Main Street Journal: On the Money: Socialism Not Seen Since FDR: Part II

The following article is taken from the February 2009 issue of the Main Street Journal. Click “Subscribe Online” above to start your subscription.

On the Money: Socialism Not Seen Since FDR: Part II
By: Chuck Bates

Last month we scratched the surface of the dangers of too much government involvement in the economy and how economic “stimulus” can actually prolong the financial woes of the nation. This month we are looking at a couple of examples where government action and the free market have proven themselves to better the economy.

President George W. Bush took a lot of flack for his proposed tax cuts that Congress then cut to about a third and passed as tax relief for Americans. Pairing the size of government and proposing tax relief is really all any president can do to try and aid the economy. Conversely proposed new spending and the requisite new taxes as well as expanding the size and scope of government are largely detrimental to the health of the economy.

Andrew Mellon was Secretary of the Treasury serving Presidents’ Harding, Coolidge and Hoover. When he entered government the highest personal tax rates on Americans was at 77%! As such a lot of folks avoided the tax and rightfully so. Mellon believed that by lowering the tax rate on all Americans it would stop the avoidance of taxes by the wealthy and allow the individual to keep more in his own possession to invest or save or just spend into the economy creating additional business and thus taxed revenue. His plans were implemented by these Presidents and the Congress of the era and the plan proved out with an explosive growth in the economy with additional revenues created for the treasury as a result of the good economic times as the highest tax bracket fell to 24% of a persons’ income. Sadly President Hoover had some socialist tendencies and his successor FDR completed the abrupt turnaround of these successful policies and by the end of Roosevelt’s term the highest brackets had returned to over 80%. Adding insult to injury the Depression lasted longer than is should have as the government essentially soaked up all of the available capital via taxation. Soon FDR was running out of money and added an additional excise tax to make up the difference! Free market principles had proven effective but socialism had destroyed that success.

The second, and more recent, example of free market principles working were used to turn around of all things, a government program. Dr. Jose Pinera, currently a fellow with the CATO Institute, found a free market fix to his native Chile’s social security scheme. In 2006 the Social Security Administration received roughly $530 billion in “contributions” and dispersed some $449 billion. Not so bad you say, but given the current growth in retirees it is expected that by as early as 2017 the Social Security Trust Fund will begin paying out more than it brings in annually. Chile had just come out from under a Marxist dictator in the mid 1970’s and the system was in a shambles; literally broke. Dr. Pinera, a Harvard educated economist, came to the fore with what was considered a radical idea at the time, privatization of a government program. Under his plan the same 10 percent that had been deducted from workers checks would redirected from the general fund and instead placed in a private investment account that each worker would own much like a 401(k) or IRA. The accounts were administered by private companies as to keep the government, which was notorious for spending the people’s retirement on themselves and their programs (sound familiar). If one wanted to stay in the old system they could but in actuality 95% of the eligible Chileans signed on to the new and successful program. Over the nearly 30 years the new private system has been in operation the participants have averaged a compounded 10% per year growth rate in their funds above inflation and tax free. Compare that to the 1.5% that Social Security generates via US government bonds. Of course now that the world seems to be embracing socialism as the solution for the global financial meltdown the socialists in Chile are attempting to go after the successful program to raid it for the needed capital. Strangely their current President Michelle Bachelet, is attempting to return part of the system to the old, failed scheme as part of her “stimulus” plan of massive government spending. Again does this sound familiar?

The Democrats in the US and of course the new President have consistently come against any and all privatization of Social Security. Former presidential candidate and US Senator Fred Thompson was the only politician in my life time to actually have a plan of action that could save Social Security and of course it is based on free market principles.

Next month we will look at the likely outcome to the President’s “stimulus” plan and why it is almost certain to fail.

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