I’ve had a lot of interest in the referendum that California voted on May 19^th regarding the financial mess their state is in.  In a Sacramento Bee article, Analysis: Convoluted ballot produces ‘a $25 million Rorschach test‘I read the following:

Californians delivered a message of general contempt, but didn’t provide clear guidance to the Legislature on how to solve what is now a $21.3 billion problem.

California is a mess, and it is a warning for the rest of America of what is to come if fiscal sanity is not quickly regained.  Interestingly, there are connections to drilling for oil, auto emission standards, and the federal bail out program.

California Could Pay for their Budget by Drilling for Oil:

In March, Californian analysts reported that they faced a $43 billion deficit.  They cut some spending, and increased some fees and taxes, and then ran into a ballot referendum designed to block further tax increases and force more budget cuts.

And all the while they debate this, California completely ignores a way to raise revenue AND help the rest of the country on energy policy.

They could allow off shore oil drilling and raise billions of dollars in permit fees they would collect from the oil companies.

“Raising fuel economy standards is a far better way to go with far better results … than drilling in pristine areas off our coast,” said Senator Barbara Boxer, who is chairman of the Senate Committee on Environment and Public Works http://www.rigzone.com/news/article.asp?a_id=75178  So, Senator Boxer and her friends are behind the effort to have President Obama increase fuel standards on cars.

Instead of Drilling for Oil, California Will Force Consumers to Pay More for Cars

 The new fuel efficiency standards sound good, but they may kill Detroit and definitely raise prices for consumers.  Based on news accounts, the car costs will increase by about $1,300 per car.  http://www.foxnews.com/politics/2009/05/19/obama-announces-new-fuel-efficiency-emissions-standards/  Not only this, but the way they hope to do that is to force people to buy electric cars.  Now, an electric car battery will have to be replaced after so many miles.  The cost to replace can range between $1,125 and $15,000, depending on make and model.  http://www.lionev.com/upgrade_to_Lithium.html

But this isn’t the only environmental issue, because they want to have what is called “Cap and Trade” environmental legislation.  This will raise the price of electricity by 40%.  Now, can you imagine taking a trip to Grandma’s house and needing to recharge your electric car before going home, but Grandma saying “Hell No” because she doesn’t want to have to pay the electric bill?  Duke Energy CEO James Rogers said “a proposal by President Obama to place a price on carbon emissions would drive up electricity rates in some areas of the U.S. by 40% and warned that it could also lead to “a redistribution of wealth” from Midwestern industrial states to coastal states.” http://www.strategypage.com/militaryforums/89-68904.aspx

Since Californians Won’t Drill for Oil Or Raise Their Taxes, We’ll Have to Bail Them Out.

I’m sure one way Mr. Rogers didn’t intend for this redistribution of wealth to take place is a proposal by Congressman Barney Frank to force us to bail out California.  In response to a request by California Treasurer Bill Lockyer to provide a back stop to California’s debt issue, Frank told Bloomberg News that he was “working with the administration now . . . to do something short-term” for California.  http://www.sodahead.com/blog/76671/barney-frank-wants-to-bailout-california/

Great.  California won’t allow oil drilling, which would raise billions in permit fees, which would fix their budget problem.  They want American cars to have all sorts of new emission standards which will raise prices, so people will end up buying non-American made cars that cost less, since the law of demand has not been repealed by President Obama and the US Congress.   Meanwhile, Barney Frank, the guy who helped create the banking crisis, will take my money to bail out California, so they won’t learn self restraint and will continue to make stupid decisions expecting me to bail them out.

Some Advice from a Hoosier from the Heartland

As a taxpayer in Indiana who tries to live within his means, pay his taxes, drives a car with 147,000 miles on it, raised three great kids who aren’t on drugs and have never been in trouble with the law, and has been married to one woman for 30 years, I have a message for the folks in California who want to keep spending like there’s no tomorrow and force me to bail you out:

Grow up and find an adult who can run your state and who won’t rip off the rest of the country in order to pander to a bunch of aging movie stars in Hollywood and their bought and paid for politicians.  

 And for the rest of you politicians: I may be just One Angry Hoosier, but I don’t think I’m the only one.

We are in danger of losing our liberties, and the American People hardly even realize this fact.  This truth came home to me as I was helping my son prepare for a final in his political science class.  While a good kid, he has little interest in the subject, and was having a tough time understanding such concepts as factions, federalism, and limited government.

