Thursday, June 26, 2014

The Coolidge Economy

When Calvin Coolidge suddenly and unexpectedly became President of the United States in 1923, he had a carefully articulated and precisely planned economic policy, although he did not expect that he would have the opportunity to implement it. President Warren Harding’s sudden death placed Coolidge into the position of having to make fiscal decisions, and he was prepared to do because of his systematic understanding of economics.

Coolidge retained Harding’s appointee, Andrew Mellon, as Secretary of Treasury. Despite the abrupt nature of his ascent to the presidency, Coolidge was confident, because he had not only worked out his economic policy over the previous years, but his experience as governor of Massachusetts had given his practical experience in taxation and budgeting.

While we have brief motion pictures and sound recordings of other presidents, Coolidge was perhaps the first president to make frequent and deliberate use of radio broadcasts and film newsreels. The confident expertise which Coolidge exuded was caught on film at an early press conference. Historian Amity Shlaes writes:

The extent to which the new administration would prioritize economy became clear at one of the first press conferences, one that Mellon, finally on U.S. soil, was able to attend. Coolidge, more relaxed than they had ever seen him, led his cabinet to pose outdoors on the White House lawn before a crowd. As the cameras of Fox News and others rolled, Coolidge seated himself in the center chair, and Secretary Hughes placed himself to the president’s right, legs spread out wide. The seat to the new president’s left waited open for Mellon. But Mellon was seconds slow to arrive. In that moment, the camera caught Coolidge’s eagerness. The presidential eyes hunted for the Treasury secretary. The president’s arm motioned. The tap of the hand was a swift but unmistakable, invitation and command.

What was Coolidge’s economic policy? He used the word ‘economy’ in the sense of behaving ‘economically’ - i.e., spending as little as possible. The core of his fiscal policy was reducing government spending. This would lead to reduced deficits, reduced debts, and reduced taxation. Reduced taxation would ease the burden on the middle and working classes, raise wages, and create jobs. These ideas don’t sound new to modern readers, but in the 1920s they were novel.

A convincing speaker, Coolidge argued for his plan, and got support from a wide variety of voters. Even significant members of the opposition party supported the plan. Historian David Greenberg writes:

The 1926 Mellon bill provided for across-the-board income tax cuts, zeroed out the gift tax, halved the estate tax, and slashed surtaxes on the wealthy by 20 percent. Supporting it were several trade associations, banks, local chambers of commerce, and a business lobby formerly called the American Bankers’ League, which had renamed itself the American Taxpayers’ League. The Democrats, adrift and cowed by their 1924 election losses, folded their hand; Senator Furnifold Simmons, one of Coolidge’s chief antagonists, from 1924, backed the new bill, he said, “to make businessmen realize that the Democratic Party is not bent on taxing them or their enterprises exorbitantly.” And with the financial outlook now rosy and the federal budget running a surplus, tax cuts were an easy sell. Coolidge even began to worry that Congress had cut taxes too much and that deficits would return. He warned lawmakers that after the easy work of cutting taxes, they would also have to rein in spending - threatening to veto various appropriations bills if they defied him.

Coolidge rightly understood that tax cuts must be accompanied by spending cuts; otherwise, an increasing deficit and debt would result - the very opposite of the anticipated outcome of such policies. Several of his successors have attempted but failed to replicate his results: they have cut taxes but not spending. These later presidents did what they did, either because they were thwarted in their intended spending cuts by the opposition party, or because they did not fully understand the necessity of such cuts.

Reducing tax was, for Coolidge, not merely an exercise in applying some abstract economic hypothesis. Rather he understood tax cuts to be incremental increases in freedom and in human dignity. If a worker pays 10% or 20% of his income in taxes, this means that for 10% or 20% of his time, he was working for naught, which is tantamount to having his time stolen from him.

Lower taxes freed the ordinary worker to access the fruit of his labor. Lower taxes gave the worker a choice about what would be done with the fruit of his labor. Rather than have the government decide how to spend his money, the worker would be free to spend his own money as he pleased, or to save it, or to give it away. Tax policy was, for Coolidge, social policy. He strengthened the American economy, but he also saw these actions as improving the lives of citizens. Historian Robert Ferrell writes:

If Calvin Coolidge prided himself on one single aspect of his presidential years, it was his policy of fiscal economy. “I favor the policy of economy,” he declared, “not because I wish to save money, but because I wish to save people.” The “people” part of the equation was perhaps a rhetorical flourish, yet people were involved; he may have been speaking of their labor, which he would save by not spending it. In any case, he saw absolute, positive good in fiscal economy, and therefore he not merely balanced the budget but obtained a surplus during every one of his presidential years (as Harding had done before him).

In terms of specific numbers, the Coolidge tax cuts, and their effect on the economy, are described by historian Thomas Sowell:

What actually followed the cuts in tax rates in the 1920s were rising output, rising employment to produce that output, rising incomes as a result and rising tax revenues for the government because of the rising incomes, even though the tax rates had been lowered. Another consequence was that people in higher income brackets not only paid a larger total amount of taxes, but a higher percentage of all taxes.

Who should get the credit for the improvement in the economy? Many historians point to Andrew Mellon, but Mellon was retained by Coolidge, and Mellon’s proposals would not have become law without Coolidge’s support.

Did America’s prosperity during these years, produced by Coolidge and Mellon, come at the cost of the economic collapse of the 1930s? Probably not. The Great Depression was created when what could have been a temporary self-correction in the economy was turned into a chronic condition by certain taxes and tariffs which distorted natural market forces, by the mere existence of the Federal Reserve System, and by well-intentioned but counterproductive attempts to intervene in the economy.

It was careful analysis which led Coolidge and Mellon to their policies, and careful implementation of those policies led to an era of prosperity for citizens of all classes.