The Fiscal Cliff – what would Coolidge do?

With the 2012 election out of the way, Democrats in the White House and the Senate, and Republicans in the House of Representatives will need to come to terms with the dire fiscal situation facing the U.S.  Predictably, the posturing about areas that play at best a peripheral role, such as higher taxes for “the rich” has already begun. But the fact is, that for the past four fiscal years, from 2009 forward, federal spending has hovered at around $3.5 trillion, some $800 billion higher than in the last pre-recession fiscal year of 2007. What was intended as a one-shot fiscal stimulus back in 2008 appears to have become a permanent part of the federal budget. Despite the anemic economy, Washington is squeezing ever higher tax revenues from citizens and corporations, with tax receipts at near-record heights of $2.45 trillion. Again predictably, the president’s only recipe to counter the resulting $1 trillion+ deficits is to insist on “a little more in taxes,” but even if he got his way and all the tax-rate increases he dreams of become reality, that will mean no more than an $160 billion drop in the  deficit bucket – leaving an annual shortfall of some $850 billion.

At the outset of the 1920s, the U.S. also was saddled by gigantic deficits. Legendary Treasury Secretary Andrew Mellon and two of the presidents who “served under him” in the 1920s, Warren Harding and Calvin Coolidge, realized full well that the fastest way to raise revenue is by way of faster economic growth. He also realized that higher taxes generally reduce economic activity, thereby slowing exonomic grwoth and actually reducing fedral revenue. This prompted the tax reforms of the early 1920s which resulted in unprecedented economic growth – accompanied by a very restrictive budgetary policy. Those long-ago lessons of the 1920s should be on everyone’s mind as they ponder the glib talk from Washington insiders proposing a “balanced” approach. The question remains if those favoring a such an approach really want to bring down the deficit, or if their hidden agenda is to ratchet taxes up to finance permanently high new spending levels.

Mellon and Coolidge would get out of the way of economic growth, selectively reduce tax rates, severely cut federal spending, and reduce regime uncertainty in the system. Little if any of this may be expected from the messy process that will now ensue in Washington.

2 thoughts on “The Fiscal Cliff – what would Coolidge do?

  1. It’s obligatory to add a postscript since opponents of this view would argue: “…and then what happened? We crashed.” But that’s where you need to include facts about Hoover as the interventionist “wonder boy” Coolidge called him.

    • Dave, that is very true…although I don’t think anyone has blamed the crash on fiscal austerity. When government policy leaves more money in people’s pockets, some people may use that money for speculation purposes, I suppose. Coolidge felt constrained by the Constitution and didn’t intervene on principle (or so would be my take on it).

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