History Facts: Economy, Taxation, and Integrity

History Facts:

Economy, Taxation, and Integrity

Calvin Coolidge represents the exact opposite of Left-wing politics.. Coolidge had integrity. He deserves a lot more respect than he ever got. ~C.A. Davidson

“Reprinted by permission from Imprimis, a publication of Hillsdale College.”

key“We must have no carelessness in our dealings with public property or the expenditure of public money. Such a condition is characteristic of undeveloped people, or of a decadent generation.” ~Calvin Coolidge

Senator Selden Spencer once took a walk with Coolidge around the White House grounds. To cheer the President up, Spencer pointed to the White House and asked playfully, “Who lives there?” “Nobody,” Coolidge replied. “They just come and go.”

It is much more important to kill bad bills than to pass good ones. ~Calvin Coolidge

Amity Shlaes
Author, Coolidge

calvincoolidgeCalvin Coolidge and the Moral Case for Economy

AMITY SHLAES is a syndicated columnist for Bloomberg, a director of the Four Percent Growth Project at the George W. Bush Presidential Center, and a member of the board of the Calvin Coolidge Memorial Foundation. She has served as a member of the editorial board of the Wall Street Journal and as a columnist for the Financial Times, and is a recipient of the Hayek Prize and the Frederic Bastiat Prize for free-market journalism. She is the author of four books, Germany: The Empire Within, The Forgotten Man: A New History of the Great Depression, The Greedy Hand: How Taxes Drive Americans Crazy and What to Do About It, and Coolidge.

The following is adapted from a talk given at Hillsdale College on January 27, 2013, during a conference on “The Federal Income Tax: A Centenary Consideration,” co-sponsored by the Center for Constructive Alternatives and the Ludwig von Mises Lecture Series.


WITH THE FEDERAL DEBT spiraling out of control, many Americans sense an urgent need to find a political leader who is able to say “no” to spending. Yet they fear that finding such a leader is impossible. Conservatives long for another Ronald Reagan. But is Reagan the right model? He was of course a tax cutter, reducing the top marginal rate from 70 to 28 percent. But his tax cuts—which vindicated supply-side economics by vastly increasing federal revenue—were bought partly through a bargain with Democrats who were eager to spend that revenue. Reagan was no budget cutter—indeed, the federal budget rose by over a third during his administration.

An alternative model for conservatives is Calvin Coolidge. President from 1923 to 1929, Coolidge sustained a budget surplus and left office with a smaller budget than the one he inherited. Over the same period, America experienced a proliferation of jobs, a dramatic increase in the standard of living, higher wages, and three to four percent annual economic growth. And the key to this was Coolidge’s penchant for saying “no.” If Reagan was the Great Communicator, Coolidge was the Great Refrainer.

Enter Coolidge
Following World War I, the federal debt stood ten times higher than before the war, and it was widely understood that the debt burden would become unbearable if interest rates rose. At the same time, the top income tax rate was over 70 percent, veterans were having trouble finding work, prices had risen while wages lagged, and workers in Seattle, New York, and Boston were talking revolution and taking to the streets. The Woodrow Wilson administration had nationalized the railroads for a time at the end of the war, and had encouraged stock exchanges to shut down for a time, and Progressives were now pushing for state or even federal control of water power and electricity. The business outlook was grim, and one of the biggest underlying problems was the lack of an orderly budgeting process: Congress brought proposals to the White House willy-nilly, and they were customarily approved.

The Republican Party’s response in the 1920 election was to campaign for smaller government and for a return to what its presidential candidate, Warren Harding, dubbed “normalcy”—a curtailing of government interference in the economy to create a predictable environment in which business could confidently operate. Calvin Coolidge, a Massachusetts governor who had gained a national reputation by facing down a Boston police strike—“There is no right to strike against the public safety by anybody, anywhere, any time,” he had declared—was chosen to be Harding’s running mate. And following their victory, Harding’s inaugural address set a different tone from that of the outgoing Wilson administration (and from that of the Obama administration today): “No altered system,” Harding said, “will work a miracle. Any wild experiment will only add to the confusion. Our best assurance lies in efficient administration of our proven system.”

