Trickle-Down Caused Recession?

Trump Hillary Debate

September 26, in the first presidential debate of 2016, Hillary Clinton said:

“Well, let’s stop for a second and remember where we were eight years ago. We had the worst financial crisis, the Great Recession, the worst since the 1930s. That was in large part because of tax policies that slashed taxes on the wealthy, failed to invest in the middle class, took their eyes off of Wall Street, and created a perfect storm.”

So Hillary says that the causes of the 2008 recession were:

1.  Lower tax rates.
2.  Government not investing in the middle class.
3.  Government taking their eyes off of Wall Street.

Let’s look at these claims one by one:

1.  Lower tax rates.

She is blaming the Bush tax cuts for the 2008 recession.  Here is a chart showing the differences in tax rates between Bill Clinton and George W. Bush.

The blue bars above are taxes paid under Bill Clinton.  The orange bars are taxes paid after the Bush tax cuts.

To Hillary Clinton, the blue bars are perfect, wonderful, a great success.  The orange bars are evil, stupid, and caused the 2008 financial crisis.

How stupid does she think the American people are?  There isn’t much difference in the tax rates.  The rates are very similar especially compared to some of the historically high tax rates of the 20th century where the richest people paid up to 90%.  The difference between Clinton and Bush on the top earners was 39.6% for Clinton, 35% for Bush.  Not much of a difference.

But even more importantly, how would this slight change in the tax rates cause the financial crisis?

I have seen this claim made before by people online.  “The the Bush tax cuts caused the 2008 recession.”

I have asked those people a simple question:  How?  How did the tax cuts cause the recession?

I have never been given an answer.  It stumps everyone.

Because tax cuts don’t cause recessions.  It’s bad reasoning.  Some reasoning is bad, but at least it works in theory.  This reasoning doesn’t even work in theory.  People are given this talking point by the media and people like Hillary and repeat it without an understanding of economics.

Tax cuts allow people to keep more of the money they earn.  In turn, they spend more money.  This helps the economy, it does not hurt the economy.  It’s one reason why America is the most prosperous country in the world, while countries that with much higher tax rates aren’t doing nearly as well.

2.  Government not investing in the middle class

She did not make it clear what she meant, but I will assume she meant more spending programs.  Maybe infrastructure spending or other projects that would hire people.  She didn’t mean tax cuts for the middle class, she just criticized tax cuts in her first point, she meant government taxing people and giving that money to the middle class in terms of government jobs or direct handouts.

But has this idea worked in the past?  Let’s look at examples:

A.  The Great Depression was met by FDR with an aggressive intervention to help the poor and middle class.  This included creating government agencies, more regulations meant to help the working class and spending programs to give people jobs.

This “New Deal” started in 1933, but it did not work well.  Roosevelt launched the 2nd New Deal from 1935 – 1938.  This also did not work.  The economy languished.

The Great Depression ended in 1941 after the bombing of Pearl Harbor.  The war effort spurred industry and created jobs.  This put America back on its economic feet, it had little to do with Roosevelt’s investments in the economy.

It is of note that in 1920 there was another hard recession.  But this recession ended in 18 months, largely because the leaders of the time cut taxes.  This allowed business owners to invest, grow their business and hire people.  Giving rise to great economic expansion historians call the “roaring 20’s”.  In contrast, government intervention by FDR prolonged the Great Depression for over a decade.

B.  After the 2008 crash, Barack Obama attempted a similar course of government stimulus.  Investments in solar, clean energy, shovel-ready jobs, etc.  All to the tune of nearly 1 trillion dollars. The biggest stimulus program ever.

Did it work?  Well if it did, why does Hillary need to propose more “investing in the middle class”?  We just invested the biggest investment in the middle class ever, where are the results?

The economy has been tepid during Obama’s presidency.  Obama has never had a GDP growth of over 3% in any given year.  If he ends his presidency in this way, which he is on track to do, he will be the only president who ever did that.

Reagan Obama

“But jobs!  The unemployment rate is way down!”

Only because they stopped counting people who gave up looking for jobs or who dropped out of the labor force.

Under Obama, the labor force participation rate has dropped from 66% to 63%.  If the labor force participation was the same now as when Obama took office, the unemployment rate would not be 4.9%, it would be 8.7%.  That’s higher than when Obama took office.

The 9 million new jobs under Obama is the same type of thing.  The potential labor force has increased from 235 million in 2008 to 253 million now.  That’s 18 million more employable individuals under Obama, yet only 9 million new jobs.  The new jobs do not keep pace with the increase in employable individuals.  That is not a success.

