Individuals can’t spend their way out of money problems by taking on more debt to escape debt. But neither can governments, even though they have printing presses and can require people to use their devalued money. Our federal government’s long-term reckless spending and taxing policies—implicitly or explicitly backed by most members of Congress—impoverish Americans. They also psychologically cripple many Americans as they think only the government can save them.
Congressional leaders, many of whom have already passed several stimulus packages, debate more of the same as a way of pulling the nation out of an impending depression. U.S. House of Representatives Democrats recently offered another stimulus measure.
“We must think big for the people now,” said House of Representatives Speaker Nancy Pelosi. “Not acting is the most expensive course,” speaking of her $3 trillion dollar legislation.
The package was contained in an 1,815-page document submitted to Congress. It includes more spending on almost everything. It was approved by the House with little review in three days.
1) GOP no Better than the Dems
The leaders of the Republican Senate said the House bill was “dead on arrival.” However, the Republican opposition is not philosophical; it is political.
The GOP, which already helped pass several stimulus bills, was recently working on its own new package. It may not be as large as $3 trillion plan proposed by Pelosi, but it is the same idea: Only more government spending solves the economic problem and forget about the dangers of long-term debt. That’s even though previous flawed government policies caused the problem, hurting countless many small businesses.
Still, most members of Congress argue that they deserve more “emergency” powers and should be able to spend much more. These policies are in the spirt of the book “Crisis and Leviathan; Critical Episodes in the Growth of American Government” by Robert Higgs. It documents how emergencies, or quasi emergencies, result in more government powers. “Once constitutional barriers have been lowered during a crisis,” he writes, “a legal precedent has been established giving government greater potential for expansion in subsequent noncrisis periods, particularly those that can be plausibly described as crises.”
It is a familiar indirect socialist approach. It amounts to the remaking of history to ensure that the blame isn’t put where it is deserved: on the disastrous economic policies of governments right and left. These are characterized by gross overspending. It is spending without regard for the taxpayers’ bills of today and tomorrow. It amounts to a kind of backdoor central planning approach. These policies are endorsed in some form by both ruling parties. They disregard taxpayers and their scions who will have to pay these bills seemingly forever.
These policies lead to many questions but perhaps the most relevant is: Who will pay for this?
These spending bills add enormous costs to an already bulging debt. But pump priming is exactly what was advocated by the most influential and destructive economist of the 20th century, John Maynard Keynes. He claimed to be an opponent of socialism but argued for “the socialism of investment.” Governments, he wrote, should spend to keep the economy booming. This ignores the dangers of bubbles, resulting crashes and of the seemingly constant justification of more government spending.
2) How Much More Debt? Who Knows?
Today that means that the already red ink plagued America continues and expands deficit spending and debts. Before this crisis started, America’s debt was “officially” $24 trillion.” This is a dubious number since the government doesn’t impose the standards of the GAAP (The Generally Accepted Accounting Standards) that it requires of private firms.
So what is the true debt?
“That is a good question,” says Garrett Watson, a senior analyst, with the Mercatus Center at George Mason University. He says the debatable issue is whether to count all the future promises governments have made over decades for programs such as Social Security and Medicare.
The debt of the United States topped $26 trillion for the first time, according to a June report of the United States Treasury Department, but it has gone up more since then. It also said the debt had topped $24 trillion only two months before.
3) Fudging the Numbers
But there are many who question these official numbers and say they are much worse. People debate how deep is the debt. Some of skeptical observers, such as economist, Laurence Kotlikoff, argue the government numbers are fraudulent. He says the government is a “functional bankrupt.” He contends it couldn’t pay off most, or even a significant number of, creditors if they all demanded payment. That has happened to some banks that have failed .
Kotlikoff’s views government debt as similar to the way fractional reserve banking works. In the latter, if a large number of depositors all want their money, the banking system collapses. And, as the debt obligations of the U.S. government continue to rise, if a large number of creditors all cash in their treasuries at the same time, or if many investors stop buying treasuries, then the government would default, Kotlikoff says.
Our currency could be severely devalued. This is what happened in the American Revolution. That’s when the Continental Congress overissued its currency, the Continental. Eventually, most people stopped accepting it. Much of the faux currency was given to veterans who had won our freedom from Britain. The soldiers saddled with this devalued money said it was “not worth a Continental.”