Have you ever played the game, “rock, paper, scissors”?  First, we have a rock, made by a fist.  Paper covers the rock, made by an open hand.  Scissors cuts the paper, made by two fingers in a “victory” sign.  Finally, the rock smashes the scissors.

Let’s apply this analogy as we think about the role of centralized government, “the rock,” how the state governments interact on an equal footing with the central government in order to limit the central government’s growth, “the paper” of what we call federalism, and “the scissors” of individual liberty.

A warning from President Eisenhower

On January 17, 1961, President Dwight D. Eisenhower gave his farewell address. In that speech, he issued this warning:

“As we peer into society’s future, we – you and I, and our government – must avoid the impulse to live only for today, plundering for, for our own ease and convenience, the precious resources of tomorrow. We cannot mortgage the material assets of our grandchildren without asking the loss also of their political and spiritual heritage. We want democracy to survive for all generations to come, not to become the insolvent phantom of tomorrow.”

          Did you catch that?  Eisenhower said we “must avoid the impulse to live only for today.”  He said “we cannot mortgage the materials assets of our grandchildren without asking the loss also of their political and spiritual heritage.”  Wow!  If we borrow and spend for today, tomorrow our grandchildren will forfeit both their political and spiritual heritage.

          Finally, if we fail in this effort and consume our grandchildren’s inheritance, then democracy will “become the insolvent phantom of tomorrow.”   In other words, the idea of liberty and democracy will become, for our grandchildren, a ghost, a forgotten memory – and our grandchildren will live in an insolvent country.

          You see, Eisenhower feared the rise of a powerful central government – something he called the “Military Industrial Complex.”  We can represent this with the idea of a rock.  How does a rock grow?  Well, while rocks really don’t grow, mountains can if they become a volcano and erupt.  Constant volcanic eruptions will cause a mountain to grow from a small “rock” to a big one.

James Madison and the Tyranny of the Majority

          James Madison, one of the men most responsible for writing our constitution, was also concerned about the growth of a large, tyrannical central government.  Madison said that because we are governed by men and not angels, the government must not only be able to control the people, but equally important, must be forced to control itself.  To do this, we need to encourage the growth of factions – different groups of people who will divide the power of government so that no one group can gain an advantage over another.  This will force compromise in order to do anything, so that all interests are balanced.  Thus, the congress, the president, and the supreme court are all co-equal branches of government.  But in addition to these balanced powers, Madison relied on 13 (now 50) states which could balance the powers of the federal government.

         In this way, the “paper” of federalism covers the power of the central government – the rock – and checks its growth.

          But in recent years, the federal government has learned how to overcome the power of federalism:  Promise the states money if they will do what the federal government wants.  Using something called “federal mandates,” the federal government forces states to do something by promising them money.  The best example of this is how the federal government got all the states to raise the legal drinking age to 21.  While there was no way to force states to increase the drinking age to 21, they simply said they would withhold federal highway funding if the states didn’t do what they asked.  In a word, the federal government used blackmail to get the states to do what it wanted.

The People Vote Themselves the Money, and Cut the Paper of Federalism

          Notice that by covering the rock of central government with the paper of federalism, the size of government isn’t reduced – we simply stop it from growing larger for a time.  But the “military industrial complex” Eisenhower warned us against doesn’t just want the government to be “the referee” between private factions.  No, it wants to be a player, too.  And so, it wants to “provide services”; it wants to decide who should get these services.  It wants to change our behavior (buy “green” technology, stop smoking, redefine the definition of marriage, etc.)  More and more Americans are becoming consumers of tax dollars doled out by the central government.  As we rely on the government to bail us out, we consume to our hearts content until we can’t survive without help from the government – and so forfeit our liberty.  We don’t even realize what we’re doing.  We’ll gladly vote to use our scissors to cut the paper of federalism, unleashing the growth of the central government – the rock – to give us what we want.

          And so, warnings by people like Eisenhower and Madison are for naught.  We don’t even realize we’re feeding the “rock” of central government, which will turn on us and crush the “scissors” of our liberty.  Instead, we trust blindly in words read from a teleprompter, and like sheep, call those words “hope.”

          It’s a false hope. One which, in the end will lead us to plunder “for our own ease and convenience, the precious resources of tomorrow” and cause us to see the democracy we now enjoy “become the insolvent phantom of tomorrow.”  Only if you and I take an interest in this issue and do something about it will we turn the tide of tyranny which threatens to enslave us.

