In the current climate of economic turmoil, with Europe and the U.S. both trying to push back the fateful pay day when decades of governmental overreach and overspending come home to roost at the same time that economic growth appears to be stalling, so-called liberals and progressives like to argue against budget cuts with the Keynesian argument that austerity would be poison for any hopes of economic recovery, let alone renewed growth. As the economy lurches, and stock market indices tumble, you will no doubt see this argument made forcefully by proponents of unrestrained government spending.
Lucky for us, we can turn to at least one significant historical example when the U.S. government did NOT resort to hectic macroeconomic retooling, pump-priming, and deficit spending. As Professor George Selgin explains, the sharp economic reversal of 1920 did not deter the government (and this means essentially the just-elected Harding government, as the Wilson administration was hardly functioning at the end of Wilson’s 2nd term) from prioritizing cutting the bloated wartime budget and retiring the enormous wartime debt. Far from plunging the nation into ruin, these policies worked so well that within two years an unemployment rate of close to 12 percent had given way to labor shortages, and industrial production, which had fallen precipitously in 1920, rose to new record levels.Notably, government spending was tightly controlled during the Harding/Coolidge years, while the economy boomed.
As Selgin points out, Treasury Secretary Mellon was unfairly tarred as “liquidationist” by none other than Herbert Hoover, who did not in fact follow austerity measures while battling the Great Depression. Moreover, the Harding/Mellon austerity of 1920/1921, which was continued under the Coolidge administration, is rarely given credit for turning the economy around. It seems austerity just can’t win!
Well, this time I’m getting an early start! Eighty years ago tomorrow, Calvin Coolidge wrote his daily “Calvin Coolidge Says” column about a subject near and dear to his heart, and also somewhat pertinent to our day and age – taxation:
The Congress has before it two distinct problems which in their solution conflict with each other. One is the necessity of providing revenue to meet obligations already incurred, or any new commitments for relief. The other is to do what it can to encourage business. The obligations must be met. But that requires taxes and perhaps more taxes. That will retard business. The answer may lie in temporary borrowing to meet temporary emergency. The danger there is extravagance.
It would seem perfectly clear that business will not be improved by spending tax money. Taxes are already too high. With all the national reductions, states and municipalities have raised taxes until the grand total is about $13,000,000,000.
Nothing would so encourage business than a reduction of this local and national burden. In 1921 it was particularly the drastic cuts in Federal expenses and taxes that brought economic revival.
While relief must be provided, those who now advocate higher taxes may be meeting the Treasury requirements but are postponing prosperity. Those who seek to improve our economic position by spending more tax money are going in the wrong direction. Rigid governmental economy would finally solve both problems.
Interestingly for those who now approvingly quote Coolidge (or Mellon) policies, it is clearly apparent that Coolidge was not of the “deficits don’t matter” school. As Joe Thorndike has only recently pointed out, Coolidge was for tax reduction when accompanied by rigid government economy, and certainly not in favor of extravagant borrowing – I’m positive he would be aghast at today’s levels of national indebtedness.
It is difficult for us today to grasp what a powerful issue Prohibition was in its heyday. We instinctively see the 18th Amendment as an aberration that was never fully accepted or enforced, and surmise that the nation breathed a collective sigh of relief when it was repealed in 1933, having been the law of the land for only about 14 years. If remembered at all, these years are recalled as a time of corruption and racketeering, while the widespread alcoholism and its attendant evils, which spawned the reform movement, are not focused on.
Liquor being poured down the drain during the height of Prohibition
Treasury Secretary Andrew Mellon in 1926, image courtesy Library of Congress
As members of the G20 prepare to meet in Pittsburgh later this month, it is unlikely that any of them will pause and reflect upon the legacy of Pittsburgh native Andrew Mellon who, following a distinguished banking and investment career, served as Secretary of the Treasury for most of the 1920s, under three successive Republican presidents (or, as some would have it, had three U.S. presidents serve under him). But maybe they should, for at least two reasons.
One, Mellon’s lasting achievement is the reduction of massive federal debt following World War I. He succeeded in doing so not by following the policies of the earlier Wilson and later FDR and successive administrations by raising existing taxes and inventing new ones, but rather by cutting tax rates, reasoning that “the history of taxation shows that taxes which are inherently excessive are not paid. The high rates inevitably put pressure upon the taxpayer to withdraw his capital from productive business.” As finance ministers ponder how to reduce sky-high debt following intervention in financial markets, they are widely expected to follow the opposite path of raising taxes.
Two, Mellon was widely vilified after the onset of the Great Depression when he voiced his theory that the recovery of the banking system was contingent upon a process of weeding out and liquidating the weak banks. He also opposed deficit spending, instead advocating spending cuts to keep the federal in balance. At the outset of the current crisis, a small number of economists warned of the dangers of keeping “too big to fail” banks afloat, but to no avail.
Times have changed since the 1920s, and for better or worse, there likely is no going back to the largely limited-government views held by Mellon and Coolidge. We will never know how the Great Depression would have played out if Mellon’s policies had been carried out. We do know that his record for much of his tenure as Treasury Secretary was outstanding and his instincts, honed by a lifetime in business, were keen. It may well be that his policy prescriptions have some value for our time as well; maybe someone should leave copies of his book Taxation: The People’s Business on the desks of G20 participants.