Raising Taxes in a Depression

President Obama, in his budget proposal, aims to raise income taxes in 2011. Leaving aside all issues of whether taxes are a productive use of the people's money, there is the question of the consequence of raising taxes in a Depression.

In the US, the last time this was tried was 1931. The federal government at the time was running a huge deficit due to collapsing tax revenue, and there was a universal political consensus at the time, that budgets must be balanced. Spending was cut in some areas. The States, however, were desperately short of funds and received expensive bailouts from the federal government that caused overall expenditures to rise. The solution seen at the time was to raise taxes.

The consequences of that, as every student of history knows, were devastating. Mr. Hoover, the president at the time, became so unpopular that shanty towns springing up were named "Hoovervilles," and newspapers were called "Hoover blankets."

We are not fond of government deficit spending, and would prefer to see fewer bailouts. However, to raise taxes to fund bailouts - taking dwindling funds from the productive population and giving it to the spendthrift elements, is just about the worst thing that could be done in this environment. We are not optimistic about the wisdom of the Congress, and it seems history is doomed to repeat.

Fire Up the Presses!

The Year of our Depression 2009 hasn't yet ended its second month, yet already a great sea of red ink is bathing the bailout-happy nations of the world. Japan's exports tanked 46% year-over-year in January; the Royal Bank of Scotland is haemorrhaging pounds like nothing else in British banking history; Fannie Mae put her lil' ol' hand out for more money after losing another $25.2 billion in fourth quarter of 2008.

Perhaps to top it all off, yesterday President Obama unveiled his $3.5 trillion budget, featuring $989 billion in new taxes. Oh, all these numbers are making our eyes bleed, dear Reader! We see a great tsunami of red ink barrelling down upon the economic landscape, and we hope to keep our head above all the mess.

Imagery aside, the implications of all these massive problems is severe: a great deal of pain and misery is required, if a society wants to honestly work its way back to fiscal health. That, however, isn't very popular with the average American, or Briton, for example. It's also political suicide to suggest such a thing: people do not want to work hard, to pay off the national bar tab, or all the gambling debts.

No, the only expedient way out of this mess, the one that is relied upon time and time again, is inflation. These debts will be inflated away into nothingness; President Obama's bloated budget makes this clear. He is only getting started with his spending spree, since he has to make up for the Baby Boomers and their underwater finances.

In summation, we turn to no less a sage that Ernest Hemingway:

The first panacea for a mismanaged nation is inflation of the currency; the second is war. Both bring a temporary prosperity; both bring a permanent ruin. But both are the refuge of political and economic opportunists.