I teach economics, and in almost every class, the issue of Wal-Mart comes up.  So, as President Obama today travels to Elkhart County, Indiana, I want to take this opportunity to talk about the issue of Wal-Mart, and the county in which I grew up, and why this is offers us a case study on the effort to socialize America. 

Did you know that there is a very coordinated PR campaign to bash Wal-Mart, and they rely on folks who don’t know about this PR campaign to spread their agenda?  In effect, these people are using folks who don’t know about this “stealth campaign” to bash Wal-Mart.

So, I’m not here to tell anyone that they should automatically fall in love with Wal-Mart, only to make you all aware that when you speak negatively about Wal-Mart, you may be the unwitting pawn of someone who is pulling your chain. 

I would encourage you to google the term “War on Wal-Mart”.  There are a number of articles you’ll find.  Just one is “The New War Over Wal-Mart” from June, 2006 in the Atlantic Monthly.  The link is http://www.theatlantic.com/doc/200606/wal-mart

Here are a couple of quotes from that article:

“One of the major forces opposing Wal-Mart is organized labor. The United Food and Commercial Workers International Union has long wanted to organize Wal-Mart’s stores.  Last year, it succeeded at a Canadian Wal-Mart, which the company immediately shut down. “If Wal-Mart doesn’t change its ways, we’ll turn it into Big Tobacco,” Chris Kofinis, communications director for the UFCW-funded Wake Up Wal-Mart, told me recently.”

“The company’s other main antagonist, Wal-Mart Watch, is also backed by labor, though at first glance its motivations are opaque. Wal-Mart Watch is heavily financed by the Service Employees International Union, whose president, Andy Stern, says he has no intention of organizing Wal-Mart. Not long after the Maryland law passed, I asked Stern, who helped push it, what he was up to. He smiled. “

Stern has something much grander in mind even than unionizing Wal-Mart. “Ford wasn’t created to be a health-care provider; it was created to produce cars,” Stern says. “My goal is to get Wal-Mart’s leadership out there in traffic and holler, ‘We can no longer compete in the global economy when health care is factored into the cost of our products.’ If Wal-Mart’s CEO, Lee Scott, were to come out and say, ‘We need a national health-care system that works for everyone,’ then it’s a whole new ball game.”

“After the 2004 election, SEIU joined with environmentalists, women’s groups, and community activists to form Wal-Mart Watch, hiring seasoned Democratic operatives and jumping into the public debate. The new group focused much of its efforts on the company’s health-care programs, with considerable success.”

Please note that Andy Stern, the head of the Service Employees International Union (SEIU), doesn’t need to have a goal of unionizing Wal-Mart because he wants to use the “War on Wal-Mart” in his argument to push of nationalized health care. He teamed up with Democrat Party “community activists” and created a PR campaign to do what he wants done.

As all of you know, I used to be a lobbyist. The lobbying practices of the SEIU are textbook PR tactics (by the way, I also teach PR for a different school).  In 1991, I worked for the National Federation of Independent Business (NFIB), an organization that represents small businesses as a sales representative. I worked as a sales representative for them.  Back in the early 1990s, NFIB was very much against Wal Mart because they feared that Wal Mart would lead to the closer of small “main street” businesses.

While SEIU is pushing for nationalized health care, NFIB agrees with Wal-Mart that this is a bad idea.  The following is from the NFIB policy guideline that addresses their policy, and mentions Wal-Mart specifically.  I encourage you all to read the full report at  www.nfib.com/object/PolicyGuide4.html  Here’s the quote concerning Wal-Mart and NFIB’s general policy on the subject of “competitiveness”:

The consumer’s “good” is the final objective; small business is only a means to that end. Government’s role is therefore limited to setting and enforcing the rules of competition and ensuring that small firms have the opportunity to compete. Its role is not to support small business directly.  Three examples illustrate the policy. The first is treatment of the retail giant, Wal-Mart, and its small Main Street competitors.