One of Harding’s first steps was to shepherd through Congress the Budget and Accounting Act of 1921, under which the executive branch gained authority over and took responsibility for the budget, even to the point of being able to impound money after it was budgeted. This legislation also gave the executive branch a special budget bureau—the forerunner to today’s Office of Management and Budget—over which Harding named a flamboyant Brigadier General, Charles Dawes, as director. Together they proceeded to summon department staff and their bosses to semiannual meetings at Continental Hall, where Dawes cajoled and shamed them into making spending cuts. In addition, Harding pushed through a tax cut, lowering the top rate to 58 percent; and in a move toward privatization, he proposed to sell off naval petroleum reserves in Wyoming to private companies.

Unfortunately, some of the men Harding appointed to key jobs proved susceptible to favoritism or bribery, and his administration soon became embroiled in scandal. In one instance, the cause of privatization sustained damage when it became clear that secret deals had taken place in the leasing of oil reserves at Teapot Dome. Then in the summer of 1923, during a trip out West to get away from the scandals and prepare for a new presidential campaign, Harding died suddenly.

Enter Coolidge, whose personality was at first deemed a negative—his face, Alice Roosevelt Longworth said, “looked as though he had been weaned on a pickle.” But canny political leaders, including Supreme Court Justice and former President William Howard Taft, quickly came to respect the new president. Secretary of State Charles Evans Hughes, after visiting the White House a few times that August, noted that whereas Harding had never been alone, Coolidge often was; that whereas Harding was partial to group decisions, Coolidge made decisions himself; and most important, that whereas Harding’s customary answer was “yes,” Coolidge’s was “no.”

The former governor of Massachusetts was in his element when it came to budgeting. Within 24 hours of arriving back in Washington after Harding’s death, he met with his own budget director, Herbert Lord, and together they went on offense, announcing deepened cuts in two politically sensitive areas: spending on veterans and District of Columbia public works. In his public statements, Coolidge made clear he would have scant patience with anyone who didn’t go along: “We must have no carelessness in our dealings with public property or the expenditure of public money. Such a condition is characteristic of undeveloped people, or of a decadent generation.”

If Harding’s budget meetings had been rough, Coolidge’s were rougher. Lord first advertised a “Two Percent Club,” for executive branch staffers who managed to save two percent in their budgets. Then a “One Percent Club,” for those who had achieved two or more already. And finally a “Woodpecker Club,” for department heads who kept chipping away. Coolidge did not even find it beneath his pay grade to look at the use of pencils in the government: “I don’t know if I ever indicated to the conference that the cost of lead pencils to the government per year is about $125,000,” he instructed the press in 1926. “I am for economy, and after that I am for more economy,” he told voters.

Coolidge in Command
“It is much more important to kill bad bills than to pass good ones,” Coolidge had once advised his father. And indeed, while Harding had vetoed only six bills, Coolidge vetoed 50—including farming subsidies, even though he came from farming country. (“Farmers never had made much money,” he told a guest, and he didn’t see there was much the government could rightly do about it.) He also vetoed veterans’ pensions and government entry into the utilities sector.

Thanks to A.F. Branco at Legal Insurrection.com for his great cartoon

The Purpose of Tax Cuts

In short, Coolidge didn’t favor tax cuts as a means to increase revenue or to buy off Democrats. He favored them because they took government, the people’s servant, out of the way of the people. And this sense of government as servant extended to his own office.

Senator Selden Spencer once took a walk with Coolidge around the White House grounds. To cheer the President up, Spencer pointed to the White House and asked playfully, “Who lives there?” “Nobody,” Coolidge replied. “They just come and go.”

But as unpopular as he was in Washington, Coolidge proved enormously popular with voters. In 1924, the Progressive Party ran on a platform of government ownership of public power and a return to government ownership of railroads. Many thought the Progressive Party might split the Republican vote as it had in 1912, handing the presidency to the Democrats. As it happened, Progressive candidate Robert LaFollette indeed claimed more than 16 percent of the vote.

