Hang On We're Heading Over the Fiscal Cliff

As usual, listening to the Washington Beltway crowd and their friends in the Mainstream Media one can easily conclude that the American economy is headed for a major crash as the economy careens over the January 1, 2013 Fiscal Cliff.

Despite Chicken Little scaremongering by the chattering classes, most people seem to be taking the cliff fairly calmly.  The stock market has declined a bit as it usually does when faced with uncertainty and potentially bad news but the nation has remained calm.

The so called Fiscal Cliff is basically a fiscal tightening or anti-stimulus that involves cuts in Federal spending and increases in taxes.  This is the opposite of a Keynesian obsession with throwing money at the economy.

Following the end of World War II we hit a major fiscal cliff in 1946 and beginning of 1947.  Then as now, Keynes and his followers were certain that going over the fiscal cliff would result in an economic crash and renewed economic depression. 

According to popular myth, World War II brought us out of the Depression.  Granted, everyone not drafted into the military had a job and factories, mines and farms were at full production throughout the war.  Government spending on materials needed to fight the war amounted to a huge economic stimulus which had the economy operating at maximum capacity.


While the statistics looked good, consumer production was minimal leaving workers with little on which to spend their earnings. Everyone had a job but only limited quantities of bare necessities were available for purchase by consumers.

It was in this immediate post war period that President Truman in a speech uttered words to the effect that war is hell but peace could be worse, alluding to the Keynesian belief that, without the continued stimulus of massive government spending, the economy would quickly collapse.

The dropping of the atomic bombs on Hiroshima (August 6, 1945) and Nagasaki (August 9, 1945) coupled with the Soviet Union joining the war against Japan on August 8, 1945 quickly brought the war to an end on August 15, 1945.

Not only did the war end much sooner than expected, but, under pressure from the people who were sick the austerity that marked the Depression and World War II, the U.S. government immediately began demobilizing the troops (which represented about 18% of the labor force), canceling contracts for military material and lifting wartime regulations and restrictions on consumer production.

 

In the1946 mid-term Congressional elections the Republicans retook the House of Representatives defeating 54 Democrats and 1 left wing Progressive Party member to obtain a majority of 246 seats against the Democrat's 188.  In the Senate the Republicans picked up eleven seats from the Democrats plus defeating the left leaning Progressive Republican Robert LaFollette Jr.in the primary and keeping the seat for a 51 to 45 Republican majority in the Senate.

While Democrats and believers in Keynesian economic theories fanned fears that there would be a major Depression in 1946, it never materialized as the private sector, freed of many of the New Deal regulations and controls quickly switched from war production to civilian production. 

Federal spending fell from $84 Billion in 1945 to less than $30 Billion in 1946.  The sharp drop in spending  enabled the Federal Government to both quickly begin paying down the war debt. The deep cuts in spending also resulted in a small Federal budget surplus in 1947.

Both the Depression of the 1930s and the current massive economic downturn under President Obama have resulted from the ill conceived stimulus spending and massive increase in unnecessary regulations. 

Going of the Fiscal Cliff may not be that bad and could result in the economy quickly turning around and recovering early in 2013.


Click the links below for more on the feared Depression of 1946:

Stimulus by Spending Cuts:  Lessons from 1946 - Cato Institute Policy Report

Cheer Up!  The Cliff Doesn't Look So Grim - Barrons December 31, 2012 issue 



 

Will Charities Survive if Congress Eliminates the Charitable Tax Deduction?

The Christmas Season is upon us and this is a traditional season of giving.

It is not just the gifts for family and friends, but also the giving of goods and money to charitable causes. 

Giving and sharing with those less fortunate makes the giver feel good.  Giving is also a part of most cultures and is reinforced by the dictates of most religions which require believers to give as a part of their religious duty.

In the United States people who give money or goods to charities have an additional, financial, incentive to give and that comes in the form of lower income taxes.  Both the Federal government and most states with an income tax allow people to deduct the value of charitable contributions from their gross income for tax purposes.

Now with concerns about the fiscal cliff and the Federal government's need for more revenue to pay for its out of control spending the search is on for ways to increase revenue.

While logically the solution should be to bring spending into alignment with revenues, politicians and bureaucrats tend to take spending as a given and look to tax increases to make up the difference.

Currently, two approaches are being explored for increasing tax revenues.  One approach is to simply raise tax rates despite the fact that, historically, that tends to result in less revenue.  A second approach calls for keeping current rates but restricting or eliminating deductions.

Deductions allow people to subtract certain types of expenses from their gross income thereby reducing their income for tax purposes.  Eliminating or restricting deductions would certainly result in more revenue for the government as people's ability to reduce their taxable income would be curtailed.

Of course, organizations and businesses, whose activities or products are affected by people's ability to reduce their tax bills by contributing to or buying from these organizations, are opposed to this solution - at least as far as their activities are concerned.

However, while it is clear that deductions for home mortgage interest and local real estate taxes provide a powerful incentive for people to buy rather than rent their living quarters, there is some question as to whether allowing people to deduct charitable contributions is an incentive for people to give to charity.

Proponents of eliminating the deduction cite statistics showing that charitable giving in the U.S. has remained a relatively constant 2% of Gross Domestic Product despite numerous changes in tax laws affecting such giving. 

Charitable giving also has a long history going back to ancient times - long before there was an income tax and the need for income tax deductions.  Long before governments became involved in building social safety nets, churches were involved in soliciting money from members to help those less fortunate.  Hospitals, orphanages, poor houses, etc. all began as services provided and paid for by churches.

In the Western world the idea of people having a duty to look out for those less fortunate has long been ingrained in the culture.  Sharing one's good fortune with those less fortunate is the thing to do for many people.

As one who not only contributes to charity but also keeps records of contributions for tax purposes and benefits from the deduction, I can honestly say that I would miss the deduction but, after reviewing my contributions haven't found any that I would stop donating to in the absence of the deduction.  Friends I have spoken with have said the same thing about continuing their contributions in the absence of a tax deduction.

That being said, eliminating the tax deduction will reduce contributions to many non-profits.  Part of this will result from people taking a closer look at an organization, its mission and how efficient it is with their money. 

In the absence of  a tax deduction, those donating to charities will be apt to take a closer look and how the charity uses their money.  Those charities in which administrative and/or fundraising consumes most of each dollar received will find contributions being redirected to other charities where the bulk of each dollar goes to helping those in need.