Toward the end of the war, Pennsylvania farmers “were refusing to accept Continental currency, which had fallen into a steady decline,” according to the book “Robert Morris, Financier of the American Revolution.” The overissue of currency by Congress also drove up prices by the end of the war.
Sarah Franklin would write to her father Benjamin Franklin, who was in France, “It takes a fortune to feed a family in a very plain way.” This is one reason why the original constitution contained no mention of paper money. It is why the founders favored hard money. James Madison, in Federalist 44, argued that no government should “make anything but gold and silver a legal tender in the payment of debts.”
He also wrote of the “pestilent effects of paper money.” Madison and others who wrote the constitution hopped that their insistence on hard money would avoid another outbreak of paper money devaluation and robbery.
But this money devaluation and robbery has already happened in our lifetimes. Today’s debts and currency overissue could give us a rehash of the 1970s. Then the value of dollars drastically declined because of deficits and the over creation of dollars. Cheap money also was part of the 2008 crash.
Today we see similar conditions. The government is spending trillions more dollars that it doesn’t have. Congress and the president pressure the central bank to keep interest rates at historically low levels. The Federal Reserve Bank is creating many new, devalued, dollars. It is spending the nation into a potential disaster. It is one in which tomorrow’s taxpayers will be put in a terrible situation.
4) Getting Worse Over Decades
This is a problem that has been hanging over Americans for decades. For instance, ten years ago the official debt number was $13.4 trillion, according to the Congressional Budget Office (CBO). Back then many were speculating that the actual figure was much, much higher. Like a shopaholic who hides his or her credit card bills, the government pretends certain obligations and expenditures don’t exist. Uncle Sam really owes closer to $60 trillion, or more, and the country is close to bankruptcy, several economists told me then in a story I did a decade ago.
“The government is lying about the amount of debt,” Kotlikoff says. He is an economist at Boston University and co-author of “The Coming Generational Storm: What You Need to Know about America’s Economic Future.” He charged that the government “is engaging in Enron accounting.”
The problem is simple: The government, at the urging the backing of career politicians seeking to win elections and oblivious to the long-term effects of their spending policies, seeks to buy votes through impossible promises at the hustings. They spend too much but win their elections.
“The problem is we’re seeing an explosion in spending,” added Andrew Moylan, director of government affairs for the National Taxpayers Union. Today, a decade later, the bi-partisan problem of overspending is worse. It continued to worsen over the past decade, a period of both Democratic and Republican rule.
5) A History of Reckless Government
Why does this reckless approach to the nation’s economic health go on and on, despite occasional calls from those out of power to end it?
Politics. It is the desire of career politicians, of both parties, to get elected and re-elected. Spending and more spending is often viewed as the elixir that will win elections.
It is a case of the short term versus the long term. The spending recklessness is because the vast majority of elected officials, both left and right, see relentless spending as politically advantageous. That’s even though it is a destructive long-term practice.
The spend without any limits policy appeals to politicians of all stripes. But now it going beyond bad economics. Some see it as a way to central planning.
Some, such as New York Governor Cuomo and former vice president Biden, talk about this crisis as a way to “restructure” American society. This is the way to bring an American socialism through the backdoor without anyone mentioning Karl Marx.
However, more commonly, overspending has been part of politics as usual in good times and bad. Spend lots of money and keep doing it, especially around election time. Forget the any long-term effects. This is a strategy that has been tried before. It seems to succeed in the short term. But it creates a Potemkin Village effect. It looks good for a while until market players spot what has happened.
The problem is in the long term it always blows up. It can win elections. Richard Nixon, just before the 1972 election, ran huge deficits and imposed wage and price controls. He said, in an interview with Howard K. Smith of ABC News, that he was “now a Keynesian in economics.” The government sent out higher Social Security checks just before Nixon’s re-election in 1972. Many Democrats in Congress, most of whom were also re-elected in 1972, supported “Nixonomics.” But they argued with Nixon over who should have received credit for bigger government payments.
Today Democrats in Congress and President Trump trade charges on how deserves credit for our paltry $1,200 stimulus checks.
6) “I Did It…No, I Did It”
More spending is also often a political winner with people with short memories; people who spurn history and forget the long-term economic results of the big government. It is tantamount to using drugs. Initially, it feels great. Later you’re hung over. And possibly you did major damage to your body.