Yet Coolidge won with an absolute majority, gaining more votes than the Progressive and the Democrat combined. And in 1928, when Coolidge decided not to run for reelection despite the urging of party leaders who looked on his reelection as a sure bet, Herbert Hoover successfully ran on a pledge to continue Coolidge’s policies.

Unfortunately, Hoover didn’t live up to his pledge. Critics often confuse Hoover’s policies with Coolidge’s and complain that the latter did not prevent the Great Depression. That is an argument I take up at length in my previous book, The Forgotten Man, and is a topic for another day. Here let me just say that the Great Depression was as great and as long in duration as it was because, as economist Benjamin Anderson put it, the government under both Hoover and Franklin Roosevelt, unlike under Coolidge, chose to “play God.”

Lessons from Coolidge

Beyond the inspiration of Coolidge’s example of principle and consistency, what are the lessons of his story that are relevant to our current situation? One certainly has to do with the mechanism of budgeting: The Budget and Accounting Act of 1921 provided a means for Harding and Coolidge to control the budget and the nation’s debt, and at the same time gave the people the ability to hold someone responsible. That law was gutted in the 1970s, when it became collateral damage in the anti-executive fervor following Watergate. The law that replaced it tilted budget authority back to Congress and has led to over-spending and lack of responsibility.

A second lesson concerns how we look at tax rates. When tax rates are set and judged according to how much revenue they bring in due to the Laffer Curve—which is how most of today’s tax cutters present them, thereby agreeing with tax hikers that the goal of tax policy is to increase revenue—tax policy can become a mechanism to expand government. The goals of legitimate government—American freedom and prosperity—are left by the wayside.

Thus the best case for lower taxes is the moral case—and as Coolidge well understood, a moral tax policy demands tough budgeting.

Finally, a lesson about politics. The popularity of Harding and Coolidge, and the success of their policies—especially Coolidge’s—following a long period of Progressive ascendancy, should give today’s conservatives hope. Coolidge in the 1920s, like Grover Cleveland in the previous century, distinguished government austerity from private-sector austerity, combined a policy of deficit cuts with one of tax cuts, and made a moral case for saying “no.” A political leader who does the same today is likely to find an electorate more inclined to respond “yes” than he or she expects.

Coolidge and Moral Economy, complete article

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Economy: History Timeline and Facts

Dinner Topics for Thursday

Month-Defining Moment

key“Keynesian” is the term for Liberal economic policy. If you try to find a definition of it, you will quickly get lost in all the liberal verbiage. Here, from American Thinker, is a definition in plain English. At the conclusion of this post you’ll find more information about why this philosophy has never worked.

Definitions

Sequester: Government Spending Cuts

Keynesian Economics: “Keynesian Economics” is the insane belief that the economy can be stimulated by government spending.  It provides the excuse to depart from common sense that allows politicians to ignore the alarm bells.  It is ludicrous mainly because our government doesn’t have any money to spend.

The New Deal was the largest real-world test of the Keynesian Myth in recent history. Franklin Roosevelt’s Treasury Secretary Henry Morgenthau confessed that the “New Deal” was a failure in sworn testimony before Congress on May 9, 1939. 

“We have tried spending money. We are spending more than we have ever spent before and it does not work.”

And FDR’s Treasury Secretary also told Congress:

“I say after eight years of this Administration we have just as much unemployment as when we started. … And an enormous debt to boot!”

debt-ceiling-obama-cartoonsToday

Facts

1. Sequester is a policy devised by the White House in the first place

2. The actual amount of the cut is 2.3 percent of $3.6 trillion budget in 2013

3. Discretionary spending budget is still 7 percent higher than when Obama took office

4. Federal employees earn 30 to 40 percent more in salary and benefits than comparable private sector workers

5. NBC/Wall Street Journal Poll: 53 percent of Americans support sequester or want even deeper slashes

Fantasy

Great Sequester Hysteria of 2013

 

