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America's Lost Decade

 
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PostPosted: Mon May 25, 2009 6:10 pm    Post subject: America's Lost Decade Reply with quote

A large tax cut would have cleared the market of excess assets and goods faster, to facilitate growth, along with helping financial firms (since some of the tax cut would have been used for consumption and some used to pay-down debt). Instead, new assets and goods are being created, through massive public spending.

Related Article:

Martin Feldstein at Harvard calculated that the elasticity of taxable income with respect to income tax rates is about 1, so that cutting the top rate from 40% to 30% would boost taxable income by about 16%. The result would be more work effort and less avoidance by entrepreneurs, doctors, scientists and others in the top quintile, which would greatly benefit the rest of us.

Unfortunately, President Obama wants to go in the other direction, raising the top two income tax rates, which would reduce production and increase avoidance by highly skilled people. Such economic damage from higher taxes is called deadweight loss. In the 2006 paper, Mr Feldstein argued that deadweight losses from a federal income tax rate increase would be $1.76 for every dollar of tax increase. That means that every new $1 billion spending programme in President Obama's budget will destroy about $1.76 billion of activities in the private sector.

That is the economics of tax hikes, but what about the politics? The Economist proposition suggests that "resentment over inequality is growing ever more vocal is taxing the rich more heavily necessary to buy social peace?" Consider that 43% of American households do not pay any federal income tax, according to data from the Joint Committee on Taxation. That large group is doing little to support the huge burden of the welfare state, so it is laughable that they might be angry at the wealthy who do bear the burden. The CBO data show that the top one-fifth of households pay 69% of the entire costs of the federal government. Frankly, the rest of Americans are free-riders on the top quintile's enormous financial support of government.

Article:

FDR's policies prolonged Depression by 7 years, UCLA economists calculate:

Two UCLA economists say they have figured out why the Great Depression dragged on for almost 15 years, and they blame a suspect previously thought to be beyond reproach: President Franklin D. Roosevelt.

In an article in the August issue of the Journal of Political Economy, Ohanian and Cole blame specific anti-competition and pro-labor measures that Roosevelt promoted and signed into law June 16, 1933.

Cole and Ohanian calculate that the NIRA (the National Industrial Recovery Act) and its aftermath account for 60 percent of the weak recovery. Without the policies, they contend that the Depression would have ended in 1936 instead of the year when they believe the slump actually ended: 1943.

Roosevelt's role in lifting the nation out of the Great Depression has been so revered that Time magazine readers cited it in 1999 when naming him the 20th century's second-most influential figure.

"This is exciting and valuable research," said Robert E. Lucas Jr., the 1995 Nobel Laureate in economics, and the John Dewey Distinguished Service Professor of Economics at the University of Chicago. "The prevention and cure of depressions is a central mission of macroeconomics, and if we can't understand what happened in the 1930s, how can we be sure it won't happen again?"

"The fact that the Depression dragged on for years convinced generations of economists and policy-makers that capitalism could not be trusted to recover from depressions and that significant government intervention was required to achieve good outcomes," Cole said. "Ironically, our work shows that the recovery would have been very rapid had the government not intervened."
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