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October 08, 2008

Avoiding Another Depression

An economist sounds the alarm.

There are many historical precedents of bad policies following crises. The worst case was after the stock-market crash in October 1929, which produced a truly perfect storm of bad policies. Tax rates rose, tariffs rose (reflecting special interest groups attempting to insulate domestic producers from foreign competition), and both Presidents Herbert Hoover and Franklin Roosevelt strongly promoted industry-labor cartels that were designed to stifle domestic competition.

In the absence of these policies, the Great Depression would almost certainly have been like every other U.S. recession -- short-lived and relatively mild.

...

I am particularly concerned about bad policies because significantly higher taxes have been proposed by Barack Obama. His plan would raise the marginal tax rate on the most productive workers more than 10 percentage points -- an increase that would bring us near Western European levels. His plan would also raise capital income taxes, taxing capital gains and dividends at 20%, compared to a 15% rate under Sen. John McCain's plan. A five percentage-point difference might strike you as small, but it is not. I have calculated that a five percentage-point difference in overall capital income taxation over the long haul is equal to a difference in the nation's capital stock of about 18%. This means a 6% difference in GDP and a 6% difference in the average wage rate. This means that real GDP and the average wage would fall, gradually but persistently declining about 6% after 25 years. That's not quite a Great Depression, but a significant step towards one.

The op-ed focuses on taxation, but it should be noted that Obama has shown 'concern' over NAFTA's lack of protection for union workers. One of Obama's economic advisors is Leo Hindery Jr, who supports the card-check law (which has the potential to substantially increase the power of unions) and tariffs. Obama's economic policies would be bad for the economy in normal circumstances. If implemented under present conditions, they have the power to be disastrous.

Sounds like another perfect storm in the making. (h/t: Greg Mankiw)


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posted by Slublog at 10:24 AM

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