Wal-Mart initially targeted small towns and rural areas. Main Street retailers were the primary competition. As Wal-Mart grew, the number of Main Street retailers declined in the immediately surrounding areas. Yet, the response from policy-makers, business owners, and the small-business support community was not to create barriers to Wal-Mart’s growth, but to help small retailers compete against the company or to find  unoccupied niches. Policy focused on competition, not competitors

Notice that while SEIU’s policy is to use Wal-Mart for a PR campaign to provide nationalized health care – and socialism in general – NFIB wants to encourage competition.  SEIU really doesn’t care what happens to Wal-Mart and the people who work there.  Their goal is to reform the fabric of our nation.

My home town of Goshen Indiana, population of 25,000, has two Wal-Marts.   It is located in Elkhart County, where President Obama will be today.   The Goshen Chamber of Commerce worked hard to revitalize the downtown mainstreet to apply this principle when Wal-Mart opened these two stores in the early 1990s.  Because of this, unemployment in the county for most of the 1990s was less than 3%, declining from a high of 7% during the 1991 recession. Now, the biggest manufacturers in Elkhart County, of which Goshen is the county seat, are RV and auto industry related businesses.  Their problems are what are causing the majority of the unemployment problems there.  Unemployment today is about 15%.  It’s the highest in the nation, and today, President Obama will go to Elkhart Indiana, 14 miles from my home town of Goshen.  By the way, as recently as April, 2008, the unemployment rate was 5%.  See http://www.nidataplus.com/lfeel1.htm

My home town has lots of problems, and the economic issues it faces are far beyond the scope of my post.  But, having two Wal-Marts at either end of the town aren’t part of the problem.  In fact, I believe, they are one of the positive elements going for my home town.

Today, the President will go to Elkhart to push for his “stimulus package.”  Those who recognize his agenda as being for socialism, and are against that, might want to go sign a petition against it at http://www.nostimulus.com/

So, as we think about economics, let us recognize that there are forces at work that are attempting to implement political philosophy as part of their economic agenda.  If you agree with such philosophy, that’s great, not a problem.  SEIU has an agenda.  So does NFIB.

Everyone pushes an agenda - Republicans and Democrats, Conservatives and Liberals.  Know what you believe and why you believe it.   If you want to bash Wal-Mart and you favor the socialization of America, that’s your choice.  It’s a free country (still!) and so that’s your right.  But please be sure to let people know that that’s your agenda.

For everyone else, I hope my post will help you avoid “thoughtless thinking”.

–

Recently, I was having lunch with a friend and this question came up:  How do you explain to people that Socialism is a bad idea?  In a culture where more and more Americans expect government (or “the rich”) to bail them out of their financial problems, why wouldn’t somebody want more – instead of less – Socialism?

So, that’s the purpose of this post:  To try to explain what’s so bad about socialism.

First, two definitions.  The dictionary defines Socialism as “any of various economic and political theories advocating collective or governmental ownership and administration of the means of production and distribution of goods”.  Now, that’s the technical definition, but in our “post modern” world says experience is king.  The idea that “something may be true for you, but it isn’t true for me” now passes for what used to be called critical thinking.  And so, in deference to the “new wisdom” that experience is more important than rational thinking, I think we need an experience-based definition of Socialism.

Of Toy Sales and “Spreading the Wealth” Under Socialism

Back when I was in fourth grade, three of my friends and I decided to have a neighborhood toy sale.  We had model airplanes, army men, comic books, board games, and other stuff we didn’t want any more, so we decided to sell them.  We set up shop on the sidewalk in front of Tim’s house and waited for customers to show up.  Hardly anybody did.  So, I got on my bike, loaded some toys in my bike basket, and rode around the neighbor hood selling my toys and directing kids back to our sidewalk sale.  My mother called the local newspaper, and they sent a reporter out to take some pictures and do a story on our little enterprise.

At the end of three days, we had made a whopping $12.75.  Now, the original idea was that each of us would get the money from the sale of our own personal toys – we’d kept track of that, just like our moms did when they had a garage sale.  My toys had brought in a little over $7.00, so that was what I was expecting to get for my efforts.  Another kid, Eric, said we should divide the money equally between all of us.  He said that would be more fair, and so instead of getting my $7 and change, I got $3.19.  Eric, of course, made more money this way than if he’d only gotten the $1.50 from the sale of his own personal toys.  One of those toys, a broken model airplane for $.50, and been featured in the newspaper article that got printed in the Goshen News.

When I asked Eric where he got this idea about sharing the money instead of giving it to the people who earned it, he said “This is Socialism, it makes sure that everyone shares equally.” 

