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He has exacerbated the interventionist tendencies of his predecessors, ignoring the constitutionalist successes of the exceptional Coolidge and Reagan for not a single good economic reason. Our November cover story.
Let’s set the stage. After 25 years of economic growth, the U.S. stumbles into a recession and double-digit unemployment. An unpopular war aggravates the crisis; the national debt skyrockets. In response, the nation elects a fresh face: a first-term U.S. senator from a Midwestern state, with a vice president from an Eastern state. They promise hope and change; their party builds a formidable coalition of blacks, whites, and immigrants, and sweeps both houses of Congress. After his election, we had a President’s Conference on Unemployment to deal with the job crisis. What emerged was a sensational plan: a stimulus package to create jobs — especially infrastructure jobs — and thereby attack unemployment directly.
Sound familiar? It should. The year was 1921, and the newly elected President Warren G. Harding and Vice President Calvin Coolidge faced many of the same issues as Barack Obama and Joe Biden 88 years later. What’s different is how these men responded. Coolidge and Obama embody two starkly contrasting visions of economic order.
Over the last century, all presidents have bought in to one of these two visions. Harding, Coolidge, and Ronald Reagan were constitutionalists. Limit the government, they argue, and let entrepreneurs and free markets create growth. By contrast, Barack Obama and most of his predecessors — especially Franklin Roosevelt — have been interventionists. Government planning, federal spending, and a Keynesian fine-tuning of the economy are the methods they choose to spark the economy and sustain prosperity.
In the case of the 1921 recession, unemployment had indeed soared to 11.7 percent, and industrial income had fallen almost 25 percent in one year alone. But Harding and Coolidge (who became president in 1923 when Harding died) were constitutionalists. They opposed the popular stimulus scheme to use tax dollars to build public works. “The excess stimulation from that source,” Harding insisted, “is to be reckoned a cause of trouble rather than a source of cure.” They epitomized what President Obama would later call “The politics of No.”
But what they said yes to was cutting income tax rates and slashing federal spending. That kind of discipline, they argued, would unleash entrepreneurs, reduce the federal debt, and release human energy for recovery.
Andrew Mellon, their secretary of the treasury, was a banking genius. He had helped launch Alcoa, Gulf Oil, and many other corporations. He designed the plan to cut tax rates and federal spending. In making his case, he made the astonishing claim that cutting tax rates might actually increase revenue. “It seems difficult to understand,” he said, “that high rates of taxation do not necessarily mean large revenue to the Government, and that more revenue may often be obtained by lower rates.”
When Mellon’s prediction was attacked, Coolidge came to the rescue. “I agree perfectly with those who wish to relieve the small taxpayer by getting the largest possible contribution from people with large incomes. But if the rates on large incomes are so high that they disappear, the small taxpayers will be left to bear the entire burden.”
With Congress in Republican hands, Harding, Coolidge, and Mellon began to implement their free market plans piece by piece. Therefore, the 1920s budgets showed surpluses every year, and income tax rates were chopped across the board, leaving the wealthiest Americans paying at a 25 percent marginal rate. The results were spectacular. By 1923, unemployment had plummeted to 2.4 percent. From 1921 to 1929, GNP soared a remarkable 48 percent, the “average annual earnings of employees” rose 34 percent, and almost one-third of the national debt simply disappeared.
Entrepreneurs enjoyed one of their most creative periods in U.S. history: from radios to sliced bread to Scotch tape, inventors marketed new products. Older inventions finally secured the capital to emerge: air conditioners, refrigerators, vacuum cleaners, and zippers thus found their way into millions of households across America. U.S. patent numbers were higher in 1929 than in every year thereafter until 1965.
Calvin Coolidge became an American icon. His reelection in 1924 was so overwhelming that the Democratic Party, with a mere 28.8 percent of the vote, appeared near death. In Coolidge’s six years as president, he averaged 3.3 percent unemployment and less than 1 percent inflation — the lowest misery index of any president in the 20th century.
ONE MIGHT THINK that Coolidge’s spectacular success would have ended the economic debate. The constitutionalists had triumphed. Instead, after 1929, the interventionists, starting with Herbert Hoover, dominated American politics for the next 50 years. Hoover, who had been secretary of commerce in Coolidge’s cabinet, often dissented from the president. In turn, Coolidge labeled him “Wonder Boy” and said privately, “That man has offered me unsolicited advice for six years, all of it bad.” Hoover believed that targeted intervention could improve the economy without losing any of the gains from Coolidge’s free markets.
Once in office, Hoover signed the highest tariff in U.S. history and then started a flow of federal subsidies (and loans) to farmers, bankers, industrialists, and those unemployed. The Federal Reserve, which is somewhat independent of the president, also intervened and contributed to the Great Depression that followed, by raising interest rates and shrinking the money supply. As the country wallowed in federal deficits, Hoover signed a bill raising income taxes to a top marginal rate of 63 percent. Entrepreneurs retrenched, and jobs rapidly disappeared.
With unemployment at 25 percent in 1932, Gov. Franklin Roosevelt of New York, the Democratic nominee for president, was poised to oust Hoover from office. In doing so, FDR decided to campaign as a constitutionalist, someone much less interventionist than Hoover.
Calvin Coolidge could have written FDR’s campaign speech in Pittsburgh two weeks before the election. Hoover’s deficits, FDR announced, were “so great that it makes us catch our breath.” Such spending was “the most reckless and extravagant past that I have been able to discover in the statistical record of any peacetime Government, anywhere, any time.” Of Hoover’s tax hikes, FDR concluded that such a burden “is a brake on any return to normal business activity. Taxes are paid in the sweat of every man who labors because they are a burden on production and are paid through production. If those taxes are excessive, they are reflected in idle factories….”
Mellon was from Pittsburgh, and if he had been in the audience that day he would have cheered. You can’t create jobs by taxing one group and giving to another — you can only redistribute existing wealth. To create wealth, you had to cut tax rates, not raise them. That was the chief premise of the constitutionalists.
A man of faith in a godless age is hitting Americans where it hurts.
Mr. and Mrs. American Spectator Reader, let P.J. O’Rourke talk sense to your kids.
In Britain, defending your property can get you life.
The debacle of this president’s administration is both a cause and a symptom of the decline of American values. Unless Congress impeaches him, that decline will go on unchecked. An eminent jurist surveys the damage and assesses the chances for the recovery of our culture.
It won’t take long for conservatives to scratch this presidential wannabe off their 2008 scorecard.
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Was the President done in by the economy, or by the politics of the economy?
H/T to National Review Online