Obama Regime Policy: Keynesian Economics

1. Government must never lose a dime

2. If Americans insist on reducing government, Americans must be punished by government

1944-1947 Post World War 2

Fantasy

Keynesian Predictions (Translate: “Budget Cut Hysteria of 1946”)

1. Depression in 1946, economic Armageddon

2. 35 percent jobless rate

Facts

1. 1946—Federal spending fell by 66 percent in one year

2. “The ‘Depression of 1946’ may be one of the most widely predicted events that never happened in American history.” ~ Jason E. Taylor, Richard K. Vedder, Cato Institute policy report

3. 1947—Budget surplus of over 5 percent of GDP

4. In the four years from peak World War II spending in 1944 to 1948, the U.S. government cut spending by $72 billion—a 75-percent reduction. It brought federal spending down from a peak of 44 percent of [GDP] in 1944 to only 8.9 percent in  1948, a drop of over 35 percentage points of [GDP]. While government spending fell like a stone, federal tax revenues fell only …10.6 percent. Yet, the economy boomed. September 1945 to December 1948, the average unemployment rate was only 3.5 percent. ~David R. Henderson, Mercatus Center at George Mason University

5. As government spending fell by 66 percent, private investment rose by 156 percent.  ~James Pethokoukis, American Enterprise Institute

6. “Why did the U.S. economy do so well in the years following World War II, given how badly it had done in the years preceding America’s entry into the war? The answer, in a nutshell, is that dramatically reducing government spending and deregulating an economy can take that economy from sickness to health.” ~ David R. Henderson, Mercatus Center at George Mason University

The Madness of Keynesian Economics

By Jonathon Moseley

American Thinker
President Barack Obama demands more stimulus spending to avoid the “fiscal cliff.”   Obama increased the national debt $6 trillion to $16 trillion.  Yet the Democrats’ ‘cure for what ails ya’ is even more spending.   Obama demands around $75 billion in new spending to stimulate the economy in 2013.

“Keynesian Economics” is the insane belief that the economy can be stimulated by government spending.  It provides the excuse to depart from common sense that allows politicians to ignore the alarm bells.  It is ludicrous mainly because our government doesn’t have any money to spend.

If the government had a surplus saved up, spending actual money might give our economy a short-term sugar high (with dubious long-term results).   But our Federal and state governments must first suck money out of the economy by borrowing it.

History has repeatedly proven that this is nonsense.  Yet Democrats will not let go of the Keynesian Myth.  The government is the center of society, America’s modern Democrats want to believe.  So they cannot shake the dogma that our entire economy depends upon government spending.

The New Deal was the largest real-world test of the Keynesian Myth in recent history. Franklin Roosevelt’s Treasury Secretary Henry Morgenthau confessed that the “New Deal” was a failure in sworn testimony before Congress on May 9, 1939. 

fdrnewdeal“We have tried spending money. We are spending more than we have ever spent before and it does not work.”

And FDR’s Treasury Secretary also told Congress:

“I say after eight years of this Administration we have just as much unemployment as when we started. … And an enormous debt to boot!”  (See:  Human Events    and The Heritage Foundation   

What’s more, Morgenthau was a friend and ally of FDR’s, not just the Treasury Secretary responsible for the finances of the New Deal.

Morgenthau made this “startling confession,” says historian Burton W. Folsom Jr., in the New Deal’s seventh year.   “In these words, Morgenthau summarized a decade of disaster, especially during the years Roosevelt was in power. Indeed average unemployment for the whole year in 1939 would be higher than that in 1931, the year before Roosevelt captured the presidency from Herbert Hoover,” Folsom’s book is “New Deal or Raw Deal?: How FDR’s Economic Legacy Has Damaged America.”

It’s like this:  You scoop water from the deep end of a swimming pool with a bucket, run around to the shallow end, and then pour the water into the shallow end of the pool.  Can you make the shallow end deeper?  The entire swimming pool is one inter-connected whole.  You are accomplishing nothing…  except spilling some water (waste) and using up energy (administrative overhead).