So, What’s So Bad About Socialism?

  Looking back as an adult, here’s what I took away from that experience with Socialism way back in fourth grade:  Socialism can only work if the hard working individuals (I was the one who rode his bike through the neighborhood drumming up business) do the “heavy lifting,” because only then will there be any wealth that “everyone can share fairly.”  But here’s the rub.

Why should the hard working people who have the ideas, the drive and the work ethic to get things done, start businesses, and create jobs for others IF they don’t get to take a greater share of the profits to reward their greater share of the effort?  If these people don’t have an incentive to go out and bust their butts, they will eventually decide to sit back and do just enough to get by.  And if that means everyone ends up starving, fine.  At least that way, everyone will starve equally.

But, one might object, shouldn’t we help others?  The answer is: OF COURSE WE SHOULD.  But we should not confuse charity and helping those less fortunate than us with the creation of a socialist state.  Socialism is a government run system that ultimately forces some people to do what the government says they should do.  It kills creativity and the motivation to succeed.  Helping others is something God has called all of us to do, volunteering not because we are forced to, but because it is the right thing to do.

Years ago, I volunteered at a local homeless shelter.  For five years, I met with one man, Richard.  He went through a lot of ups and downs in his journey from dependency to self sufficiency.  At one point, he stayed with my family for three weeks after showing up on our doorstep after having attempted suicide.  Mine is not a unique story.  Countless Americans across this country volunteer their time and treasure to help others.  But they do it voluntarily.

In my experience, those who advocate Socialism feel guilty because they haven’t “labored in the trenches.”  So, to avoid the guilt of not helping others one-on-one, they decide to tax everyone so they can pay government bureaucrats to take care of “those unfortunate people.”  This justifies their laziness – whether its laziness in preferring to live off the labor of others, or laziness in not doing the hard work of helping a neighbor in need.

In the end, Socialism and the idea that we can just “spread the wealth around” creates a lazy society.  And a lazy society in a world that is becoming increasingly competitive will quickly loose ground.  In the end, that is a consequence that Americans can ill afford.

This post was sparked by a request to write an article about the financial bailout and student loans for one of the schools where I teach economics.  It’s one that affects many American families.  I have three adult children:  One with a six figure student loan; one who, with his wife, have a mortgage-sized five figure student loan; and a third still attending college while living at home with a four figure student loan.  Hence, my opinions are rendered without prejudice toward anyone who has a student loan:  My family and I are in this boat with much of the rest of America.

The Theory Behind the Bail Out

You have no doubt heard of the “stimulus package”.  In economics, this is called an “accelerator” that sort of “jump starts” the economy.  Once you get it, the idea is that you will spend it and it will spread throughout the economy.  When Ronald Reagan applied this theory, it was derisively called “trickle down economics,” but when JFK announced his tax cut plans, it was called “the multiplier effect.”   

Thus, the whole bail out plan is predicated on this idea of economics, first expressed by an economist named John Maynard Keynes in his “General Theory” back in 1935.  He wrote that book during the Great Depression.  But Keynes had a zinger in his general theory.

Basically, if you and I save that “accelerator” instead of spend it, then the multiplier will be smaller than it should have been.  Another economist named Paul Samuelson, author of a text book series that every student who has majored in economics over the last 40 years has read, wrote: “By attempting to increase its rate of savings, society may create conditions under which the amount it can actually save is reduced.  This phenomenon is called the Paradox of Thrift.”

The thing is, if you and I don’t save, banks don’t have money to lend.  If they don’t have money to lend, businesses can’t create new jobs (because they need to borrow money to build a factory just like we borrow money to buy a house).  And, groups like Sallie Mae can’t get the money they need to lend to students who need student loans.

Now, the US has a negative 1% savings rate.  We have bought into “Keynesian Economics” BIG TIME.  How do we get money to invest in America to create jobs?  We borrow from the Chinese, the Taiwanese, the Japanese – all those “eses” who still think it’s a good idea to save money.

The problem is that none of these lenders (who bought from hedge funds, Fannie Mae, Freddie Mac, etc.) are sure what the value of all those houses that “stand behind the loans” as collateral are worth.  And, because they aren’t sure, instead of lending money, they’re holding the dollars they received from the bail out (something that Keynes warned could happen in what economists call a “liquidity trap).