In the case of Nixon and the Democratic Congress, both were re-elected in 1972, so many politicians today see it as the path to election or re-election this fall. But they should remember what happened to their predecessors in 1972. Yes, most of them stayed in office. But it later led to a disastrous period of stagflation. That lasted a decade and destroyed millions of businesses and caused incalculable pain.
For Nixon and his Democratic opponents, big spending policies produced stagflation in the 1970s and 1980s, which wiped out millions of jobs.
7) Could the United States Go Broke?
Today, the big spending ways of our politicians are, once again, endangering the economy.
A recent Government Accountability Office (GAO) report, in effect, blames both parties. It notes debt has gone from some $5 trillion to $24 trillion over the last 25 years. This was a time of both Republican and Democratic presidents and Republican and Democratic Congresses.
But the always spend more idea, whether under Obama or Trump, is starting to have a long-term destructive effect as the GAO and other government reports document. These big spending levels can’t continue, according to a government spending watchdog.
These debts and deficits are “unsustainable,” the report says.
That is the assessment of “The Nation’s Fiscal Health,” a GAO report. It was prepared just before trillions of dollars in new stimulus money were authorized by almost all Republicans and Democratic lawmakers in Congress as well as President Trump. The report warns these spending levels can’t continue because of entitlement spending promises.
“While spending on Social Security already exceeds $1 trillion per year, health care and net interest are expected to grow faster than GDP and be key drivers of federal spending in the future. Medicare spending is projected to reach $1 trillion per year by 2026, and net interest is projected to hit this milestone by 2032,” according to the GAO.
Today, we not only have unprecedented levels of red ink, but there is a greater danger: A huge part of it will end up paying for nothing. It will leave the nation with a perpetual debt that compounds forever.
“Over the past 50 years, net interest costs have averaged 2 percent of GDP but these costs are projected to increase to 7.2 percent by 2049, when they become the largest category of spending,” according to the GAO.
8) The United States Government Could Become a Giant Revolver
The United States, on the present course, could become another Weimar Republic. If it continues on its present Keynesian course, the nation will have the same problem as millions of Americans who mismanage credit cards. They face a perpetual debt. They can only pay interest on cards monthly. They face debts that could ruin them.
The credit card industry has a term for these beloved customers. It is “revolvers.” They are those cardholders who have revolving credit lines. They pay interest each month to the delighted card companies. They love them because revolver business goes on for years and seemingly never ends, like U.S. government red ink. By contrast, card companies quietly hate another group of customers: transactors. They are cardholders paying off card balances every month. They pay zero interest.
The United States, due to its huge welfare/warfare state philosophy, is a nation whose government is a giant revolver. It can never retire its debt or even have a year in which it doesn’t add to it since it always has deficits. This collective red ink—the deficit of each year added to the permanent debt—is destroying the nation, according to the GAO.
However, the danger is deeper, more dangerous, than economic. It is philosophic. Many are unconsciously using the big spending philosophy to move the nation to socialism. They believe that the “benefits” of government spending, of government taking more and more of our assets as well as those of future generations, will restore prosperity.
The policy may seem harmless. Some even say it is beneficial. But it is destroying liberty and it has been going on for generations as many Americans have never heard of the traditions of liberty.
9) The Roots of an American Socialism
Over close to a century each generation has been depending on the government more and more and on themselves less and less. At the same time, they have seen major political parties gradually move more and more to socialism, ideas that would have stunned predecessors. That’s because they now agree with Speaker Pelosi: Only the government can turn things around.
Yet once, as I will detail later, the standard government policy was the opposite: The government facing a depression would let economies recover without stimulus packages and other government interventions.
Administrations as varied and distant as Martin Van Buren in 1837, Grover Cleveland in 1892 and Warren Harding held to these principles. Even some Democratic administrations, such as Kennedy and Truman, cut taxes as a way of helping the economy recover.
However. the standard policy of letting economies naturally recover from depression, of cutting taxes, was reversed in the administration of President Herbert Hoover—accurately called by one historian, Joan Hoff Wilson, as a “Forgotten Progressive” —and also by the succeeding administrations of President Franklin Roosevelt and others. FDR took the Hoover approach and expanded it. That’s even though FDR’s supporters and most mainstream historians have wrongly branded Hoover a laissez-faire president. So for many years the lesson of letting market forces cure depression has been forgotten or condemned as a return to the policies of Herbert Hoover.