So our government vacuums money out of the economy by borrowing it.  The money is largely wasted because it is directed according to political goals and to benefit political cronies, not by sound economic criteria.  No one is accountable for good or bad results.  Some of the money is wasted on administrative overhead.  Some of the money is wasted on fraud or abuse or to line people’s pockets.

But nothing real has changed.  So the economy will end up right back where it was before — after a sugar rush hangover.  Salaries might be bigger only due to inflation lowering the value of the dollar.

For one thing, businesses and consumers do not change their behavior when they know that government actions are only temporary.   Only permanent changes in conditions affect economic dynamics, empirical evidence shows.

Advocates for the Keynesian Myth argue that unemployment dipped during the Great Depression from 20% to “only” 14% in 1938, before it jumped back up to 17% by 1939.  They insist that “austerity” budgets drove unemployment back up again to 17%.

So liberals admit that Keynesian Economics is a failure.  As soon as the government spending stops, the economy slumps back where it was before.  Nothing has actually changed.  The Keynesian Myth promises that the economy can be fundamentally improved.

Moreover, liberals ignore the massive debt they burden the country with.  Considering the whole picture, including the debt, the nation is left worse off than it was to start with.

Liberals argue that Roosevelt’s stimulus was not big enough and it took World War II to finally end the Great Depression.  However, Obama’s most out-spoken economist lets the truth slip:   The Great Depression ended partly because Adolf Hitler drove wealth out of Europe and into the United States.  As European war loomed in 1938 and 1939, genuine increases in real investments flowing from Europe fundamentally grew the economy.  This was real money invested in the country, not government manipulation.

Christina D. Romer is Obama’s most eager cheerleader for the Keynesian madness.  But she cannot avoid giving away the store in the process.  Romer was Chair of President Obama’s Council of Economic Advisers, and an economics professor at the University of California, Berkeley.

Romer reluctantly lets the cat out of the bag.  It was not World War II deficit spending but the military draft removing nearly 10 million men from the work force.   Nearly 10 million jobs needed to be back-filled.   Romer also reluctantly concedes that economic participation was driven by national survival.  In a recession, consumers pull back on spending out of fear and limited funds, while businesses wait for the economy to improve.  But when Japan bombed Pearl Harbor, and Germany declared war under their defense pact, national output soared out of patriotism.  After the war, many of America’s global competitors had been laid waste while the USA was untouched.

Economic historian Robert Higgs offers a detailed analysis in his book Depression, War and Cold War of how Roosevelt’s New Deal made the Great Depression longer and worse and how government deficit spending during World War II did not cure the Great Depression.  Higgs notes that Roosevelt stimulated manufacturing with some policies that are today Republican proposals:  Tax deferrals, contractual incentives, and capital and guarantees to convert their factors to defense manufacturing.

Top economists show us that the government cannot expand the economy through deficit spending because borrowing disrupts and displaces other economic activities, including Milton Freedman, E. Cary, John Taylor of Stanford, Gary Becker and Eugene Fama of the University of Chicago and Greg Mankiw and Robert Barro of Harvard. In the end, the government simply moves economic activity around (benefitting campaign donors) without any real improvement. As economist Hal Varian of the University of California at Berkeley points out, private investment  in the economy builds a foundation for long-term, sustainable growth and prosperity, whereas government spending does not.

When political cronies benefit, honest business building is demoralized and discouraged.  Economic growth is harmed by liberal meddling and government disruption of the private sector.

This author was reminded (scolded, really) that even John Maynard Keynes himself would never approve of the claptrap thrown around in his name.   Keynes argued that governments should run deficits in bad times but should also pay off those debts promptly in good times and run up surpluses to save for the future.  But since Keynes is not here anymore to defend his reputation, Keynes’ theories have become grossly perverted in the halls of Congress, the White House, and academia.]\

Now, the tea party cannot save the country without slaying the Keynesian dragon once and for all.  The tea party is fighting against out-of-control government spending as its most important priority.  Ordinary Americans were driven out of their living rooms and into the streets to form the tea party by the fiscal madness in Washington.  But the tea party cannot bring a stop to deficit spending without confronting the demon at its core.
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