Part of what Secretary Paulson and Ben Bernanke of the Federal Reserve have been doing is to increase the money supply.  They hope that by providing money (economists call it “liquidity”), banks will lend, people will borrow, and life will go on as usual.  In a liquidity trap, that doesn’t happen.  In fact, in a class I teach, the following appears on page 369 of Steven L. Slavin’s 9^th ed. of Macroeconomics where he summarizes what Keynes said:

“but during a bad recession perhaps people would just hold their money, waiting for interest rates to rise before they lent it out. … If the money supply were increased during a bad recession, said Keynes, the money would simply be held as idle cash balances by relatively well-to-do people.  Nothing would happen to the money until the economy was well on its way toward recovery, interest rates rose, and more investment opportunities became available.”

Now FED Chairman Bernanke is said to be an expert on the Depression and what Keynes said.  Yet, he ignored this piece of economic wisdom.  In fact, with the exception of Congressman Mike Pence from Indiana and a handful of others who spoke out against the bail out plan, virtually all the “smart people” in Washington and Wall Street ignored what I teach students in Economics 101 today!!!

And so, where do we find ourselves?  Well, the banks aren’t lending out the money.  What’s more, we aren’t going to stop with a bail out of the banks.  News reports indicate the auto industry, cities, states like California, home builders and others are lining up to get their bail outs.  Those who watch the Student Loan Industry are worried that Sallie Mae will be the next Fannie Mae and Freddie Mac.

What Should A Student Do?

If houses are what serve as collateral to back mortgages, then what serves as collateral to back a student loan?  The answer is that you, the student, serve as collateral with respect to your expected future earnings potential.

And if banks are hesitant to loan money because they are having a hard time calculating the value of a house that secures a mortgage, think of the implications as lenders try to calculate the value of a student’s future earnings potential.

Clearly, this is a difficult task, as hardly any individual student can project their future earnings, let alone a bank. And so, in answer to the question “what is going on in the economy and the recent bailout we have had and how it might affect student loans” that I was recently asked to address, here’s my answer, though you may not like it.  And of course, since it’s free advice, so don’t feel obligated to take it:

1.     Go to school because you have a clear purpose and plan for how you will apply your degree once you graduate.  This is what our adult daughter has done, and she is a medical doctor in her first year of residency as a surgeon.

2.      If you don’t have a clear purpose and plan for how you will apply your degree once you graduate, develop one.  This is an application of the “Problem Based Learning” decision making model taught in some of the schools I teach for, and is something my son and daughter-in-law had to do.  While they at first did not have a plan, they are presently in S. Korea teaching English and receiving free rent (though it is a one room flat and a bathroom).  They are using the money they earn and save to repay their student loans.  They estimate it will take 5 years, at their present pace, to pay off their loans.

3.     Finally, if you know you need an education but are not sure of a plan, work for a company that reimburses tuition expenses while you “figure it out”.  This is what our adult child #3 is doing, as he lives at home, goes to school by day, works nights, and is reimbursed by his employer.

4.     If you can’t do any of these three things, then don’t go to school and go into debt, as you will have little hope of bailing yourself out.  For more information on this, read “Will the Student Loan Industry be Bailed Out Next?”

All of us are in charge of the decisions we make.  If we wait for the government to bail us out, there’s going to be a long line ahead of us.  My wife and I are very proud of our three children and the decisions they are making.  Our family is in this boat with you, the reader, as we try to figure out what is the best course of action to take through these troubled times.

With respect to our leaders in Washington who got us into this mess, I’m angry as hell.  I’m not sure what, if anything, I can do about it – though I hope posting this article does some good.

In closing, I highly recommend “Paradox of Thrift R.I.P.” In that article, you’ll find this quote:

“Perhaps the single most destructive tenet of Keynesian economics was its denigration of saving. Keynesianism has been used to justify wasteful spending, massive deficits, and one after another scheme to redistribute wealth from those who would save it to those who would spend it.” (emphasis added)

I have more to say on the whole “Spread the Wealth” idea in my blog post “Joe the Plumber and the Character of the American People.”

Have you noticed in the last two presidential debates that McCain accused Obama of doing things that President Herbert Hoover (a Republican) did that led to the Great Depression?

Well, he has.

By an act of God, Destiny or Fortune, which ever you might choose to credit, the run-in between Joe the Plumber and Senator Obama over the issue of “spreading the wealth” has served to create a vehicle to talk about the lessons of the Great Depression.  It lets us see how the character of the American People changed from that of reliance upon God and self effort to a reliance on Government and a Socialist State.

