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Obama 2012 Borrowing a Page from FDR’s Playbook

“Hope and Change” worked well for Barack Obama in 2008 but likely will not in 2012. With the nation’s confidence in itself at an all time low, there seems to be little hope. And about all that has changed is a worsening mood in this country due to a stillborn recovery and persistent unemployment.

Because of this, the President has coined a new slogan, “We can’t wait!” The strategy is to place the blame for our economic woes directly on a Republican Congress that has held the majority for less than a year. To make this work, the President is taking a page out of Franklin D. Roosevelt’s reelection campaign of 1936. Like Roosevelt, President Obama has chosen a tact that links Congress with the wealthy.

William Galston of the Brookings Institute sees a direct correlation between FDR’s campaign speeches in 1936 and the “We Can’t Wait” campaign for 2012. Galston said, “Roosevelt wasn’t just saying: ‘I am fighting for you.’ It was: ‘I am fighting against them.’” He adds, “In normal circumstances, this pitch might be suicidal. But these are not normal circumstances.”

“There is surging sentiment out there among voters that the economy is weighted towards the wealthy,” said a White House official. “Public opinion has changed dramatically.”  Occupy Wall Street and other progressive/liberal voices are keying on a sentiment that has been growing for the last thirty years.

The independent Congressional Budget Office reported this week that the after-tax income of the wealthiest 1 percent of U.S. households increased by 275 percent over the past three decades, compared to an average of 62 percent for all Americans. For the poorest 20 percent, the growth was only 18 percent.

Occupy Wall Street, progressives, Democratic leadership, and the President believe the immediate answer is to raise taxes on everyone that makes over $200,000 a year. To the historically naïve, this makes perfect sense. Higher taxes equal higher revenue, so what could be more obvious?

The last century reveals something quite the opposite. In fact, raising taxes during flat economic times invariably causes more harm than good. After the 1929 stock market crash, the Smoot-Hawley tariff raised the cost of imports. This basically threw ice water on global trade, plunging the economy into an even deeper depression. The economy had very little chance to recover.

Three years later, President Hoover raised taxes, and the results were devastating. Speaking of this decision to raise taxes, Alan Reynolds points out: “President Herbert Hoover asked for a temporary tax increase…in June 1932, raising the top income tax rate from 25 percent to 63 percent and quadrupling the lowest tax rate from 1.1 percent to 4 percent. That didn’t help confidence or the Treasury. Revenue from the individual income tax dropped from $834 million in 1931 to $427 million in 1932 and $353 million in 1933.”

The result of Hoover raising taxes was a “double-dip” recession, sky-rocketing the unemployment rate to well above 20 percent. In the wake of such a disaster, it was inevitable that Roosevelt would be swept into office. After 1933, the economy showed glimmers of recovery: unemployment dropped from near 25 percent in 1934 to under 15 percent in 1937, and economic activity was picking up.

What most people don’t understand is that Roosevelt’s New Deal had little to do with ending the Great Depression. Even Christina Romer, former chief economic advisor to President Obama, concedes: “Fiscal policy played a relatively small role in stimulating recovery in the United States.” Instead, the initial recovery happened largely because of monetary expansion, as the money supply increased nearly 42 percent between 1933 and 1937.

Ironically, Roosevelt made the same critical error Hoover had made just five years earlier. FDR raised taxes sharply in 1937 in an effort to balance the budget. Once tax increases took effect, the economy collapsed into another recession – the second stage of the double-dip, which lasted into World War II.

Even the war didn’t end the economic downslide. Near the end of 1945, President Truman lead Congress to lower marginal tax rates, thus halting an impending slide back into deep recession. The nation moved toward full employment, and for the first time in fifteen years, the country was on solid economic ground. Burt Fulsom writes of this period:

Congress reduced taxes. Income tax rates were cut across the board. FDR’s top marginal rate, 94% on all income over $200,000, was cut to 86.45%. The lowest rate was cut to 19% from 23%, and with a change in the amount of income exempt from taxation an estimated 12 million Americans were eliminated from the tax rolls entirely.

Corporate tax rates were trimmed and FDR’s “excess profits” tax was repealed, which meant that top marginal corporate tax rates effectively went to 38% from 90% after 1945….By the late 1940s, a revived economy was generating more annual federal revenue than the U.S. had received during the war years, when tax rates were higher. Price controls from the war were also eliminated by the end of 1946. The U.S. began running budget surpluses.

Tax increases are damaging to economic growth and job creation no matter what point of the business cycle we are in. In a weak economy, tax increases are especially harmful. That we’re having a national debate about this today is a sign of deliberate disregard of history and a favor of ideology over genuine economic concern.

There is no doubt that corporate tax loopholes need to be plugged, spending needs to be curbed, and focus must be placed on helping business do what it does best and get out of its way. It is a little known fact that FDR seriously proposed a 100 percent tax on all millionaires at the height of the Great Depression. One can only wonder where the country would have been at the beginning of World War II had Roosevelt had his way.

Perhaps President Obama is counting on the fact the current crop of college-aged voters either didn’t bother to study history or were taught by professors as blinded by ideology as the President.

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