The government now seems forever committed to promoting booms. Leon Levy, a founding chairman of Oppenheimer & Co., called Keynes “the most influential economist of the 20th century.” Levy, by the way, agreed with Keynes that high savings rates were bad for the economy. Writing in 2002, in his book “The Mind of Wall Street, he warned that, if the nation’s savings rate rose above the six percent to ten percent range, “the country will be in deep trouble.” Of course, Levy ignored what low savings rate were and are doing to tens of millions of Americans, who can’t retire or fund their children’s higher education.
10) The Economist of Economists
John Maynard Keynes wrote that governments should create and then permanently sustain booms.
“The right remedy for the trade cycle is not to be found in abolishing booms and thus keeping us permanently in a semi-slump; but in abolishing slumps and thus keeping us in a quasi-boom,” according to Keynes’ most influential work, “The General Theory.”
That was written in the midst of the Great Depression of the 1930s. Many of its lessons were more extensively applied in the administrations of President Franklin Delano Roosevelt, although key FDR advisers such as Marriner Eccles were convinced of this course even before they read Keynes and before they put FDR’s New Deal policies into effect.
The result was FDR and his advisors, despite inflationary Keynesian policies and historical myths, never restored prosperity.
“Whatever it (the New Deal) was, was not a recovery program, or, at any rate, not an effective one.” writes David M. Kennedy in his book “Freedom from Fear.”
By the late 1930s, James Farley, a key FDR advisor and postmaster general, was warning that things were even worse than under Hoover. That was one of the reasons why Farley, once one of the president’s close political advisors, eventually parted with the president. FDR had been guided by the ideas of Keynes even if he didn’t quite understand them.
“Keynes,” wrote the economist Benjamin Anderson, “was a dangerously unsound thinker. He believed that purchasing power or consumption—not production or saving—was the key to a strong economy.” One often hears echoes of Keynes today when mainstream media often say that the consumer is 60 percent or 70 percent of the economy, ignoring the importance of production (saving and investment). Keynes was dangerous because his flawed theories, whether understood or not by most lawmakers, give them intellectual license to spend and tax without limits; to ignore the classical liberal ideas of limited government.
Keynes argued that supply doesn’t create demand in the private sector so the government, through spending, must prop up or create demand. Keynes didn’t believe that a recovery through the natural reduction of prices and the increase in productivity was the right course. That’s even through that formula has worked in America just a decade or so before as we will later see.
11) Keynes and His Slaves
Keynes’ influence in the Roosevelt administration “was very great,” Anderson writes in “Economics and the Public Welfare.” Most of FDR’s political allies endorsed Keynes without reading his books, and even though the president said he was confused by his conversation with Keynes, who he thought was a mathematician.
We must create a boom by spending trillions of dollars is the Pelosi/Keynes philosophy.
Today the vast majority of our leaders are following this quasi-socialist, spend the country back to prosperity, road. Most Republicans and Democrats, share a tacit bi-partisan prejudice in favor of bigger government. They believe fiscal and monetary policies can artificially create “quasi booms,” the language of Keynes.
The economist dense writings are rarely read by our rulers. Yet his influence is felt more than 75 years after his death. This is ironic. Keynes famously wrote, “Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist.”
Many of our career politicians, few of whom have ever studied Keynes, insist the way out of this economic disaster is more of the same.
They insist that the government, which caused our problems in the first place, must think and spend “big.”
12) More than Economics
FDR’s questionable big spending policies, which didn’t cure the Great Depression are also now advocated as a “way to re-structure” our nation. Left unsaid by many of our popular politicians: This is another way of quietly giving Americans a “socialism without doctrines.”
These self-destructive policies also ignore history.
And since most of our leaders are oblivious to the blessings of liberty; they disdain, or perhaps have never heard of, our commonsense libertarian heritage. They advocate dysfunctional economic policies. These policies don’t create prosperity yet they are often politically popular when pushed by some politicians. This explains why FDR, despite flawed economic policies that never pulled America out of a depression and restored the strong economy of most of the 1920s, was re-elected three times and is revered by millions of Americans as the man who supposedly saved America.
Yet FDR’s policies cripple Americans today. They will hurt our country even more tomorrow because they ignore basic economic principles. The more money government takes out of peoples’ pockets, the more money that is taking out of production—savings and investment—the more difficult it is for the economy to grow. It is more than economics. It is philosophy. But it is an economics and philosophy that many Americans have forgotten or never heard.
