the federal budget.
  • Smoot-Hawley Tariff Act: In 1930, Congress passed the Smoot-Hawley Tariff Act, which raised the costs of goods imported to the U.S., which set off a trade conflict with other countries.

Results? The GDP of the U.S. was:

1930: -8.6%
1931: -6.4%
1932: -13.0%

In a recent article, Dr. Thomas Sowell, economist and author, commented on the Smoot-Hawley Act and federal actions of the 1930s:

  • Unemployment rate before government actions: June 1930: 6.3%
  • Unemployment rate after government actions: February, 1932 to January, 1935: 20%+

The rate of 24.9% in 1933 was the high point, with a rate range from 14% to 19% through 1938.

2. The 1990s: In Japan, it was about government spending, trade, taxes…
In the 1990’s, the biggest experiment in history for government spending to stimulate an economy was undertaken by Japan. According to a recent Washington Post article (9/22/08), from 1989 to the early 1990s, Japan experienced economic events that severely impacted investments, banks, and real estate:

  • Financial markets in the 1980s were heavily engaged in speculative investing, with the Nikkei average peaking in 1989 before it collapsed to a value that is 30% of its value of that period.
  • Banks engaged in increasingly speculative lending practices, which created a loan portfolio bubble that, as loan assets dropped in value, threatened bank industry solvency.
  • Real estate investments were highly speculative, especially commercial properties. Prices collapsed, ending in huge losses to investors. Properties today are at 40% of property values of that period.

How did the Japanese government react to collapsing values of investments, bank loan portfolios, and real estate, as well as a long-term recession?

According to the article noted, in the early 1990s, the government of Japan launched massive spending programs, borrowing heavily to finance new public works construction as well as subsidizing hundreds of thousands of banks and businesses that would otherwise be insolvent. Government borrowing and spending exceeded $700 billion U.S. in the 1990s. In addition, according to the Institute of International Economics, Japan increased taxes and imposed new trade regulations to protect domestic markets.


Hello, World!

Annual Growth, 1980s-presentNational debt v GDP, 2007
Japan2.9% from 1987-1995
1.3% Since 1995-2008
182% of GDP
U.S.2.7% from 1987-1995;
2.9% from 1995-2008
36% of GDP

The U.S. economy has outperformed the economy of Japan since the mid-1990s and the onset of Japan’s economic problems. If government spending and intervention are the answers, why didn’t Japan achieve growth rates at least comparable to or better than the U.S. for the time period? Government spending and intervention were policy failures for Japan and we as a nation will hopefully not follow the path of failed policies.

Can we go back to basics? We already know how to create jobs: low taxes, free trade, and less government intervention. Let’s get to it!

This article is part of a series called Opinion.
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