Out of Control Policy Blog

Cap and Trade Taxes Would Mean a Double-Dip Recession

In 1930, the Congress exacerbated the stock crash from the previous year by passing the Smoot-Hawley tariff. This protectionism significantly contributed to the development of the Great Depression because it raised the costs of goods and labor when income and business were down. A recipe for disaster-pudding.

During the Lost Decade in Japan, the government raised business and individual tax rates (separate times) in an attempt to curb their national debt. Both times the economy was starting to show signs of recovery before getting smashed.

Progressive economic logic suggests that taxing cigarettes and other vices will reduce the consumption of those products. And that is right. Increasing the tax (and thus price) of a product will decrease the demand. So why is this not extended to other taxes—namely, the Waxman cap and trade taxes being considered today in the House.

Jim Lindgren blogging at the Volokh Conspriacy says this:

The cap-and-trade bill, if passed by the Senate and actually implemented over the next few decades, would do more damage to the country than any economic legislation passed in at least 100 years. It would eventually send most American manufacturing jobs overseas, reduce American competitiveness, and make Americans much poorer than they would have been without it.

And here is the truly ironic part:

The cap-and-trade bill will have little, if any, positive effect on the environment—in part because the countries that would take jobs from US industries tend to be bigger polluters. By making the US — and the world—poorer, it would probably reduce the world's ability to develop technologies that might solve its environmental problems in the future.

The concept of cap and trade isn't necessarily the problem, it's the devil in the details. It's the structure of the bill the House is likely to push through today, which includes a call for increased tariffs on countries that are not seeking to curb emissions.

I wrote in May about a "W" shaped recession, sometimes referred to as a double-dip recession. The Federal Open Market Committee said on Wednesday "that the pace of economic contraction is slowing. Conditions in financial markets have generally improved in recent months." Household spending is stabilizing and businesses are making progress in bringing inventory into alignment with demand. By all accounts it wouldn't be improbable to see the recession end by the beginning of 2010. But if this cap and trade tax (likely the largest federal tax in history) gets passed, while being coupled with the end of the Bush tax cuts and other tax increases that the White House is pushing for (like upping the double taxation of capital gains), the economy is going to hit a wall.

That wall will be decreased incentives to create wealth and less capital in the hands of producers. The mortar for those bricks will be the higher taxes. And hitting that wall is going to cause another significant dip in the economy. A "W" shaped recession.

Anthony Randazzo is Director of Economic Research


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