13) Economics and History 101
When the government spends more, it takes away more of our economic liberty. It creates long term misery.
When it spends less, a lot less, it engages in a kind of Gladstonian thrift. Then we not only have more liberty and keep more of our hard-earned dollars, we prosper.
This seems like a ridiculously simple idea. Yet it is the opposite of a once bi-partisan economic policy that over generations was the standard for escaping economic woes. Today’s Keynesianism—and Keynes was contemptuous of Gladstonian thrift and middle-class values just as today’s collectivists often demean middle class values—ignores or denigrates the Anglo-American classical liberal traditions.
W.E. Gladstone, a British 19th century prime minister and chancellor of the exchequer, argued state spending and various government schemes would not save the citizen. He once aimed to abolish the income tax because it was suspicious of the power of governments.
“Of one thing I am, and am always been convinced—it is not by the State that man can be regenerated and the terrible woes of this darkened world effectually dealt with,” he said.
Gladstone, much to his credit, quit his last ministry in 1894 because he opposed “constructionism” (socialism), big increases in military spending and was frustrated that parliament would not grant home rule to Ireland.
Gladstone thought overspending was ill-moral. He believed government surpluses should be returned to taxpayers, that taxes should be low, a Jeffersonian idea.
In his first administration in 1801, President Jefferson, rejecting the taxes of the previous Federalist administration, warned that “a wise and frugal government” should leave citizens “free to regulate their own pursuits on industry and improvement, and shall now take from the mouth of labor the bread it has earned. This is the sum of good government.”
These were principles many of our own lawmakers once followed because most Americans believed them. But the idea of letting people keep the fruits of their labors, of the government not interfering with the natural recovery of economies through market forces, isn’t so distant.
Indeed, just over a century ago that economics of liberty not only allowed an economy to recover but to prosper. And it happened about a century ago.
14) Harding, Silent Cal, Andrew Mellon and an Unknown Depression
At the conclusion of World War I, U.S. officials found themselves in a bleak position. The federal debt had exploded because of wartime expenditures. Annual consumer price inflation rates had increased more than 20 percent by the end of the war. The unemployment rate peaked at 11.7 percent in 1921.The same year, the new president, Warren Harding, promised to restore the traditional laissez-faire philosophy.
How had America arrived at the depression of 1920? Today’s leaders might consider these words.
“Business was depressed. For months following the Armistice we had persisted in a course of much extravagance and reckless buying. Wages had been paid out that had not been earned. The whole country, from the national government down had been living on borrowed money,” wrote Calvin Coolidge, Harding’s taciturn vice president, in his autobiography. Coolidge credits a regime of spending reductions and tax cuts for turning the economy around.
The depression of 1920-21 is a little known one yet it would be the last one in which primarily laissez-faire methods would be used. Most people have never heard of it. That’s because it was a depression that was short. It was one in which market forces generally operated and in which led to a strong recovery.
Exactly a century ago America’s economic situation was grim. In 1920, unemployment had jumped from 4 percent to nearly 12 percent, and GNP declined 17 percent. Secretary of Commerce Herbert Hoover—falsely characterized as a supporter of laissez-faire economics—urged President Harding to consider an array of government interventions to turn the economy around. Hoover was ignored. Harding didn’t go along with him.
15) The Cure for Unemployment
Warren Harding, whose administration later was caught up in the Teapot Dome scandal, laid out a series of laissez faire principles at the outset of his administration that worked.
“We will attempt intelligent and courageous deflation, and strike at government borrowing which enlarges the evil, and we will attack high cost of government with every energy and facility which attend Republican capacity. We promise that relief which will attend the halting of waste and extravagance, and the renewal of the practice of public economy, not alone because it will relieve tax burdens but because it will be an example to stimulate thrift and economy in private life,” Harding said in a 1920 speech. It was very unlike the policies of most of his successors who faced economic woes.
Harding, in words that would have shocked our letters today, called “for denial and sacrifice if need be, for a nationwide drive against extravagance and luxury, to a recommittal to simplicity of living, to that prudent and normal plan of life which is the health of the republic. There hasn’t been a recovery from the waste and abnormalities of war since the story of mankind was first written.” He also warned that “needless spending and heedless extravagance have marked every decay in the history of nations.”
