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The Great Depression that began in 1929, just as the Great Recession we have today, needlessly rotted our economic core.
In those early days, tragically misguided federal policies, adopted to diminish what was thought to be unruly capitalism, prevented the economy from fully recovering for a decade. Today, just as in the 1930s, expansive government is the culprit, prolonging the lack of economic recovery.
The Great Depression created a widespread misconception that market economies are inherently unstable and must be managed by the government.
Keynesian economics, the economic theory of “priming the pump” through spending and economic policies during the Great Depression, failed, just as the Obama Administration spending spree and the creation of money by the Federal Reserve have failed to resuscitate the U.S. economy.
The economic policies of the 1930s are “a continuing source of myth and confusion,” according to Chris Edwards, Cato Institute Director of Tax Policy. Many still believe capitalism caused the Great Depression and that President Roosevelt helped end it. These “claims are incorrect.”
It is valuable to look back to the years just preceding the Great Depression. In the early 1920s, unemployment was low and the economy rolled along smoothly. The government got out of the way and let the market alone. Resources shifted to market-guided areas. Optimism radiated from the business community, and investment grew.
In the early 1920s, Warren Harding’s brilliant Treasury Secretary Andrew Mellon led an economic boom. He had found that taxes from the wealthy had fallen with each new rate increase. Mellon concluded that lowering the rates on everyone—especially the wealthiest—would actually result in their paying increased taxes.
From 1921 to 1926, Congress cut tax rates from 73 percent on the top income earners and 4 percent on the lowest earners to 25 percent and 1.5 percent, respectively. The taxes were cut even further in 1929. The tax take from the wealthy nearly tripled, while others also saw their taxes drop. The national debt fell by a third in five years.
Federal spending under both Harding and his successor, Coolidge, was held low. American entrepreneurs produced the most vibrant eight-year burst of innovation and manufacturing in the country’s history.
Many politically wise economists believe benefits somewhat similar could happen again as occurred in the administrations of Presidents Reagan, Kennedy and George W. Bush.
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