Calvin Coolidge hated the national debt he inherited from his pre-predecessor Woodrow Wilson, it is safe to say. Like Warren Harding before him, he made it the top priority of his administration to sharply reduce the debt, scrimping and saving a couple of million here and there to produce budget surpluses year after year in the process. It also is safe to say that he would be aghast at the fiscal mess the country is in today, a mess caused by Democratic and Republican administrations and Congressional majorities.
While reporting on the Fiscal Cliff negotiations, commentators have chosen to focus on the supposedly catastrophic mix of tax increases and “draconian” spending cuts going over the cliff will entail. Well, I hope I’m not taking too great liberties with his legacy when I say I firmly believe that Calvin Coolidge would be the first to go over the cliff with flags flying, because it is precisely the dose of bitter medicine the U.S. needs to wean itself off profligate spending. Coolidge was no fundamentalist when it came to taxes, and I think he would also be the first to agree that in the present situation selective tax increases will need to be part of the package to reduce the staggering deficit.
So, in closing this blog post and this year, and while we still don’t know if the wheelers and dealers in Washington D.C. will wheel and deal themselves out of going over the cliff (still the likeliest outcome, I’m afraid), I would like to call out to them what I think would be Calvin Coolidge’s and Andrew Mellon’s view – do your job, swallow the pill, go over the cliff, get your fiscal house in order. It may be the best thing to happen to the country in a long time.
Uncle Moneybags character copyright Hasbro, Inc.
Stephen Moore, a member of the Wall Street Journal’s editorial board, lays out the case for lower tax rates, yes, even for millionaires, and argues that the only sensible way to make millionaires pay more in taxes is… to create more millionaires. He evaluates the various 20th century presidents who cut taxes (surprise – not counting those blissful years before the income tax was instituted, we never had it so good as during the Coolidge 20s).
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.