Harding’s words should be considered in the light of warnings from today’s Congressional watchdogs that, if current spending patterns continue, interest on the debt will someday soon become the biggest item in the budget. That would have repulsed Harding and Coolidge, whose approach was very different from today’s.
In 1921, there was no massive stimulus spending and the inflationary ideas of a Keynes, although there was an attempt to do so by Hoover. Malinvestments were liquidated as the government didn’t rush in to rescue failing politically connected business. This is a key element in any strong recovery as detailed by economist Joseph Schumpeter in the book “Business Cycles.” He argued that malinvestments must be allowed to liquidate, the economy must be cleansed, for a recovery to happen. The government should not interfere with this process, he said.
16) Cut Everything
So, instead of “fiscal stimulus,” Harding strongly cut government spending between 1920 and 1922. The rest of Harding’s approach was largely laissez-faire. Tax rates were slashed for all income groups. The national debt was reduced by one-third. More importantly, markets were allowed to operate. Wages and price drops took as the market corrected itself.
Austrian economist Murray Rothbard, in “America’s Great Depression,” says the Harding government did tinker with the economy through monetary policy; the easing of interest rates. However, Rothbard also noted that wage rates were “permitted to fall, and government expenditure and taxes were reduced.” Rothbard says this was “our last natural recovery to full employment.”
“The old-fashioned” approach prevailed in the recovery from the depression. “Government, the older view which had been the standard many times before, should keep taxation and spending low and reduce the public debt. Unemployment dropped to 6.7 percent by 1922, and was down to 2.4 percent by 1923.
“In 1920-21,” Anderson writes, “we took our losses, we readjusted our financial structure, we endured our depression, and in August 1921 we started up again. By the spring of 1923 we had reached new highs in industrial production and we had labor shortages.”
17) “The Best Treasury Secretary Since Alexander Hamilton”
President Harding was aided by a Treasury Secretary who was also followed the old-fashioned policies, Andrew Mellon. His book, “Taxation; The Peoples Business,” is a treasury of commonsense and limited government. He contended government should be run on business principles. The book is a fascinating exposition of Mellon’s low taxation ideas.
Mellon warned high taxes not only hurt the rich, but the poor as well because taxes embedded in items drive the cost of living for everyone. High tax rates tend to produce higher prices for the everyday items that most people buy. High tax rates, he added, are counterproductive for the government. That’s because, Mellon wrote, higher rates often generate less, not more, tax revenue.
Federal taxation, he argued, “should be the least burden to the people” and “yielding the most revenue to the government.” The way to do the latter was through low taxes. For instance, he contended that high capital gains taxes, estate and gift taxes hurt the government.
Mellon also warned that regressive taxes inevitably led citizens into tax shelters, which was not good for the economy. He disliked municipal bonds. Most people bought them because tax rates were too high, he said. So they were looking for relief, but they were not putting money into productive businesses that would help the economy grow.
18) Mellon: Get Rid of War Taxes
Everyone, most especially average people without any investments and those who wanted the government to receive strong revenues, was better off with low taxation, Mellon contended.
Reviewing the high tax rates of World War I, including the surtaxes aimed at great wealth, Mellon wrote that “Experience has shown that the present high rates of surtax are bringing in each year progressively less revenue to the government.” But he noted the secondary effects of these taxes were hurting more than the rich. They hurt everyone, especially those with modest incomes.
“High taxation, even if levied upon an economic basis, affects the prosperity of the country, because in its ultimate analysis the burden of all taxes rests only in part upon the individual or the property taxed. It is largely borne by the ultimate consumer. High taxation means a high price level and high cost of living,” Mellon concludes that a reduction in taxes helps everyone.
After his initial work in 1921-22, Mellon also followed with more tax cuts throughout the rest of the decade. This sparked a boom that carried into the next administration. The prosperity resulted in members of Congress calling Mellon “the best Treasury Secretary since Alexander Hamilton.” Mellon’s tax cuts were similar to those of German Finance Minister Ludwig Erhard. His low tax policies after World War II led to the German economic miracle.
Harding also called for people to adopt thrift. Meanwhile, Hoover made little headway in the Harding administration. In the succeeding presidency, President Calvin Coolidge virtually held Hoover in contempt. He privately complained that every piece of advice that he had received from him had been wrong. By contrast, Coolidge praised the Mellon policies that had reversed the depression of 1920-1921.