So, a great question is:  Just what was it that President Hoover did that helped create the Depression, and how does that apply to us today in the current financial crisis?   There are three main things that happened that helped cause the Depression.

First:  An Increase in Tariffs.

In 1930, Congress passed, and President Hoover signed, the Smoot Hawley Tariff. 

What had been happening since the end of WWI was that the US was importing more and more goods from Germany.  Germany needed the money it was making by selling to the US in order to pay its war reparations to England and France, who won WWI.  The problem was that the American Federation of Labor, under the leadership of Eugene Debbs, wanted Congress to protect American workers.  Unfortunately, by increasing tariffs, Germany wasn’t able to sell materials, so it couldn’t earn money to pay its war reparations, which meant that France and Great Britton couldn’t repay America for the loans they’d been given by American banks.   Here’s how Answers.com describes that act: http://www.answers.com/topic/smoot-hawley-tariff

“U.S. legislation that raised import duties by as much as 50%, adding considerable strain to the worldwide economic climate of the Great Depression. Despite a petition from 1,000 economists urging Pres. Herbert Hoover to veto the act, it was passed as a protective measure for domestic industries. It contributed to the early loss of confidence on Wall Street and signaled U.S. isolationism. Other countries retaliated with similarly high protective tariffs, and overseas banks began to collapse.” (emphasis added).

Sound familiar?  http://www.heritage.org/research/taxes/bg180.cfm

Second: Increase Taxes

If you go to this link, http://www.taxfoundation.org/publications/show/151.html you can see a history of income tax rates for the US.  Take a look at what they were in 1928, and compare that to 1932.   

There, did you see that in 1928, the poorest earning less than $4,000 paid 1.5%, while the richest earning over 100,000 paid 25%?  In 1932, the poorest were paying 4%, and the richest earning over $1,000,000 were paying 63%. And those earning more than $38,000 saw there income tax rate rise from what it had been before (15%) to 25%. 

Now, if you saw that your income taxes were going to triple, what would you do?  If you said “try to avoid paying income taxes,” you’re not alone. Rich people started investing in municipal bonds and other things that are not taxed.  As a result, the proportional income contribution of individuals making over $300,000 actually declined from a 23.5 percent share of total revenues to 18.4 percent.  On the other hand, people earning less than $25,000 saw the percentage of the total tax bill they were paying increase from 21 to 36.5. (See, for example, http://www.heritage.org/research/taxes/bg180.cfm ).

In other words, trying to get the rich to pay more in taxes backfired:  It was the middle class that ended up carrying more of the load.

Third: The Federal Reserve Reduced the Money Supply

I don’t want to make this into a long drawn out economics lesson for those that don’t have the interest.  Banking policy, while very important, can also be rather tedious.  So, if I may draw an analogy:  The supply of money in the economy is like the blood supply in the Human body.  Not enough, and the body grows weak and can’t function.  Too much, and organs can rupture, resulting in internal bleeding.

A GREAT article to be found at http://www.hoover.org/publications/policyreview/3476271.html makes the following two points:

1. This massive destruction of liquidity began when the Federal Reserve responded to the 1929 stock market crash by allowing the quantity of money to decline by 2.6 percent over the next year. This extremely tight monetary policy put the economy into severe recession.

2.     The great depression’s most serious and long-lasting consequence was not the collapse of prices and employment, but the displacement of the traditional reliance on individual responsibility with government guarantees of security. Beginning with Social Security, these guarantees have grown into the all-encompassing welfare state. This has changed the character of the American people, and it has changed the character of their government.

I hope you’ll take the time to read it – it’s a great article, and it makes the point that government intervention, rather than the failure of the market place, is what caused the great depression.

And that’s the issue before us today.  Who is smarter:  Millions of “Joe the Plumbers” each acting in their own best interests, or a handful of Harvard trained lawyers and economists sitting in Washington telling us how to behave – and then funneling money to groups like Acorn to make sure they get elected instead of folks that agree with Joe the Plumber? (See, for example, http://michellemalkin.com/2008/09/25/kill-the-bailout-more-acorn-funding/ ).

What do you think?  I’m looking forward to your thoughts, so long as they are posted with respect.  As I have done here, please provide reference links to back up your opinions!