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Join Date: Oct 2008
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O-Bombing an already fragile economy...
Obama’s Stock
The market is afraid of Obama’s New, New Deal.
By Pat Toomey
With the federal government demonstrating its willingness to spend any sum of money in any manner necessary to prevent a collapse of our banking system, why is the stock market predicting such a gloomy economic future? Perhaps because it can read the political writing on the wall, and it doesn’t like what it sees. Over the past couple of weeks, it has become increasingly clear that Barack Obama may not only win the presidency but may also gain sufficient Democratic majorities in both houses of Congress to hammer through his radical economic agenda. This agenda includes tax increases, protectionism, massive new spending programs, empowered labor unions, and crippling government regulations.
Unlike Barack Obama, the stock market has learned a thing or two from history’s mistakes. Five major policy errors helped turn the 1929 downturn into a full-blown Depression lasting over ten years, and Barack Obama has promised to repeat all five of these. No wonder investors are running for the doors.
Taxes. Both Presidents Hoover and Roosevelt imposed a slew of onerous tax increases precisely when the economy could least afford them. Hoover’s Revenue Act of 1932 raised the top marginal income tax rate from 25 percent to a whopping 63 percent and imposed new and increased excises taxes. FDR followed in Hoover’s footsteps and then some, raising taxes in 1934, 1935, and 1936. These included tax increases on personal income, corporate income, capital gains, estates, gifts, and corporation excess profits. Most debilitating was Roosevelt’s undistributed profits tax that squeezed capital out of businesses by taxing corporate savings. Obama has vowed to inflict much of the same damage. His war against prosperity includes increasing income taxes, taxes on capital gains and dividends, estate taxes, Social Security taxes, and windfall profit taxes.
Trade. On June 17, 1930, President Hoover signed the Smoot-Hawley Tariff Act, raising import tariffs an average of 59 percent on more than 25,000 products and precipitating a trade war around the world. The stock market tanked and U.S. exports dropped precipitously.
Obama has learned nothing from Hoover’s folly. Not only has Obama opposed new free trade agreements with Colombia and South Korea, he has insisted he will either renegotiate or withdraw from NAFTA. Like Smoot-Hawley, these protectionist measures will result in huge economic losses for American businesses and consumers and likely retaliation from countries around the world.
Spending. One of the first things President Hoover did following the 1929 crash was convince local governments to increase government expenditures while he did the same at the federal level. FDR took this approach to new levels, launching a host of public works programs. These programs were credited with putting the unemployed to work, but they were funded with new taxes or borrowed money that drained sorely needed money from the private sector. Left in the private sector, this money would have been spent more efficiently and more productively than most of FDR’s government programs.
Unfortunately, Obama spending programs look equally ambitious. From universal healthcare to alternative energy boondoggles to a dubious $300 billion economic stimulus package, it is clear that a President Obama will significantly loosen the public purse strings. Money doesn’t grow on trees; the market knows that this money will come directly from the private sector’s pockets.
Labor. FDR’s signing of the Wagner Act in 1935 created the pro-labor National Labor Relations Board and drastically expanded labor unions’ ability to organize, strike, and boycott. Not to be outdone, Mr. Obama, together with large Democrat majorities, will quickly pass the Orwellian-named Employee Free Choice Act, which will strip workers of their right to a secret ballot in union elections, making workers vulnerable to intimidation and coercion. Obama’s other promised gifts to big labor include narrowing the definition of management, banning the replacement of striking workers, and forcing states and municipalities to accept unionized police and firefighters.
Regulation. New government interference devastated business in the 1930s, starting with Hoover’s insistence on keeping wages steady despite rapidly declining prices. FDR’s National Recovery Administration (NRA) imposed price controls, minimum wage rules, health requirements, labor laws, and production quotas. At a time when struggling businesses needed the flexibility to innovate and cut costs, Roosevelt’s regulations made it impossible for them to do so. On the contrary, these regulations imposed new and often onerous costs, resulting in persistently high unemployment and the failure of many businesses.
The disaster of the NRA is apparently lost on Sen. Obama. An Obama presidency will likely deliver further minimum wage increases; restrictions on domestic drilling; higher CAFE standards; increased regulation of financial markets; new health-care mandates; and prescription-drug price controls.
A dramatic contraction of the money supply in the 1930s no doubt contributed greatly to the length and severity of the Depression and, mercifully, a President Obama will not have his hands on those levers. But Hoover’s and Roosevelt’s misguided policies on taxes, trade, spending, labor, and regulation surely cost millions of jobs and inflicted years of economic misery. Barack Obama is promising a return to those failed policies. The stock market has noticed.
— Pat Toomey is the president of the Club for Growth.
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