“Within a year the country had adopted that course, which has brought an era of great plenty,” Coolidge wrote.
19) Hoover and Harding
However, the boom times of the 1920 came to a crashing end when the Mellon philosophy was ended and Hoover became president in 1929. Hoover’s embrace of disastrous tariff policies combined with terrible central bank decisions suddenly condemned the nation to depression. Now that Hoover was president, he finally adopted the stimulus, anti-depression policies that had been dismissed in 1920-21. He also raised taxes and tried to bail out several failing companies These policies are similar to those being used today by both major parties the depression.
Later, when Hoover was president, he would be the first president to ignore laissez faire policies and apply government stimulus in a depression. In his memoirs, he bragged about it.
“No government in Washington has hitherto considered that it held so broad a leadership in such times,” Hoover wrote. Indeed, he wrote that “for the first time in the history of depression, dividends, profits and the cost of living have been reduced before wages have suffered.”
Hoover was ignoring something that many of today’s leaders also do: High wages aren’t any good when you’re out of work and don’t know when you will get a job.
Hoover, Rothbard writes, should be “considered the founder of the New Deal in America.” He also disdained Mellon’s advice and eventually exiled him to England as ambassador. What did Mellon advocate when the U.S. went into another depression, a depression that would last much longer than 1920-21 and one incorrectly blamed on laissez-faire policies?
20) Mellon’s Exile and Prosecution
Mellon argued for letting malinvestments liquidate and for tax cuts. In other words, repeat what had been done in 1920-1921. His advice was ignored. Hoover actually raised taxes in the middle of a depression as would the succeeding president, Franklin Delano Roosevelt. The government, Hoover believed, should not rescue badly run firms. But the Reconstruction Finance Corp. (RFC) actually did that. It was set up by Hoover as a government corporation designed to save struggling businesses. So the government propping up the economy idea wasn’t initiated by FDR. Rather, he greatly expanded it.
Mellon was a remarkable leader. He was later prosecuted and exonerated in two tax trials that were regarded as political prosecutions. Even a hostile biographer, David Cannadine, who said he would have opposed his tax cutting policy, concedes Mellon was honest in his tax filings. He deliberately didn’t claim certain deductions that he qualified for, Cannadine writes.
Nevertheless, Mellon, whose art collection was generously donated to the National Gallery, died before the exoneration of the second trial. FDR, later asked about the trial, deviously answered that he was still waiting for a report from his attorney general. He pretended he had no idea what had happened to the controversial Mellon, a symbol of the low tax policies once popular in America.
How was FDR doing with his attempts to restore prosperity by continuing and expanding the Hoover stimulus approach?
21) The Wrong Way of Escape a Depression—he Failure of the Hoover/FDR Stimulus
Under Hoover, and later FDR, the painful depression would go for more than a decade. Some defenders of various stimulus approaches concede the FDR policies didn’t work; that prosperity was never restored. What is their defense?
The same as today after every new round of big spending: The stimulus wasn’t enough. If it had been bigger, it would have worked. But clearly, the most candid of FDR’s supporters concede that, unlike under Harding’s classical liberal measures, prosperity was never achieved though Roosevelt’s policies of stimulus and market interventions.
“At no point during the 1930s did unemployment go below 14 percent,” writes Jim Powell in “FDR’s Folly.” Median unemployment between 1934 and 1940 was 17.2 percent. “Even in 1941, amidst the military buildup for World War II, 9.9 percent of American workers were unemployed. Living standards remain depressed until after the war,” Powelll adds.
What happened after World War II? There was a small tax cut.
22) The Choice Before Us
So what is to be the best way of climbing out of economic disaster?
A tax cut, says economist Arthur Laffer, “is much more effective in re-generating the economy that the government spending more money to stimulate the economy.”
So Americans must answer these questions.
More stimulus and still more government spending, which is the Keynes/Hoover/FDR/Pelosi approach? Or is to be the once traditional methods employed by presidents as varied Harding, Coolidge, Grover Cleveland and Martin Van Buren. These four presidents all faced economic disasters and all opted to let market forces operate. And in the case of Harding and Coolidge, they used tax cuts—more economic liberty for Americans—as a way to speed up the recovery process.
Tens of millions of Americans are hoping today’s leaders will re-discover the old, hopefully not forgotten, methods of liberty.
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