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.

***

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.

The Herbert Hoover Award

Unlike the popular phrase would have it, History never repeats itself; rather, History will be eerily parallelled. For example, the 2007 Depression does not repeat the 1929 Depression, but it is closely related. Instead of President Herbert Hoover talking about permanent prosperity, the present has President Barack Obama talking about the work needed to bring back permanent prosperity. Close, indeed, but not an exact repeat.

In honour of that parallelism, we present the Herbert Hoover Award. This Award will be given weekly to the individual (or group) which demonstrates ignorance of History by repeating the painfully obvious mistakes of the past. Without further ado, let us now turn to this week's winner of the Herbert Hoover Award! Presenting (drum-roll):

Illinois Governor Patrick Quinn

In a recent speech before the City Club of Chicago, Governor Quinn said that massive budget cuts were in store for the State, unless the legislature agrees to a 50% hike in the income tax.

"It’s no fun whatsoever to propose higher taxes on anyone, whether it’s families or business, but if we don’t do this, if we don’t repair our state and get it back in order we will regret it till kingdom come.” [source]

Apparently Governor Quinn is not aware that raising taxes during a depression, a credit crisis, rising unemployment, and social discord is a very bad idea. According to these excellent graphics from iTulip, the United States is suffering from a sharply rising unemployment rate. Illinois is not immune to the effects of the Depression. We have no doubt that, if this 50% income tax hike is passed, the citizenry of the State will suffer all the worse.

Congratulations, Governor Quinn. Your trophy is in the mail.

End of the Workers' Paradise

During the 20th Century, the world stage was dominated by a contest between two great economic and political ideologies. One the hand was Communism, state ownership of large-scale capital, and central planning, on the other was Liberal Democracy. In the non-Communist developed nations, some concessions towards central planning and income redistribution were made. The legacy of these concessions include the Income Tax, Minimum Wage, and the Welfare State.

As everyone knows, Communism failed and Liberal Democracy in its modified form survived. Unfortunately, in its efforts to win the people over, Liberal Democracy encouraged the notion that economic security was an entitlement. People imagined that making lots of money was as simple as following a formula: getting a college degree and a career-for-life would fall in their laps; buying a house and watching its value ascend skyward; or investing in the stock market and get reliable dividends and capital gains.

We opine this desire for stable and predictable economic returns is a vestige of agricultural civilisation. Note that the most important and durable Communist Powers, Russia and China, were still agricultural when they went Red. Industrial civilisation works on a less steady basis. If humanity is to embrace the full benefit of industrialisation, it must acknowledge that it not an especially stable system.

The current Depression is partly a result of attempting to force the industrial system to do something it cannot: supply steady, generous paychecks to the entire population. The Depression will be prolonged by governmental efforts to sustain the unstainable with bailouts, and expansions of both the public payroll and the dole. In a bizarre effort to "save capitalism," a grotesque is being created. This state will not last long, and eventually be seen as a tragic waste of resources.