It negates the
court's ruling on Pollock vs the Farmers' Loan
& Trust Company, which declared the income tax
in the Wilson-Gorman Acts unconstitutional because
it was a direct tax that
required apportionment among
the states.
The Sixteenth Amendment,
ratified on February 25, 1913, preceded by only
six months the Seventeenth Amendment adopted on
April 8, 1913, which established direct election
of US Senators by direct popular vote. The
Seventeenth Amendment superseded article I, ง 3,
clauses 1 and 2 of the constitution, under which
senators were elected indirectly by elected
officials in state legislatures. It also altered
the procedure for filling vacancies in the senate,
to be consistent with the method of election. It
also preceded the Nineteenth Amendment, rectified
on August 26, 1920, which gave women the right to
vote.
The Sixteen Amendment exempted
income taxes from the constitutional requirements
with regard to direct taxes, after income taxes on
rents, dividends, and interest were ruled by the
Supreme Court to be direct taxes in Pollock v
Farmers' Loan & Trust Co (1895) that must be
apportioned among the states.
A regime of
central banking was also adopted with the
establishment of the Federal Reserve System when
congress passed the 1913 Federal Reserve Act (ch.
6, 38 Stat. 251, enacted December 23, 1913)
Blaming Smoot-Hawley for the Great
Depression In response to dismal economic
conditions in the Great Depression following the
stock market crash of 1929, congress escalated its
long-standing trade protectionist policies,
culminating in the Smoot-Hawley Act of 1930, which
was a basket of various increased tariffs to
protect many fragile industries in the US economy
in a severe depression, that was signed into law
on June 17, 1930 by president Herbert Hoover. Two
years later, Hoover, a conservative Republican,
lost the1932 presidential election to Franklin
Roosevelt, liberal Democrat governor of New York.
Until the current financial crisis that
started in mid-2007, it had been conventional
neo-liberal wisdom to blame the Smoot-Hawley Act
as having deepened the Great Depression. Yet
Smooth-Hawley was signed into law only on June 17,
1930, almost a year after the stock market crash
on October 24, 1929. It is not possible for an
event to trigger retrospectively other events that
have taken place before it.
Further, imports during 1929
were only 4.2% of the US GNP (gross national
product) and exports only 5.0%, with the US
enjoying a trade surplus equaling to 0.8% of its
GNP. Two-way total foreign trade amounted to only
9.2% of GNP. Before 1991, the US used GNP as its
primary measure of total economic activity. After
that, it began to use gross domestic product
(GDP). GNP contrasts with
GDP in that while GNP measures the output
generated by a country's enterprises - whether
physically located domestically or abroad, GDP
measures the total output produced within a
country's borders - whether produced by that
country's own firms or not. Since globalization,
many developing economies that sought development
through exporting economies have become
statistical boom towns while in reality are
trapped in poverty by exporting low-wage
production financed by foreign capital.
Even with a US trade deficit of $647
billion in 2010 that amounted to 2.9% of its GDP
of $14.87 trillion, US GNP of $15.2 trillion was
still greater than US GDP by $330 billion. For
2006, when the trade deficit was at $840 billion,
US GNP was $13.8 trillion, still larger than US
GDP of $13.6 by $200 billion.
In 2006,
some six months before the current financial
crisis first exploded in July 2007, US import was
18% of GDP and export was 13%, with a trade
deficit amounting to 5% of GDP. Foreign trade
still amounted to only 31% of US GDP.
In
2006, China's import was 31% of GDP and export was
39% of GDP, yielding a trade surplus of 8% of GDP.
Foreign trade accounted for 70% of Chinese GDP.
China imported a larger percentage of its GDP than
the US did in 2006. Foreign trade was twice as
important to the Chinese economy as it was to the
US economy in 2006. China has since adopted a plan
to reduce the percentage of GDP devoted to foreign
trade by trying to stimulate growth in the
domestic sector faster than that in the export
sector. US foreign trade being less than
10% of its GNP in 1929 was cited by monetarist
Milton Friedman as evidence for the reason he
dismissed the alleged critical role of
Smoot-Hawley played on the other 90% of the US
economy that was not related to foreign trade.
Instead, Friedman pointed to the critical role
played by the failure of Federal Reserve monetary
policy to provide needed liquidity to a stagnant
market, as the main cause of the depression. For
seven decades, Friedman's assertion was held as
valid by mainstream economics until 2008, when the
Alan Greenspan Fed's repeated administration of
monetary easing at the first sign of any economic
slowdown over an 18- year period merely built
toward an accumulative crisis that exploded in
mid-2007.
