by Jon Sanders
Director of the Center for Food, Power, and Life, Research Editor, John Locke Foundation
[E]conomics studies the consequences of the decisions that are made about the land, labor, capital and other resources that go into producing the volume of output which determines a country’s standard of living. — Thomas Sowell, Basic Economics, Third ed., p. 2
My newsletter this week, “They broke it; we bought it,” offered a brief, sober assessment of the coming consequences of the decision this country’s voters made on election day and alluded to the years of economic missteps and egregious policies during the Great Depression that caused, deepened, and perpetuated it. My piece was upsetting to those who want to hear only that (a) stunning economic growth is just around the corner now and anyone who says otherwise is being unbelievably irrational, and (b) hey, there’s this one philanthropist who just took over, like, the entire state of North Carolina and therefore deserves death, death, death.
For the superstition, hysteria and death fantasies, one must continue to look elsewhere, but for more discussion of the economic consequences of our national choice and their parallels during the Great Depression, economists Thomas Cooley and Lee Ohanian write in The Wall Street Journal today of “FDR and the Lessons of the Depression“:
in 1936, the Roosevelt administration pushed through a tax on corporate profits that were not distributed to shareholders. … This tax significantly raised the cost of investment, as most investment is financed with a corporation’s own retained earnings.
The tax rate on dividends also rose to 15.98% in 1932 from 10.14% in 1929, and then doubled again by 1936. Research conducted last year by Ellen McGratten of the Federal Reserve Bank of Minneapolis suggests that these increases in capital income taxation can account for much of the 26% decline in business fixed investment that occurred in 1937-1938.
Meanwhile, after the 1935 National Labor Relations Act, union membership rose to about 25% in 1938 from about 12% in 1934. The increase in unionization was fostered by the sit-down strike. …
There are important parallels between the tax and labor policies of FDR and those of President Obama. As in the 1930s, tax rates on capital income will be rising sharply with the expiration of the 2001 and 2003 tax cuts. Beginning in 2011, dividends will be taxed as ordinary income with rates increasing up to 39.6% for many taxpayers, more than double the current 15% rate. The capital gains tax rate will rise to 20% from 15%.
And like FDR, Mr. Obama has advanced unionization through his recess appointments to the NLRB and his support for “card check,” a provision in the controversial Employee Free Choice Act that would allow unions to organize without holding a secret ballot vote. …
The lesson, Cooley and Ohanian write, that the Obama administration should draw is this:
Raising business costs by increasing capital income taxes and promoting higher unionization is a mistake that will hurt most those who they should want to help—workers who have lost jobs during this recession.
The national picture underscores the importance for North Carolina’s leaders to do their utmost to make this state a place where workers and entrepreneurs can breathe relatively free, an oasis of job creation as free as practicable from unnecessary regulations and taxes. As always, the John Locke Foundation strives to light the way.