The average income for an individual has declined from when Obama took office.  Not only has the average income not kept up with inflation, it hasn’t increased at all.  It has decreased.

This is a terrible track record.  Partly due to Obama’s government inventions into the economy that haven’t worked.  These are the same type of idea’s that Hillary means when she talks about “investment into the middle class.”

It didn’t work under FDR.  It didn’t work Obama.  Why would it work going forward?

C.   Consider a 3rd scenario that Trump mentioned at the debate, Reagan.

Ronald Reagan assumed the presidency at another difficult economic time.  Unemployment was 7.5%.  Interest rates and inflation were sky-high and America was in the midst of a recession.  After a few years, the interest and inflation rates stabilized.  When Reagan left office the unemployment rate was 5.4%.  But unlike Obama, the labor force participation rate increased during Reagan’s term.

The GDP growth under Reagan more than doubled the GDP of the Obama years.

Average annual household income went up by 10% under Reagan.

The economy was thriving when Reagan’s left office.  Giving way to the computer and internet booms that lasted 2 decades and still benefit the economy today.

Why?  What did Reagan do differently?

He cut taxes and cut regulations.  Exactly what Donald Trump is proposing.

Getting out of the way of industry, not meddling like FDR, Obama and Hillary wants to do.

3.  Government taking their eyes off Wall-Street.

By this, Hillary is referring to the real estate loan derivative market.  Real estate loans were bundled and sold in complicated fashions in the lead up to the 2008 recession.  A housing boom created investor exuberance that was not well-founded.  When the real estate bubble popped, the banks holding the loans collapsed.  This had a negative domino effect on the economy that caused the recession of 2008.

Why did it happen?

Some blame the repeal of Glass–Steagall in 1999 for the risky bank activities, bubble and crash.  (Bill Clinton was the person who signed the repeal).

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But let’s look even further back to the creation of the FHA (Federal Housing Administration) in 1934.  Yes, a government invention of the New Deal.  One of the functions of the FHA is to insure home loans from banks. The purpose of insuring loans is to encourage banks to lend more.  So more people will be able to buy a home.

What could possibly go wrong?

If the loans are insured, banks can be more reckless with who they loan to.

Loosened lending standards gives buyers more purchasing power.  More purchasing power leads to higher home prices.  This is the way the housing market became a bubble.

If the government would stay out of it, banks would not make risky loans because they wouldn’t be insured.  Investors would be less likely to buy uninsured risky loans on a derivative market.  In this way, the bank loan industry would regulate itself.

Government intervention caused an unstable housing market that caused a painful recession.

But not only did government intervention cause the recession, it also raised mortgage and rent costs to everyone.

Before the FHA was invented, a typical home loan was paid off in 3 – 5 years.  That is unheard of now.  Who could pay a mortgage off in 3 – 5 years?  That shows how low prices were at the time. And how the government’s interventions have led to increased home prices.  And indirectly, increased rent.

That affects everyone negatively, especially poor and middle class whose #1 expense is usually housing.

Hillary was right about a perfect storm though:

– FHA in 1934
– Fannie Mae created in 1938 also created to facilitate more lending
– Freddie Mac created in 1970 sister company to Fannie Mae
– Politicians like Bill Clinton, Barnie Frank and Chris Dodd continually pushing these institutions for more loans all the time

Housing bubble.  Recession.

Because of the meddling of the government into the private sector.  The kind of meddling Hillary is in favor of.

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A Hillary presidency will be more of the same things that FDR and Obama tried and failed: higher taxes, more government interventions.

She does not understand the economy, everything she wants to do will hurt the average American on the street. She is a bureaucrat with a history of poor results. The only thing she is semi-good at is blaming others for the bad results of her failed ideas.  
Sources:

http://theeconomiccollapseblog.com/archives/barack-obama-is-on-track-to-be-the-only-president-in-history-to-never-have-a-year-of-3-gdp-growth

http://www.realclearmarkets.com/articles/2016/03/28/president_obamas_overrated_unemployment_story_102083.html

http://www.forbes.com/sites/kylesmith/2014/09/11/sorry-obama-fans-reagan-did-better-on-jobs-and-growth/#17f5e8a33c92

https://en.wikipedia.org/wiki/Federal_Housing_Administration

http://www.cato.org/publications/commentary/1920s-income-tax-cuts-sparked-economic-growth-raised-federal-revenues

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