Since then, while the first Fed
quantitative easing (QE1) of $1.7 trillion that
ended in March 2010 arguably prevented a total
meltdown of the financial markets, QE2 in the
amount of $600 billion administered through June
2011 so far has failed to jump start any recovery
from a seriously impaired economy. There is still
talk of more quantitative being needed even after
a total of $2.1 trillion had been committed.
The Fed has kept the benchmark interest
rate near zero since December 2008 against an
inflation rate of above 2%, going on 30 months,
which is too long a time for negative interest
rates for any economy to sustain without
commensurate inflationary penalty down the road.
In addition, the Fed's balance sheet has ballooned
to a record $2.8 trillion, with no visible
strategy on an orderly exit from the market and
unwinding of toxic assets held that would not
cause serious market turmoil.
Even then,
Friedman's assertion was only a myth that was at
best half right - only on the monetary part.
Friedman failed to acknowledge the role low wages
played in the growth of the debt bubble in the
Roaring Twenties and the long-term unemployment
caused by the bubble's bursting that put the world
economy in a spiral of supply/demand imbalance.
The depression was then prolonged by intractable
demand deficiency resulting from prolonged high
unemployment and declining wages.
It was
ironic that Friedman did not learn from his
teacher, Jacob Viner, who, as the leading faculty
member in the Economics Department at the
University of Chicago, identified "unbalanced
deflation", in which both asset prices and wages
declined while nominal debt levels remain
constant, as the prime cause of the Great
Depression. Without lessons of history on the
danger of deficient wages being acknowledged, the
same chain of events seven decades later was
allowed to again cause the current depression that
started in 2008.
On the economics of
nuclear war-making, Viner spoke at the Conference
on Atomic Energy Control in 1945, saying "that the
atomic bomb was the cheapest way yet devised of
killing human beings" and that the destructive
characteristics of nuclear bombs "will be
peacemaking in effect". For this testimony, Viner
is sometimes viewed as the founder of nuclear
deterrence later developed into the Cold War
doctrine of mutual massive assured destruction
(MAD) as a stabilizing deterrent of nuclear war by
Herman Khan in his book: On Thermal Nuclear
War. (See War
and the military-industrial complex, Asia
Times Online, January 31, 2003.)
In
reality, Smoot-Hawley's high protectionist tariffs
actually prevented wages from declining further
through cross-border wage arbitrage during the
1930s Great Depression, which seven decades later
became a main cause of demand deficiency that
caused the current economic crisis that first
manifested itself as a financial crisis in 2007.
Unlike during the age of industrial
imperialism when mercantilist trade raised
domestic wages in the imperialist economies such
as Britain's and Germany's before World War II,
global international trade in the neo-liberal era
in the 21st century acts to depress wages in all
economies through cross-border wage arbitrage to
create a downward spiral of wages worldwide, in a
race to the bottom on consumer demand that needs
to be compensated through massive consumer debt in
the form of subprime mortgages that were supported
only by rising home prices rather than rising
wages.
Fed's QE cash goes to wrong
recipients In the 1930s, companies had to
close their doors and lay off workers because
those workers did not have enough money to buy the
products they produced. The resultant high
unemployment rate shrank consumer demand further
to cause more companies to close and to layoff
still more workers to depress demand further in a
downward spiral. This chain of events seem to be
repeating itself seven decades later in an economy
gravely impaired by the current global financial
crisis that began in the US in 2007. This is
because management has not learned from history
that taking money from wages to increase return on
capital is a self-defeating dead-end in a market
economy.
Furthermore, in the current
financial crisis, the solution adopted by the
Federal Reserve and the Treasury is to create
money ex nihilo (out of nothing) to buy toxic debt
from insolvent financial institutions, and lending
these walking-dead financial institutions newly
created money that the tax-paying public would
have to pay back with future taxes, merely to
create an illusion of profit for these financially
distressed institutions, while management
continues to lay off more workers.
Hamilton's protectionism saves US from
British imperialism While liberal economic
theory after World War II mistakenly asserted that
intensified protectionist trade policies had
worsened the Great Depression, the adherents of
this theory, in their eagerness to promote global
trade liberalization in the 1990s, have chosen to
ignore the historical fact that the US economy in
the new nation's early decades had benefited
greatly from the protectionist trade policies of
Alexander Hamilton against British trade
imperialism for most of its history until the two
World Wars in the 20th century made the US the
leading economic power to benefit from low tariffs
and open trade worldwide.
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