The Final Word on Economic Stimulus


— Albert Einstein


The Physics of Economics – Tax Cuts

Economics is another sphere where we have empirical evidence that certain things work and certain things do not. When President-elect Obama announced that 40% of his new economic stimulus plan involved tax cuts on business and individuals, his aides admitted that such tax cuts are the fastest way to stimulate the economy and get people working. Since then, we have seen congressional democrats balking at the notion, eager to raise taxes and spend that money to stimulate the economy.

The problem is that history teaches us that the cuts these senators and congressmen are against are the very things that have a real track record in stimulating the economy. John F. Kennedy, Ronald Reagan, George Bush—they all cut taxes and upon doing so, the economies they presided over improved. Ireland dropped its corporate taxes to 12.5% and they are among the most prosperous countries in the world. Hong Kong, with its low taxes and loose regulations holds the title as the world’s freest economy and it is perhaps the most prosperous spot on Earth.

How does that work? It works because the free market takes care of itself. It works because keeping more money in the private, productive sector of the society has a real stimulating effect on the economy than siphoning the money off to the non-productive (aka governmental) sector of society intent on “spreading the wealth.”

The Physics of Economics – Bailouts and Stimulus

It was proven, back in the 1940s, that bailouts and stimulus programs, then called The New Deal, did not work. That was the assessment of the highly respected Treasury Secretary, Henry Morgenthau, a staunch FDR ally, when he testified before the House Ways & Means Committee in May of 1939:


And that came from a guy who liked FDR! He didn’t sugarcoat it and he didn’t have to, the New Deal, with all of its “infrastructure” spending, protective tariffs, bank regulation and so on, was such an obvious failure that all Morgenthau really needed to do to get the point across was open a window and invite the Committee to have a really good look outside. Jim Powell, a senior fellow with the CATO Institute, sums it up like this:

The New Deal tripled federal taxes between 1933 and 1940 -- excise taxes, personal income taxes, inheritance taxes, corporate income taxes, dividend taxes, excess profits taxes all went up, and FDR introduced an undistributed profits tax. A number of New Deal laws, including some 700 industrial cartel codes, made it more expensive for employers to hire people, and this discouraged hiring.

Frequent changes in the tax laws plus FDR's anti-business rhetoric ("economic royalists") discouraged people from making investments essential for growth and jobs. New Deal securities laws made it harder for employers to raise capital. FDR issued antitrust lawsuits against some 150 employers and companies, making it harder for them to focus on business. FDR signed a law ordering the break-up of America's strongest banks, with the lowest failure rates. New Deal farm policies destroyed food -- 10 million acres of crops and 6 million farm animals -- thereby wiping out farm jobs and forcing food prices above market levels for 100 million American consumers.

Why did FDR do all of this? Publicly because Hoover, who presided over the beginning of the Great Depression, failed to act quickly enough or strongly enough to get the country out of the economic mire. Roosevelt had to do something to get the American economy back on track again. But all he did was make things worse until World War II, ironically, arrived to make things better again.

Fast-forward to the latest economic debacle. Like Hoover before him, Bush thought the answer was to throw money at the problem. Tax rebates, the TARP program, the automakers. He panicked everyone by allowing Paulson and Bernanke to demand $700 billion from Congress, no questions asked. Like Roosevelt, they said they had to do something. Unemployment skyrocketed. The economy continued to tank. Nothing that the government—the ones who are really responsible for our troubles today—has done or can do will fix this problem. They talk about fixing roads and bridges. That is fine, where will the money come from? It will be taken from other, healthier sectors of the economy. The same goes for all these green jobs they talk about and research into new energy technologies. Giving money to these activities merely means taking it away from actually productive places.

Of course, Paulson and Bernanke have already promised to simply print more money to cover these expenses. You can do that when the currency is not actually backed by anything more substantial than the promise of the government that it is good for paying debts. That means American money is only as good as you think it is and printing lots more than you should only leads to runaway inflation as the perceived value deteriorates.

So there you have it: Spreading the wealth around. It doesn’t work. It has never worked. Yet, here we are, in much the same circumstances, about to do it again, with Bush in the role of Herbert Hoover and Obama in the role of FDR. All we need, then is World War III to really cure the economy and history will have truly repeated itself.

The Bottom Line

Do those shoving this course of action down the collective throat of the American people believe that the results of high taxes and high spending will be different this time? If they do, then Einstein and his definition of insanity is vindicated. If not, then we are, indeed, witnessing the most rapacious, ideologically-driven power-grab in American history by a left-wing political elite that easily dominates a weak, go-along-to-get-along opposition and finds socialism far more congenial than capitalism.

Either way, it is the reality of our time and so it is time for small business to demand its share of the pie. Florida is doing it, the Federal Government should be doing it, too; an end run around the banks and the credit squeeze. Then, at least, the real engine of the economy and employment will have some fuel to run on. Even better, though, is the idea of Texas Republican Representative Louie Gohmert to stop the government from collecting any taxes until the full amount of the bailout is reached. The government keeps the bailout money, you keep your money. Simple. That would have a powerful effect on the economy since the money would remain in the hands of those who actually keep the economy going—businesses and consumers.