Republican Herbert Hoover and Democrat Franklin D. Roosevelt would both feel right at home in today's Washington.
In an article in the London Telegraph, economists Charles Rowley of George Mason University and Nathanael Smith of the Locke Institute suggest there are "troubling similarities" between the current administration's actions and those in the 1930s that sent the United States and much of the world spiraling into the Great Depression.
Hoover and Roosevelt made four big mistakes:
Increasing government spending, running huge deficits, with the hope that the increased spending would give jobs to the unemployed.
Raising income taxes on the rich with the hope that tax revenues would increase to fund the huge deficits.
Raising tariffs on foreign goods coming into the country, with the misguided notion that doing so would protect American jobs.
Allowing the banks to fail and raising interest rates.
President Barack Obama and Congress have made varying degrees of three of those same mistakes.
"The prognosis is catastrophic if projected government policies are not cut back," say Rowley and Smith. According to President Obama, in 2009 the federal budget deficit (our national overspending rate) will be $1.6 trillion. This accounts for 11.2 percent of the overall economy, and it's all borrowed money. It's the highest overspending rate by our government since World War II.
As a result of our deficit spending, our national debt has doubled from $5 trillion to more than $10 trillion in just a few years. The current administration wants to add even more debt with national health care, cap and trade taxes on carbon emissions, and possibly a third stimulus bill. If these proposals pass, the national debt will double again by 2019 and will represent 76.5 percent of the overall economy.
Our debt was similar to countries like England, Switzerland and the Netherlands, which have national debts 40 percent to 50 percent of their overall economy. Our new debt level will be similar to those of Greece, Italy and Jordan. Rowley and Smith say such a high national debt will guarantee "the international reserve status of the U.S. dollar will not survive."
As other countries begin to react to our deteriorating financial stability, they will begin to pull their investments out of the U.S. This will result in the dollar continuing to weaken and interest rates rising, which will leave Congress no choice but to either increase taxes or slash spending. In my mind, there is no question that the current president and Congress will raise taxes.
"In such circumstances, the U.S. economy will teeter on the edge of a black hole," Rowley and Smith say.
This brings us to the second "big mistake" that helped to create the Depression-higher taxes. One of the largest tax increases in our history is scheduled to happen in 2011. Many experts predict the taxes for small businesses will increase around 33 percent. This will mean people and businesses have less to spend, exacerbating our economic problems, stagnating the economy and guaranteeing the jobless rate remains high.
Hoover tried to protect U.S. jobs by raising tariffs (taxes) on imported goods. Obama, while promising world leaders not to become protectionistic, has gradually raised tariffs on an array of imports, including a 35 percent tariff on tires imported from China.
The fourth mistake has been avoided, probably due to Federal Reserve Chairman Ben Bernanke doing everything in his power to not replicate the mistakes made in the Great Depression.
No one can predict whether or when we may face another downturn in the economy and stock market. What this investment adviser is sure of is that, without a change in our economic policies, our economy will flounder for many years to come.
Rick Kahler, CFP, is a fee-only financial planner and author. Follow him on Twitter @RickKahler. Contact him at
[email protected] or 343-1400.
