This Week's Herbert Hoover Award

One of the things that President Herbert Hoover showed is that, without a doubt, raising taxes during a Depression is a very bad thing to do. In the spirit of never-learning-from-History, we present this week's Herbert Hoover Award to (drumroll):

Pennsylvania Governor Edward Rendell and North Carolina Governor Beverly Perdue

Governor Rendell wishes to raise his State's income tax from 3.07% to 3.57%, to help close a $3.2 billion budget shortfall; Governor Perdue is asking her State's legislature to raise up to $1.5 billion in new taxes, to help close North Carolina's $4.5 billion budget deficit.

Cutting spending is something that Governments often cannot do, as Governor Perdue makes painfully clear, when defending the need to raise taxes to protect the jobs of North Carolina's teachers:

"We cannot increase class size. We cannot lay off teachers. We will not sacrifice North Carolina's economic future."

Governor Rendell has his own version of that attitude, stating that he wanted to decrease taxes in his State, but the 2007 Depression “blew the wheels off that idea.”

Sorry, Governors Perdue and Rendell, but you both fail basic economic history. During economic contraction, a Government - if it wishes to alleviate the pain of said contraction - should shrink at least as fast as the greater economy. Better still, the Government should shrink its presence in the economy - specifically, its taxation rates - even faster than the economy is contracting. The reason is very simple: in order to help an economy regain its footing on a new, lower footing, the citizenry requires a larger share of their shrinking income to stabilise their personal finances.

If a Government moves aggressively to take a larger share of a shrinking pie, an economic contraction likely will become an economic collapse. During economic downturns, investable capital must be as liquid as possible, so that investors - via markets - can help build up viable enterprises and tear down the dead and dying refuse. Increasing taxation rates effectively prevents that, as savings is hampered. Governments will invariably spend their tax revenue on dead-or-dying enterprises (a.k.a. major campaign contributors) - misallocating capital which ought to go to promising ventures.

Congratulations, Governors. Your actions are an inspiration to us.

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On a positive note, we give weak applause to the Government of Ohio for refusing to raise taxes, even in the face of an argument for raising taxes involving the old "think of the children" ploy. In fact, a planned tax reduction is being kept on schedule.

New tax cuts would be an excellent idea, but we suspect that's asking for too much. Still, here's hoping the Ohio Government will continue to resist the urge to kill the State's economy.