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Good Advice for Life

1. Never say anything about anyone that you wouldn't say if they were standing right there.
2. Never back anyone into a corner. You will get the exact opposite of the result you desire
3. People behave the way they do for a reason.
4. Anger is really fear. Angry people are expressing their fear.
5. Don't fall in love with a person who is a 'fixer-upper'.
6. Pick your friends carefully - people judge you by the people with whom you choose to associate.
7. What you wear sends a message. Be aware of the message you are sending.
8. Don't be mean. It will cost you more than it's worth in the long run.
9. Be nice. It doesn't cost you anything.
10. Pay your bills on time. If you can't pay, call the people you own money to tell them you are going to be late. Call BEFORE the payment is late.
11. Don't go to bed mad
12. People that you love - tell them.
13. People you hate - keep your mouth shut - they already know.
14. NEVER put anything on email that might ever haunt you later. Email is NOT private.

Taxes, Depression, and Our Current Troubles

The 1930s has become the sole object lesson for today's monetary policy. Over the past 12 months, the Federal Reserve has increased the monetary base (bank reserves plus currency in circulation) by well over 100%. While currency in circulation has grown slightly, there's been an impressive 17-fold increase in bank reserves. The federal-funds target rate now stands at an all-time low range of zero to 25 basis points, with the 91-day Treasury bill yield equally low. All this has been done to avoid a liquidity crisis and a repeat of the mistakes that led to the Great Depression.

Even with this huge increase in the monetary base, Fed Chairman Ben Bernanke has reiterated his goal not to repeat the mistakes made back in the 1930s by tightening credit too soon, which he says would send the economy back into recession. The strong correlation between soaring unemployment and falling consumer prices in the early 1930s leads Mr. Bernanke to conclude that tight money caused both. To prevent a double dip, super easy monetary policy is the key.

A New York City breadline, 1930

While Fed policy was undoubtedly important, it was not the primary cause of the Great Depression or the economy's relapse in 1937. The Smoot-Hawley tariff of June 1930 was the catalyst that got the whole process going. It was the largest single increase in taxes on trade during peacetime and precipitated massive retaliation by foreign governments on U.S. products. Huge federal and state tax increases in 1932 followed the initial decline in the economy thus doubling down on the impact of Smoot-Hawley. There were additional large tax increases in 1936 and 1937 that were the proximate cause of the economy's relapse in 1937.

In 1930-31, during the Hoover administration and in the midst of an economic collapse, there was a very slight increase in tax rates on personal income at both the lowest and highest brackets. The corporate tax rate was also slightly increased to 12% from 11%. But beginning in 1932 the lowest personal income tax rate was raised to 4% from less than one-half of 1% while the highest rate was raised to 63% from 25%. (That's not a misprint!) The corporate rate was raised to 13.75% from 12%. All sorts of Federal excise taxes too numerous to list were raised as well. The highest inheritance tax rate was also raised in 1932 to 45% from 20% and the gift tax was reinstituted with the highest rate set at 33.5%.

But the tax hikes didn't stop there. In 1934, during the Roosevelt administration, the highest estate tax rate was raised to 60% from 45% and raised again to 70% in 1935. The highest gift tax rate was raised to 45% in 1934 from 33.5% in 1933 and raised again to 52.5% in 1935. The highest corporate tax rate was raised to 15% in 1936 with a surtax on undistributed profits up to 27%. In 1936 the highest personal income tax rate was raised yet again to 79% from 63%?a stifling 216% increase in four years. Finally, in 1937 a 1% employer and a 1% employee tax was placed on all wages up to $3,000.

Because of the number of states and their diversity I'm going to aggregate all state and local taxes and express them as a percentage of GDP. This measure of state tax policy truly understates the state and local tax contribution to the tragedy we call the Great Depression, but I'm sure the reader will get the picture. In 1929, state and local taxes were 7.2% of GDP and then rose to 8.5%, 9.7% and 12.3% for the years 1930, '31 and '32 respectively.

The damage caused by high taxation during the Great Depression is the real lesson we should learn. A government simply cannot tax a country into prosperity. If there were one warning I'd give to all who will listen, it is that U.S. federal and state tax policies are on an economic crash trajectory today just as they were in the 1930s. Net legislated state-tax increases as a percentage of previous year tax receipts are at 3.1%, their highest level since 1991; the Bush tax cuts are set to expire in 2011; and additional taxes to pay for health-care and the proposed cap-and-trade scheme are on the horizon.

