Tuesday, November 11, 2008

Will the history of the Great Depression repeat itself under an Obama Administration?

It's interesting learning what happened to bring on and lengthen the Great Depression of the 1930s. From what I've read the chief culprit for prolonging the problem was actions taken by the government. They tightened the money supply, raised taxes particularly on higher income folks, the people who run and invest in businesses, and raised tariff barriers which resulted in reciprocal actions by other countries which in turn slowed economic growth.

Looking at some of President-elect Obama's constituencies, it's not hard imaging many of those things happening again. He's already proposing raising taxes on those with highest incomes. His labor union constituents will no doubt clamor for trade protection from other countries. (It doesn't seem likely there will be a tight money policy with the Fed doing all it can to flood the market with money. Bernanke the Fed chair was a student of the Great Depression.)

I came across this graph on what happened with the highest income tax rates during the 30s. They started out at 25% at the beginning of the depression but ended up at 79% by 1940. Today, the highest rate is 36% but will go up to 39.5% if we don't make the temporary cuts permanent. However, with massive budget deficits it's not hard envisioning Obama and a Democrat Congress raising it even higher.

This could be another case of history repeating itself.

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