In addition to all of these tax issues, the U.S. in the early 1930s was on a gold standard where paper currency was legally convertible into gold. Both circulated in the economy as money. At the outset of the Great Depression people distrusted banks but trusted paper currency and gold. They withdrew deposits from banks, which because of a fractional reserve system caused a drop in the money supply in spite of a rising monetary base. The Fed really had little power to control either bank reserves or interest rates.

The increase in the demand for paper currency and gold not only had a quantity effect on the money supply but it also put upward pressure on the price of gold, which meant that dollar prices of all goods and services had to fall for the relative price of gold to rise. The deflation of the early 1930s was not caused by tight money. It was the result of panic purchases of fixed-dollar priced gold. From the end of 1929 until early 1933 the Consumer Price Index fell by 27%.

By mid-1932 there were public fears of a change in the gold-dollar relationship. In their classic text, "A Monetary History of the United States," economists Milton Friedman and Anna Schwartz wrote, "Fears of devaluation were widespread and the public's preference for gold was unmistakable." Panic ensued and there was a rush to buy gold.

In early 1933, the federal government (not the Federal Reserve) declared a bank holiday prohibiting banks from paying out gold or dealing in foreign exchange. An executive order made it illegal for anyone to "hoard" gold and forced everyone to turn in their gold and gold certificates to the government at an exchange value of $20.67 per ounce of gold in return for paper currency and bank deposits. All gold clauses in contracts private and public were declared null and void and by the end of January 1934 the price of gold, most of which had been confiscated by the government, was raised to $35 per ounce. In other words, in less than one year the government confiscated as much gold as it could at $20.67 an ounce and then devalued the dollar in terms of gold by almost 60%. That's one helluva tax.

The 1933-34 devaluation of the dollar caused the money supply to grow by over 60% from April 1933 to March 1937, and over that same period the monetary base grew by over 35% and adjusted reserves grew by about 100%. Monetary policy was about as easy as it could get. The consumer price index from early 1933 through mid-1937 rose by about 15% in spite of double-digit unemployment. And that's the story.

The lessons here are pretty straightforward. Inflation can and did occur during a depression, and that inflation was strictly a monetary phenomenon.

My hope is that the people who are running our economy do look to the Great Depression as an object lesson. My fear is that they will misinterpret the evidence and attribute high unemployment and the initial decline in prices to tight money, while increasing taxes to combat budget deficits.

By ARTHUR B. LAFFER

Mr. Laffer is the chairman of Laffer Associates and co-author of "The End of Prosperity: How Higher Taxes Will Doom the Economy?If We Let It Happen" (Threshold, 2008).

The Airport for No One

Republicans had their Bridge to Nowhere in Alaska, and now Democrats seem intent on wrapping themselves firmly around Congressman Jack Murtha's Airport for No One in Johnstown, Pennsylvania. So much for changing the culture of spending in Washington.

Last week 53 Senators?including 51 Democrats?voted down an amendment by Republican Jim DeMint of South Carolina to stop spending federal funds on the airport that Mr. Murtha built with more than $150 million in federal subsidies and earmarks over the last two decades. (The Republicans voting against Mr. DeMint were Kit Bond and George Voinovich, neither of whom is running for re-election.) The airport has three daily commercial flights, and those are to Washington, D.C. The federal subsidies average $100 for each of the fewer than 30 passengers who use the airport each day, which means it would be cheaper for taxpayers to buy a train ticket for Mr. Murtha and other Washington D.C.-bound travelers than to keep the airport open.

Pennsylvania's two Senators, Democrats Arlen Specter and Robert P. Casey, Jr., denounced the DeMint amendment because it singled out one airport. Of course, so do Mr. Murtha's earmarks. The Senators also argued that airport funding decisions should be left to the Federal Aviation Administration. But everyone knows that Mr. Murtha's clout at the House Appropriations Committee trumps the FAA. Earlier this year the airport received $800,000 in federal stimulus money, which has been spent in part to pave a second runway, even though the first one is barely in use. Mr. Murtha also secured $8.5 million for a new radar system that's never been used.

Mr. DeMint pleaded with his colleagues that "if we can't cut funding for this project, we can't cut anything in Washington" and that the Senate will have declared "there's no such thing as waste, there's no such thing as fraud and corruption." He lost, but voters keeping score can add it to their mental tally of why we have a $1.6 trillion deficit.